What Procurement Dangers Are Lurking In The Shadows?
Just as the organisation’s CIO has been struggling with “shadow IT” the CPO is now faced with similar challenges as company employees armed with a credit card and a browser can buy almost anything online.
For years the enterprise CIO has been struggling with Shadow IT which has been described as “IT systems or solutions used within an organisation without the approval, or even the knowledge, of corporate IT” . This is often referred to as the consumerisation of IT.
Various IT industry analysts reports state that Shadow IT is somewhere between 30-50 per cent of the total IT spend in large organisations and this is a large number considering that this is IT spend that has not gone through the sanctioned IT function.
Shadow IT has transitioned into Shadow Procurement thanks to the rise of digital cloud marketplaces
The ‘shadow’ problem is no longer confined to the CIO with
the CPO also facing a growing population of enterprise staff
that procure and subscribe to many services in the cloud that havent been through the sanctioned process and often they are not allocated to the correct budget codes.
Thanks to the public cloud there are many new digital marketplaces that have lowered the barrier to entry for the end user for procuring a range of products and services (e.g. Amazon, eBay, Alibaba, Google, Rackspace, Microsoft, even crowd sourcing).
Also of concern is that shadow procurement can also include the teams of people hired by the business to provide various services across the business (often these costs are hidden in project budgets or expense codes and not shown against the correct budget categories).
While the CPO aims for compliance the shadow procurement means a further loss of control
For the CIO the issue of Shadow IT often means they are excluded from the decisions of how the IT services are supported as well as assessing the risks of what is being purchased such as security.
Similalry for the CPO the issue of Shadow Procurement often means that they are excluded from important commercial decisions particulalry when the staff member blindly clicks the “accept terms and conditions” button when buying products and services online. These online terms will always favour the supplier and may not satisfy the commercial appetite or the target price point. Only when things come unstuck will these accepted terms and conditions see the light of day.
The rise of shadow procurement flies in the face of the respected analysis of CPO surveys over recent years that continue to place “Procurement Compliance” as one of the top three challenges that the CPO is focused on addressing*.
When Procurement is seen as beeing a blocker then Shadow Procurement is likely to be, or become, an increasing problem
While I have discussed that the rise of the easily accessible digital marketplace has contributed to the increase in shadow procurement there are likely to be a range of other factors that will also determine the size of the problem in your own organisation:
Business and Procurement mis-alignment
Where procurment is seen as a blocker and the process takes too long then the employees will find a way to work around Procurement to achieve business and project goals
Lack of clear roles and responsibilities and an inneffective governance structure
Where the roles are not clear and the governance is inneffective, or not well understood, then the employees may take this as a green light to hire a shadow team within their project or business unit. In some organisations it can become an unnofficially sanctioned fixture
Many organisations are decentralised and large programs/projects operate separately to the Business-as-usual functions such as Procurement
Because many companies are decentralised and indirect spend is spread across departments and projects, there is typically little input from procurement.
Little or no use of big data analytics to understand the indirect spend occuring as part of the Shadow Procurement problem
- Indirect spend is often very difficult to understand as the shadow procurement buyers don’t use a formal process in purchasing goods and services for the indirect spend. indirect purchases are often made off contract.
- Therefore spend data is not effectively leveraged or analysed, or spend data is typically incomplete and not coded by the commodity or category.
- Instead, spend data is linked to accounting or expense codes, and purchase orders are either not created or if they are created they can be vague or created “after the fact.”
Procurement have not leveraged digital disruption putting themselves in front of employees like their “shadow suppliers” have done
- If your employees rely on digital and mobility solutions to buy, then you have to have a procurement solution that is mobile-centric and digitally-enabled
- Automation of a quicker quoting and approval process is just one key factor
The Bottom Line For The CPO
- Partner with stakeholders to better understand their needs, supplier relationships and processes. Show them that you’re not just trying to find a lower price at the expense of their quality requirements, supplier relationships or the time they have available to move
- Embed procurement staff into their project teams to bridge the misalignment gaps
- Adopt an “agile procurement” approach to shorten the time it takes to complete the procurement cycle. An RFP is not always required and there are many opportunities to leverage flexible and agile thinking
- Invest in big data analytics to understand the company’s indirect spend amount, categories and how many suppliers are currently being used in each category. Leverage consultants spend analysis tools or request data from suppliers to achieve better visibility into your spend data
- Implement an eSourcing tool to better manage indirect categories supported by automated processes
