Trust me, I never ever thought that I would write about my vacuum cleaner. There is hardly a more mundane and low interest appliance that I can think of, and yet here we are. The other day when our old vacuum cleaner broke down, we had to buy a new one. I don’t know about you, but I’m totally not familiar with the market for vacuum cleaners. I spent two evenings on procurement, familiarizing myself with the different offerings on the market.
Doing this actually brought back some early memories. I remember my parents always looked at the National Consumers’ Association product test results before buying a new household appliance. They invariably went for the ‘best of test’ and consistently ended up being disappointed.
Any product that comes out ‘best in test’ based on a highly subjective list of criteria, is unlikely the best under real world conditions. After two nights of research, we bit the bullet and went for the Dyson and never looked back. It is great, it simply is the best vacuum cleaner that we have had, even though according to the Consumers Association, it did not come out ‘best in test’, partly because it is expensive.
A poor man buys twice
Last weekend the Financial Times published an interview with Pascal Soriot, the CEO of Astra Zeneca, the embattled pharmaceutical company. The article provides an interesting insight in the differences in the way the UK and the EU have negotiated the contract for the supply of the Covid-19 vaccine. As where the EU team was led by Sandra Gallina, a seasoned Brussels’ career bureaucrat, the UK team was led by Kate Bingham, a biochemist and successful venture capitalist. As where the EU probably negotiated a better price, the UK negotiated early preferential delivery and a large supply.
Both examples, the vacuum cleaner and the vaccine, illustrate that it is time to review and reengineer the traditional procurement process. In the legal industry for the past decade or so, clients have used multiple tools to get a better deal and lower their external legal spend. Despite these industry wide individual efforts, data shows that effectively clients are paying more, not less. In the real world, procurement doesn’t seem to work very well.
It is not about the price, but about the value
Just like any other purchase, be it a vacuum cleaner or a vaccine, ultimately the purchase price should not be decisive. Benjamin Franklin, one of the Founding Fathers of the US, used to say, “The bitterness of poor quality remains long after the sweetness of low price is forgotten”. Also using an ultimately subjective list of ‘objective’ criteria rarely leads to the best result. It is always better to focus on value, rather than on price.
So what exactly is value? The answer is, it depends, but is on an individual level always in the eye of the beholder. That is one of the primary reasons that ‘objective’ criteria don’t tend to work. This also explains the power of brands. Many premium brands are objectively way too expensive, but are highly desirable nevertheless. Some premium products are even highly impractical and still people pay vast sums of money to own them. Why spend money on a premium sportscar that can carry only two passengers with no luggage, is highly uneconomical to drive and cannot handle speedbumps, if you can buy let’s say a Mercedes E-class for 30% of the price? For an individual, ‘procurement’ is not a rational process.
On a corporate level Value is closely tied to Return on Investment. Companies are in the business of selling and making money. Spending money should in this process only be a means to an end. Typically companies are happy to spend money on things that help them make money, and not so much on things that are merely considered a cost. This does not mean that price is unimportant, it means that price should be considered in relation to Return on Investment. The higher the ROI, the more can be invested. Narrowed to the legal industry, this means for example that for employment law, a company would be prepared to pay a lower rate for a lawyer that handles the dismissal of an individual employee, and a very high rate for the lawyer that manages to prevent Uber drivers to be considered employees. Could be the same lawyer, but two entirely different value propositions. For further explanation please have a look at our TGO Value Matrix©
The dreaded procurement process
We have all been there. We are putting a lot of energy in a pitch, only to be left totally frustrated because the only element the client seems interested in, is the price. Or even worse: you are required to provide all sorts of non-relevant information, that takes a great amount of time to assemble and says nothing about your quality or ability to handle the mandate. Sometimes you’re left with the unpleasant feeling that the potential client only needed your proposal to get the price from their preferred supplier down. O, how much we hate this type of pitch.
I’m with you on this. It is a stupid process and it does not work. There are tons of data to prove that it does not lead to a better product or to a lower price. What is important is that companies (and governments for that matter) upgrade to Procurement 2.0 and start using the ROI principle. This means that there should be a clear relation between money spent and Return on Investment. Law firms can play a pivotal role in this upgrade process, as they should stop putting equal price on all hours. I am aware that this opens up a can of worms, on which I will elaborate in the weeks to come. To be continued!