Your most valuable asset

Your procurement department’s most valuable asset is not its people, technology or processes, but its credibility. You can increase resourcing, upgrade technology and implement new processes by throwing money at the problems, but regaining your lost credibility is far more difficult and potentially far more costly.

Imagine you run a small procurement department managing $200 million in spend. If it is not performing well, you might make substantial improvements by throwing in some extra cash. However, if your department has lost its credibility, you can't just buy it back and, of greater concern, your contract spend will probably increase, perhaps dramatically, because fewer suppliers will tender for your work and those who do will increase their tendered margins in the belief, rightly or wrongly, that they have an advantage over other respondents. This can quickly get very expensive: For your procurement department, a 1/2 percentage point increase in contract prices means an additional $1 million in spend.

Telstra, Australia's largest telecommunications carrier, is currently facing this situation, but on a much larger scale. Unsuccessful respondents are alleging that Telstra is awarding contracts to pals of CEO Sol Trujillo without following a fair competitive-tendering process. Even if not true, these allegations may lead to higher prices through a reduction in the number of suppliers tendering for work and an increase in tendered margins.

As an example of the credibility issues, last year, Telstra retained Accenture to run a tender for a $1/2 billion billing system. The tender resulted in the selection of an Accenture-lead consortium. The other respondents, as you might imagine, are crying foul. Amongst the most vocal is Amdocs. The Australian Financial Review reports that “Amdocs is now bidding on another major contract and insiders say Telstra will be under pressure to deliver a deal.” You can bet that Amdocs will consider this when pricing their offer.