Carrot or Stick? Keys to Boosting Supplier Performance Revealed

2017 PROCUREMENT STUDY Research Summary

Key Insights for Leading Procurement Professionals Contents

Background 3

Key Findings/Takeaways 4

Findings and Outcomes

1. Performance Management Matters 5

2. It’s not the dollars that matter - it’s the Soft Skills that make the difference 7

3. The best buyers interact differently with their suppliers 9

4. Organisations that practice transformational supplier leadership experience significantly better supplier performance 10

5. Public Sector versus Private Sector 14

6. There’s two sides to every story - what your suppliers say 16

Conclusion 18

How we can help 20

Methodology 22

Appendix 24

2017 PROCUREMENT STUDY Research Summary 2 Background

This study is part of Grosvenor’s ongoing commitment to the improvement of the procurement profession in Australia and New Zealand.

This year’s study is the fourth of its kind and includes input from both buyers and suppliers to determine how buyers can best help improve and boost supplier performance.

2 2017 PROCUREMENT STUDY Research Summary 3 Key Findings / Takeaways

Study covers a sample of 89 suppliers and 163 buyers representing a combined spend of $5.6bn.

Average supplier performance satisfaction rating is 74%. This means that $3bn worth of spend are at or below 70% performance. A staggering $611m is even below 30%.

Only 28% of respondents received a performance rating of over90%.

There is a marked difference with how those buyers with +90% performance interact with their suppliers, it’s their soft skills.

Organisations motivating, developing and challenging suppliers are three times more likely to receive superior performance and receive a whopping 29% more performance!

Buyers typically overestimate how well they are motivating, developing and challenging suppliers.

Buyers overestimate the importance of specifying what needs to get done and what rewards to expect

Suppliers react much better to trusting buyers who ask for input and express confidence in the supplier.

2017 PROCUREMENT STUDY Research Summary 4 Findings and Outcomes 1 Performance Management Matters There are two types of organisations amongst the 252 participants: Those that actively manage supplier performance and those that don’t and hope for the best.

Guess who gets the better results?

The average supplier delivers 74% performance

The participants represent a combined spend of $5.6bn. Understanding what the difference between receiving 74% performance (which is the average) or 90% plus is a seriously worthwhile exercise.

4 2017 PROCUREMENT STUDY Research Summary 5 Let’s start by looking at what the suppliers said would help lift their performance:

“treat us with respect”

“Listen and engage in

partnership rather than work “collaborate with us in a power relationship” to solve problems”

“focus on outcomes “change cultural mindset. not process” Suppliers have strategic value and deserve to be included in important discussions”

“Be transparent about what you expect and what “communicate early any concerns outcomes you need.” in performance”

“clarity about “clear and reasonable “earlier engagement expectations” timeline of deliverables, with the market” agreed upon in advance”

“get involved in the “Respond to emails “interaction” project more often” and return phone calls.”

“be responsive to advice offered rather than exhibit “be timely in your more concern over ticking provision of inputs/ “provide feedback contractual boxes.” feedback” more often”

2017 PROCUREMENT STUDY Research Summary 6 Findings and Outcomes It’s not the dollars that matter - it’s the Soft 2 Skills that make the difference

Conventional wisdom would tell us that, buyers that have a big share of the supplier’s overall revenue would receive superior performance.

Also, suppliers should be more likely to go the extra mile for buyers that are more profitable or hold big potential for future revenue.

The data tells us however that the contract value or the size of the supplier has little impact on the level of performance the buyer receives.

So much for conventional wisdom…

2017 PROCUREMENT STUDY Research Summary 7 Want more performance from suppliers? It’s time to dangle a few carrots.

To find what does determine better performance we asked those buyers receiving a performance level above 90%. Yes, more than 90%!

What we found is that they interact in a very different way with their suppliers.

They use carrots not sticks – yes soft skills that encourage and reward better performance!

What do they do that’s different? 1st They actively manage the performance of their suppliers. They do not use “sticks” in their contracts: they recognise that 2nd “abatements”, “performance discounts” and other negative consequences for underperforming suppliers do not incentivise the right behaviours and do not lead to superior performance. Why? Because they know that these mechanisms only lead to enough performance to avoid the “stick”.

2017 PROCUREMENT STUDY Research Summary 8 Findings and Outcomes The most successful buyers interact 3 differently with their suppliers Buyers who receive performance above 90% interact differently with their suppliers (see figure 1). They:

> Motivate suppliers by providing meaning and challenge to the work at hand. They are enthusiastic and optimistic about the outcomes of the contract (IM)

> Lead by example and create trust by conducting business with underlying ethics, principles and values. They go beyond self-interest for the good of the outcomes (II)

> Pay attention to the individual supplier’s needs and growth potential. They then develop and coach that supplier to realise their maximum potential (IC)

> Challenge the status quo and support innovative ideas and solutions proposed by the supplier (IS).

Combined, these four elements represent ‘transformational supplier leadership’.

The difference in performance is in how the buyer interacts with their supplier: Successful organisations motivate, develop and challenge their suppliers. And they reward good performance instead of punishing underperformance.

Figure 1

Performance below Performance 90% or better

Motivate Suppliers (IM)

No active Leads by example (I) management (LF)

Punishes Developes and underperformance... coaches suppliers (IC)

Rewards good Challenges status performance (CR) quo (IS)

Refer to appendix for detailed descriptions of buyer leadership 8 2017 PROCUREMENT STUDY Research Summary 9 Findings and Outcomes Organisations that practice transformational supplier leadership experience significantly 4 better supplier performance Why leadership matters

The 25% of organisations that make the most use of transformational supplier leadership are almost three times as likely to receive superior performance (>90%) than the bottom 25%.

On average they achieve 29% better performance (8.5 instead of 6.4 out of 10).

64% vs 85% average performance

Poor High performance performance 1 2 3 4 5 6 7 8 9 10

Don’t lead their suppliers Lead their suppliers

2017 PROCUREMENT STUDY Research Summary 10 Findings and Outcomes Organisations motivating, developing and challenging suppliers are three times as likely to receive superior performance. And receive a whopping 29% more performance!

Conversely those organisations that least use transformational supplier leadership elements are twice as likely to receive LESS than 60% performance on their contracts.

Clients making the most use of transformational supplier leadership 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0 Clients receive performance Clients receive performance of less than 60% above 90%

Buyers who make the most use of transformational supplier leadership are three times more likely to receive superior performance

Clients least using transformational supplier leadership 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0 Clients receive performance Clients receive performance of less than 60% above 90%

10 2017 PROCUREMENT STUDY Research Summary 11 A lot of this sounds straight forward so you could be forgiven for assuming that most Australian organisations are already actively managing their suppliers in this manner.

Well, not quite, only 52% of organisations reward better performance and approximately 10% still make frequent use of abatements and contractual “sticks”.

Then there are other organisations that don’t manage their supply base at all, hope for the best and as a result receive a much lower perfor- mance.

It’s unknown exactly how many of these organisations exist as only 2% of buyers surveyed admitted that they use this “laissez-faire” style.

When suppliers were asked the same question, they said that 11% of their buyers don’t manage them at all.

Does this mean there are many more hiding out there?

2017 PROCUREMENT STUDY Research Summary 12 Buyers overestimate how well they are motivating, developing and challenging suppliers. Many still have not started managing suppliers at all.

This leaves 37% of buyers saying that they use transformational elements regularly but yet again their suppliers disagree with only 27% seeing their buyers actually using these techniques.

Buyers overestimate how well they are motivating, developing and 60% challenging suppliers

50%

40%

30%

20%

10%

0% No active Punishes Rewards good Use transformational management (LF) underperformance performance (CR) supplier leadership (ME) Buyer admit using this style Supplier see clients use this style

60% Many still have not started managing 50% suppliers at all

40%

30%

20%

10%

0% No active Punishes Rewards good Use transformational management (LF) underperformance performance (CR) supplier leadership (ME)

Buyer admit using this style Supplier see clients use this style

2017 PROCUREMENT STUDY Research Summary 13 Findings and Outcomes 5 Public versus Private Sector Where they agreed.

Both public and private sector agreed that the most important element for influencing positive supplier performance is the buyer’s ability to motivate the supplier.

In the private sector, this is slightly more important and includes articulating a compelling vision of the future and expressing confidence that goals can be achieved.

Where they differed.

In the public sector, leading by example and challenging the status quo are more important for buyers.

This means that those organisations that generate the highest performance are those that are able to motivate their suppliers to provide proactive service and innovative solutions.

It is particularly important in the public sector to challenge suppliers to be more innovative and lead by example through values, beliefs and a sense of purpose.

2017 PROCUREMENT STUDY Research Summary 14 Findings and Outcomes The data also indicated that performance in the private sector is more sensitive to “bad” management styles: If a supplier is only managed by exception (ie when they have done something wrong) or if they are not managed at all, private sector organisations receive worse performance than their public-sector counterparts.

If suppliers are badly managed or not managed at all, they more often punish private sector buyers via lower performance than their public-sector counterparts.

2017 PROCUREMENT STUDY Research Summary 15 Findings and Outcomes There’s two sides to every story - what 6 your suppliers say

What exactly did suppliers say will improve their performance? The highest positive impact on their performance is driven by the following buyer behaviours:

1. expresses confidence that goals will be achieved 2. helps us develop our strengths 3. goes beyond self-interest to enhance the performance of the contract 4. seeks our input and experience when solving business problems 5. talks enthusiastically about what needs to be accomplished.

Let’s compare that to what the buyer’s think is important?

Buyers significantly underestimate the importance of three out of the five behaviours above, namely:

1. helps us develop our strengths 2. goes beyond self-interest to enhance the performance of the contract 3. seeks our input and experience when solving business problems.

2017 PROCUREMENT STUDY Research Summary 16 Findings and Outcomes

Buyers overestimate the importance of specifying what needs to get done and what rewards to expect - suppliers react much better to trusting buyers who ask for input and express confidence in the supplier.

Buyers also overestimate the importance of other behaviours, such as:

> making clear what the supplier can expect to receive when performance goals are achieved

> being specific about what level of performance is required from the supplier

> communicating the importance of achieving the goals of the contract to all internal stakeholders and to the supplier.

This shows that buyers rely too much on communicating their expectations, while suppliers are more motivated by buyers who trust develop and seek their input.

16 2017 PROCUREMENT STUDY Research Summary 17 Conclusion

Given the $5.6b worth of contracts studied are delivering an average performance level of 74% the scope for improvement and commercial impact is enormous.

Procurement is a well evolved and mature discipline from a process and technology perspective. The mind set attached to the management of suppliers is lagging and therefore where the greatest opportunities for improvement now lie.

The concept of supplier “partnerships” is nothing new. Our study still found significant gaps between what the buyer and the supplier view as important in achieving this state.

From a supplier perspective the motivational drivers to perform, grow and go the extra mile are remarkably similar to well accepted and adopted employee motivators. They want to be motivated, developed and challenged.

This makes sense considering the human element and the associated essence of partnership, especially when procuring services rather than goods.

So, it’s the soft skills that matter: that’s where you should next focus your efforts if you want to obtain a higher level of supplier performance and the associated economic benefits.

2017 PROCUREMENT STUDY Research Summary 18 Further reading

2016 Procurement Study: How leadership impacts supplier value www.grosvenor.com.au/resources/ 2016-supplier-management-study Supplier Performance Starter Kit info.grosvenor.com.au/ supplier-performance-starter-kit

2015 Procurement Study: www.grosvenor.com.au/resources/ cpo-study-2015-emerging-trends-in-advanced-spend-levers

2014 Procurement Study: What is the right size for your team? www.grosvenor.com.au/resources/ procurement-champions-benchmark-study-2014

2017PROCUREMENT STUDY Research Summary 19 What you can do today to improve your supplier’s performance

Please Contract is actively managed and performance regularly tracked Contract does not include “sticks” Contract includes “carrots”

What can you do today to motivate, develop and challenge your supplier?

What I intend to do today Supplier Leadership Dimension with my supplier

1. MOTIVATE: Express confidence that goals will be achieved Like staff, suppliers achieve their full potential when they are motivated. Contract managers should know what can be achieved and challenge their suppliers to achieve best performance.

2. DEVELOP: Understand the supplier’s strengths and build on them Suppliers are all at different levels of maturity they have strengths and weaknesses. Understanding exactly what they are is key for every contract manager. Those who then work with suppliers to leverage their strengths and address their weaknesses receive much better performance from suppliers.

3. CHALLENGE: Seek the supplier’s input and experience when solving business problems Chances are your supplier has seen it all before. They serve hundreds of customers every day. Tapping into this knowledge is important, buyers too often pretend or think they know the best way to solve problems. Seeking supplier input not only delivers better solutions, it also creates ownership and keeps everyone motivated.

The performance equation MOTIVATE + DEVELOP + CHALLENGE = Get BETTER PERFORMACE

2017 PROCUREMENT STUDY Research Summary 20 How we can help

Modern day procurement is not just about sourcing suppliers. It’s about forming relationships and growing with your partners while at the same time delivering you real savings.

Truly successful contractual relationships deliver all the required outcomes, all the anticipated benefits and then some.

For too long procurement teams have lacked a voice and too often find themselves bogged down in the urgent and unimportant.

Grosvenor helps you optimise your procurement function to deliver long-term tangible and visible results through the provision of high level, high value proven improvement programs.

Supplier Leadership Frustrated with suppliers not pulling their weight?

PERFORMANCE TURNAROUND Check if your contract fires from all cylinders and what needs to be done if it doesn’t.

SUPPLIER RELATIONSHIP Truly understand your supply base with our 360-degree feedback mechanism.

COMMERCIAL REVIEW Benchmark cost performance against other suppliers, innovation or in-house delivery.

Our supplier leadership interventions typically increase performance by 20% to 30%.

20 2017 PROCUREMENT STUDY Research Summary 21 Procurement Transformation Worried about how procurement operates, including not driving sufficient savings?

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Cost reduction range typically: 5% to 12%

If you would like a no obligation one-hour consultation with Dr Stefan Gassner to discuss your procurement function please feel free to call or email on the numbers below.

(02) 8274 9200 [email protected]

2017 PROCUREMENT STUDY Research Summary 22 Methodology

Our 2017 Procurement Study invited all leading procurement professionals from Australia and New Zealand to participate in the survey, based on Grosvenor’s contact databases and targeted posts on LinkedIn. We have further addressed our survey to 4,000 suppliers working with the NSW Government.

The survey was open between April and August 2017. Grosvenor received a total of 376 responses. After putting incomplete responses aside, 252 proceeded to the analysis stage.

Our study distinguishes between Champions, Followers and Laggards for supplier performance. Champions are those top 25% organisations that have the highest supplier performance. The next 50% by performance were termed Followers and the bottom 25% are performance Laggards.

Suppliers, 89, 35%

Buyers, 163, 65%

Table 1: Contract Size

Contract Size Average contract value Number of contracts

Large contract $88,841,667 60

Medium $1,871,801 119

Small $96,539 73

22 2017 PROCUREMENT STUDY Research Summary 23 Table 3: By role for the buyers

Role Buyer I make sure that day to day activities are getting done 9 I ensure the overall performance of the contract 77 I hold the overall budget under which this contract is funded 12 I support this contract from a procurement point of view 56

I support this contract from a 5 payment/finance point of view

None of the above 4

Table 4: By role for the suppliers

Role Supplier I make sure that day to day activities are getting done 17 I ensure the overall performance of the contract 60 I support this contract from an administration point of view 5

None of the above 7

Table 5: By sector: 108 Private Sector, 125 Public sector, 19 unknown Industry breakdown:

State Government 72 Other 37 Federal Government 29 Manufacturing 23 Other services 15 Professional services 15 Other industry 13 Financial services 12 Resources 12 Other Government 6 Retail 3

2017 PROCUREMENT STUDY Research Summary 24 Appendix

Different Leadership Styles for Buyers The Multifactor Leadership Questionnaire (MLQ) framework was developed by B. Bass and B. Avolio 25 years ago. Grosvenor applies it to the management of suppliers and described its four different leadership styles below:

Laissez-faire (LF) This maturity stage is best described as “no leadership”. Buyers engaging in this leadership style avoid getting involved, are absent when needed and avoid making decisions.

Suppliers frequently take advantage of situations where the client is passive. This allows suppliers to reduce their overall cost and maximise their profits. As you may expect, the overall performance of these contracts is very low and the relationships dysfunctional.

“When the cat is away, the mice will play”, this is as true for an absent manager of staff as it is for an absent contract manager.

Management by exception (ME) These organisations clearly specify in their contracts acceptable levels of performance. If not achieved, contracts include punitive measures and managers spend a lot of time fighting fires, ensuring compliance and pointing out mistakes. Buyers typically only get involved when things have become serious or chronic. They have a firm belief in “if it isn’t broken, don’t fix it”.

Suppliers will adapt to this style by performing at the minimum level required to avoid punishment. As the client just gets involved when things go wrong, relationships are often adversarial. Imagine sitting down with your staff every time things go wrong but not providing any positive feedback!

24 2017 PROCUREMENT STUDY Research Summary 25 Appendix

Contingent Reward (CR) At this maturity stage, contracts include “carrots” to reward the achievement of goals and contract managers openly state and clarify what performance is expected. It is clear to all parties involved who is responsible for achieving goals and buyers provide positive and constructive feedback regularly.

Suppliers want to do a good job and want to demonstrate to the client that they are adding real value. This leadership style allows them to do so and provides an upside for good performance. Suppliers will provide the level of performance that is specified in the contract, through Key Performance Indicators or Service Levels, and do just enough to receive their reward. Relationships are working relationships, similar to those you may have with a colleague from a different department.

Transformational leadership (II, IS, IM, IC) Suppliers managed by transformational buyers go beyond what is required in the contract. Think of the best boss you’ve ever had and how they managed you. Their leadership is conducted in a way that encourages innovation, keeps up morale, and motivation and exceeds performance expectations. Relationships are a true partnership with all partners bringing to the table what they possibly could.

Organisations that excel in the leadership of their suppliers instil pride in anyone associated with contracts, create trusting relationships, communicate a strong sense of purpose, talk optimistically about the goals of contracts, seek the suppliers’ input into solving issues and spend time teaching and coaching suppliers.

2017 PROCUREMENT STUDY Research Summary 26