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