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2015 IRF Procurement Study
This study was designed to help the incentive industry understand the language, interactions, measures of success and procedures that work and do not work among business owners, procurement, and incentive program suppliers.
Speaking confidentially and under anonymity, research participants came from Consumer Products, Manufacturing, Automotive, Hospitality, Banking, Insurance, Telecommunications, and Business Services industries.
Note that this does not claim to be a thorough review of the “closed loop” relationship across Corporate America; it offers directional insight into how productive relationships between Business Owners, Procurement, and Suppliers require open dialogue, trust, and a solid understanding of roles and objectives.
1. PROCUREMENT’S CHANGING ROLE
“Procurement” is challenging to define, as it can mean both direct and indirect purchasing. The role typically reports to the CFO, although an increasing number work under or with a dotted line to the COO.
While still rare, Chief Procurement Officers (CPOs) who take an enterprise view are considered most successful of all. This is a good evolution for improved partnerships among customers and suppliers, as the CPO’s broadened view allows for better understanding among all involved.
In some organizations, incentive travel, rewards, and recognition have generated enough business and cultural impact to have specialized procurement representatives.
The individuals in these roles recognized the unique and developing nature of their roles, and acknowledged that the strength of their business and parterships were always rooted in successful program execution.
During the downturn, various contracts were cancelled and some suppliers had to close shop. These factors gave procurement organizations a greater understanding of the risks they and their suppliers faced, as well as the opportunity to rebuild business trust.
Companies reported various practices and procedures regarding the purchase of incentives (primarily group travel) and all acknowledged that procurement has been more involved since the recent economic downturn.
The downturn lead procurement and business owners to learn more about one another’s processes and needs, and how to work more closely together as internal business partners.
Use of outsourced procurement (hired purchasing expertise) has diminished overall recently, but was a common practice during much of the downturn.
Each of the companies interviewed had significant annual group travel incentive purchases. Most differentiated group travel --including meetings and events -- from corporate travel which included hotel, air, and car rental for conducting everyday business.
Some separated incentive travel completely from other group meetings. There were a wide range of perspectives, longevity in the roles, diversity of influencers, and management opinions about group travel.
Long Term Partnerships
Interviewees reported a preference for ongoing “partnership” relationships. This allowed them to concentrate business with fewer suppliers, as long as learning and improvement continued based on shared insights.
Companies noted they are regularly solicited by multiple suppliers and that it can be exhausting to constantly respond to interested potential partners.
Ongoing partnerships offered an opportunity to identify additional areas of synergy and collaboration.
Rapid Pace of Change
Understanding the hospitality industry was reported to be more challenging than ever, with participants citing the following as key drivers:
- Disruptive technologies
- Constant price changes (ranging from the lowest average daily rates and occupancies in 2009 to record highs in 2014)
- World affairs
- Health considerations
- Cyber security, and more
With increased focus on program ROI, supplier expertise required today goes well beyond sourcing and logistics.
Business Owners and Procurement spoke of emerging travelers -- such as millennials and travelers from developing countries -- as well as the importance of relevant supplier experience.
For example, supplier expertise that is essential today must include meeting the objectives, but also to satisfy the need for an overall enjoyable experience that includes accommodating meetings, creating adventure, serving up brag-appeal, and sometimes offering a bit of community involvement as well.
Each company in the closed loop reported its own set of job metrics for the individual professional:
- The Business Owner may be evaluated on the strength of business performance attributed to their initiatives/decisions.
- Procurement measures have evolved from a focus on savings to supplier performance, process efficiency, policy compliance, risk mitigation and internal/external customer satisfaction.
- Supplier representatives are typically measured on profitable sales growth and customer satisfaction.
One important aspect of successful relationships is a shared language used by all parties, particularly in the area of what “value add” means:
- For Suppliers “value add” equates to industry knowledge, buying power, proprietary technology, call centers, and skills.
- For Procurement, “value add” meant “included at no additional cost”, as well as “recommended expertise that incurs additional investment”.
- For Business Owners, “value add” translates to how well their suppliers accomplish the job or project, provide insights, and help Business Owners achieve their objectives.
There was considerable dialogue around risk mitigation that included financial, reputational, operational, regulatory, and safety issues.
Today, procurement pays special attention to risk mitigation in such areas as Sarbannes-Oxley considerations, PCI compliance, size and financial stability of suppliers, innovation risks, switching costs, travel crisis management and more.
Other risks are less concrete. For example, “reputational risk” came up in several conversations as did such challenges as:
- Financial breaches
- Missed supplier SLAs causing participant dissatisfaction
- Subcontractors who behave badly affecting the sponsoring company’s brand, etc.
“Values risk” was also discussed, with companies more vocal than ever about “values alignment” with Suppliers -- relating to the organization’s reputation as a brand.
For example, a company that has defined humanitarian policies (such as opposing slave labor and human trafficking) may be more inclined to prefer Suppliers that have taken a similar stand and which employs subcontractors or other vendors who share these values.
Another such example was a group travel company that requires their prospects and clients to limit hotel searches to those with employees who are trained in identifying and reporting the suspected exploitation of children.
Additional values cited included companies that want to:
- Reinforce their sustainability position by seeking hotels with LEED certification
- Improve minority/diversity spend
- Provide community involvement opportunities for their attendees while attending a group incentive or meeting.
In short, Suppliers who are aligned with these risk areas will be perceived as powerful allies and can achieve “preferred” status with the client companies they serve.
Productivity meant different things to different research participants, ranging from simplified invoicing and reduced internal labor costs, to strong SLAs, contract term efficiencies, and more.
One company reported a seven-step Procurement process that separates price (apples-to-apples comparisons) from all other evaluation components.
This organization negotiates price from the price comparison, then reviews the add–ons. Then they apply a value to extra capabilities and competencies.
And, bigger was not always better: some Business Owners expressed concerns about not getting full attention from big Suppliers, and mentioned smaller Suppliers as offering greater mindshare. Others perceived there to be risks in small Suppliers not having adequate resources to meet the company’s needs.
Suppliers who can outline better Total Cost of Ownership (TCO) offer high value. For example, continuous improvement efficiencies, systems that grow with the client, the ability to leverage business from other client divisions and supplier-invested resources offer a strong value proposition that can far outweigh individual component prices.
Business Owners focused on program results, such as market share improvement, participant commitment, improved sales, employee engagement, and expanded memberships.
They also expected a high level of responsiveness from both Suppliers and Procurement.
The marketplace moves swiftly, and internal and external partners are expected to move accordingly. It is not uncommon for the Business Owner to request contingency plans for various circumstances.
Co-funding innovation in today’s fast-paced environment is another welcome offer on both sides of the table.
For example, one Business Owner described benefits of the Supplier and client disclosing growth plans to find “points of light,” where each organization’s plans intersect. By exploring their mutual growth plans, both parties benefitted by funding growth and developing “go to market” strategies.
Strategic business reviews have become a standard practice between Business Owners, Procurement, and Suppliers. These insight-based, forward-focused action planning sessions are based on analytics, rather than period report outs.
Continuous improvement and education was perceived as an ongoing process and Suppliers were expected to provide more than destination knowledge.
Price VS. Value
Not surprisingly, research participants noted that price is always part of the evaluation. The “commodity” component of the offering is often
separate from the results drivers and value add components of the offering.
Long term pricing stategies – typically greater than one project or one year -- can provide mutual benefits in creative ways, such as to offset labor increases or anticipated efficiencies through technology.
2. STRENGTHENING THE PARTNERSHIP
Our research revealed important insights about how to improve cooperation and coordination among Business Owners, Procurement, and Suppliers throughout the incentive travel, rewards, and recognition sourcing process.
Humanize the Dialogue Among Parties
Shedding light on the background, resumes, and talents of all involved can create an environment for the most effective and useful communication. This is best accomplished prior to any process being formed and requires an investment into discovery around optimal business relationships.
Several interviewees began Supplier dialogue informally at tradeshows, business conferences and even through personal endeavors such as philanthropic work. Some got acquainted through participation in roundtables and workshops that built credibility and transparency among the parties.
Likewise, multiple Procurement representatives discussed how extra time spent with Business Owners discussing needs and sharing risk mitigation stratgies paid great dividends. While difficult to assign a value in the scoring process at assessment time, Procurement and Business Owners indicated that familiarity was helpful to Suppliers, if the encounter was positive, personable, and provided an opportunity to see the Supplier working effectively.
Positive feedback, crisis management on previous projects, and stepping in where others have failed can place the Supplier on the “preferred vendor” list, a coveted position for growing and retaining business.
Invest in the Relationship
Both Procurement and Suppliers should begin by evaluating the Business Owner’s needs, objectives, measures, and budgets, as soon as the potential project is known. Once the effort becomes process driven (RFI, RFP, negotiation, etc.,) it is immensely difficult to change or influence any aspect of the effort.
Be “Other Focused”
It almost goes without saying, but focus attention on the other’s values and needs:
- The Business Owner should ask the Procurement partner how to best include the business result into the supplier evaluation.
The Procurement owner should ask the Business Owner for the “must have” needs and “desirable” wants, as well as how the initiative will be measured.
- The Supplier should ask the Business Owner and Procurement about corporate values, as well as what success looks like for each of them.
Clearly, Suppliers must understand what their client’s greatest concerns are in selecting a supplier partner.
One Supplier told how she asked the client to describe an existing preferred Supplier and how the company earned that status. This helped the potential Supplier know what “excellence looked like” to the Business Owner and to act accordingly.
Sharing an understanding of the known business climate is best for all involved. Business Owners and Procurement expressed appreciation for Suppliers who:
- Demonstrated an understanding of their marketplace
- Shared experiences facing similar issues
- Asked astute questions regarding the business situation
No Gossip or “Trash Talk”
Conduct business professionally by avoiding gossip about any party, whether internal or external. Some interviewees harbored distaste toward an internal or external partner who spoke out of turn or ill of its competition, and warned against betraying confidence or engaging in any type of unprofessional dialogue.
Have Some “Skin in the Game”
It is reasonable for Procurement to ask that issued SLAs reduce Supplier costs. Likewise, it is reasonable for a Supplier to expect that superior performance will result in increased investment. Consider balancing these expectations in developing pricing strategies that allow for pricing differentiation.
This good faith effort to reduce remuneration when possible and increase it when needed, allows both parties to succeed.
Determine if a new relationship requires a pilot program to better understand the program and partner dynamics. If so, choose a fair testing opportunity to best replicate the actual program environment.
Pilots can be an ideal way to test innovation, as well as refine analytics and reporting before finalizing requirements and specifications for the project. This also provides an opportunity for all stakeholders to develop formal and informal communications plans, including strategic business reviews and critical status calls.
3. INSIGHTS FOR SUPPLIERS
In order to smooth the procurement process, some best practices for Suppliers emerged from the research. These include the following.
Talk About the Investment
It can be helpful to provide an evaluation grid that includes the insights collected and agreed upon by all parties.
If an “informed capabilities comparison grid” is not available, provide one! Additionally, Suppliers should ask about financial expectations and preferences, including what invoicing is easiest for the clients.
Think creatively to accommodate Procurement and Business Owner needs, as well as your own. This can be very attractive to the client, as doing so creates efficiency, and shows that your goal is mutual success.
Some companies prefer packaged pricing allocated by division, while others absorb shared costs at a corporate level, often distributing the rest of the investment using a formulaic per person cost by division.
One company preferred that hotel rooms and food and beverage costs be charged to a purchasing card (or P-card), so that the volume would be applied to corporate travel spend.
Asking for detailed information on expecations demostrates sensitivity to all parties and an investment premium for convenience could potentially bejustified.
Find Out About “Sacred Cows” and “Done Deals”
Determine if an existing relationship will tip the scale in favor of a specific Supplier.
For example, if a beverage company supplies beverages to a travel company or hotel, would that organization receive a stronger evaluation or even be considered a “single source” Supplier for the beverage company’s group travel program?
Ask for complete transparency. If Procurement or the Business Owner is simply seeking price comparisons to fulfill a “three-bid policy,” ask for clarity. This can be a perfect opportunity to learn about “sacred cows” and unbreakable business covenants. It is fair to ask what differentiation must exist to justify the costs of switching Supplier.
Technology is Critical
Be clear about system compatibility, if required. This can become an area of “scope creep,” if not covered early or if faulty assumptions are made by any party.
Technology came up in every Procurement interview as a source of frustration in a variety
of areas, from reporting to speed to customer experience. Technology has received heavier weight on Supplier scorecards in the past three years.
Offer Well-Considered References
Be thoughtful about references. What kind of reference would be most applicable for the Business Owner and for Procurement?
It is helpful to offer references where there were similar circumstances or business challenges. Two interviewees suggested that Suppliers can also ask for references, in order to learn about best practices that might be emulated.
Discover Pet Peeves
Ask about what concerns all parties. Access to data or scope creep may be concerns of the Supplier.
Pricing transparency or global buying power may be a concern of Procurement.
Languages, currencies, multiple internal inputs could all be frustrations for the Business Owner or Procurement.
Understanding the concerns of the decision makers allows the Supplier to provide better service and to be a better partner.
Know About Risk
Understand the risk clients face by asking about reputational, financial, regulatory, safety, legal or other risks that should be considered.
Ask for examples of risk tolerance and challenges. All companies have stories that will offer insights -- with legends coming from risks manifested or prevented. Discuss these experiences and evaluate the potential for risk with the organization’s particular tolerance levels in mind.
Speak the Language
Business Owners and Procurement highlighted the importance of understanding a partner’s language. Shortcuts and assumptions create risks, which can be avoided be ensuring you are speaking the same language. This requires dialogue which is more candid and robust than when relationships have been built over time.
Business practices evolve out of necessity. The economic downturn accelerated change. In the group travel and incentive business, what was once driven by friendly relationships or advantageous prices has become something far more useful for all parties.
Today, VALUE MATTERS and it is measured in different ways by Suppliers, Business Owners, and Procurement.
It is incumbent upon each contributor to the project to learn about the others’ measure of value. Insights based on experience, as well as the investment of time and attention are an
important first step to establishing the relationship.
Trust and the alignment of strategic objectives can also strengthen the partnership.
A “go slow to go fast” mentality has evolved, as the longer Procurement process allows all parties to develop an efficient and established dialogue.
The investment of time and resources on the front-end allows for ongoing, mutually beneficial work over time. The incentive industry is centered on driving business results and this investment of effort from all involved supports that mission.
List of Interviews for paper:
1. Large CPG Beverage Company: 4 conversations
Travel procurement expert
Global procurement executive
Business Line executive (business owner)
Services provider sales representative
2. Global Hotel Chain: 3 conversations
Business line VP
Service provider account representative
3. Packaged Goods Company (B2B): 3 conversations
Service Provider VP
4. Global Financial Services Company: 3 conversations
Travel Program Manager
Procurement Liaison to PM
Service Provider Sales Representative
5. Large Telecommunications Company: 2 conversations
Service Provider Sales Representative
6. Automotive Manufacturer: 2 conversations
Business Line Executive
Incentive Provider Sales Representative
7. Insurance Company: 1 conversation
Supplier Relations Manager
8. Agriculture Cooperative: 1 conversation
Business Line Executive
9. Benefits, Insurance and Wealth Management Company: 1 conversation
 Closed loop here refers to gaining the input of all three parties at the same organization - Business owner, Procurement Manager, and Supplier. This allowed the researcher to understand the process from all three of the participants
 CPO – Chief Procurement Officer
 PCI compliance - Payment Card Industry (PCI) compliance. The Payment Card Industry Security Standards Council (PCI SSC) was launched on September 7, 2006 to manage the ongoing evolution of the Payment Card Industry (PCI) security standards with focus on improving payment account security throughout the transaction process
 SLA’s – Service Level Agreements. An SLA is a document that describes the minimum performance criteria a provider promises to meet while delivering a service