Changing SRM Behaviors in a Period of $70/bbl Oil

I was in Houston yesterday evening, speaking to a large group of procurement executives at a roundtable held by KPMG’s Procurement Advisory Group, at the fabulous Brennan’s restaurant on Smith Street.  The event was sponsored by Coupa, one of the leading providers of software, and several of the Coupa executives from the Houston area and from California were present.  The event was well attended, with over 40 executives present.  I had an opportunity to speak with a  number of executives from various organizations, including the Port of Houston, El Paso Exploration, Baylor College of Medicine, Pioneer Natural Resources, AXIP Energy Services, LyondellBasell Chemicals, and others.  Prior to the dinner, I also spoke with one of my former MBA students from NC State, Scott Frahm, who has been working at Bechtel for the last 10 years.

The atmosphere in Houston can best be described as “full throttle”.  Everywhere I drove in the city there was construction going on, including a massive re-construction of the Hobby Airport.  Business at the Port of Houston is robust, and the volume is growing, based on the hope that the Panama Canal expansion will drive more cargo into the port.   It seems as if the infrastructure is continuing to grow, based on the strong oil prices we’ve seen in the last few years. However, with the price of oil down in the $70’s, I did sense a bit of uneasiness in the air.  One of the opinions expressed (which I heard from several people) is that the Saudis are in effect hoping to drive out the “bottom feeders” in the industry, referring to the startups that have come out of the fracking craze.  The sense was that the strategy was to drive out competition by forcing oil prices to go lower, and putting these newer companies out of business.

Interestingly, the topic of my presentation was on Supplier Relationship Management, a research area that I have been working on with KPMG for the past year.  I shared insights derived from over 29 executive interviews, talking about the need for organizations to drive mutually beneficial contracts, to share risks and rewards, and to think on how to become more transparent and visible in their planning and actions, to derive greater value to stakeholders.  A big part of the ensuing discussion focused on the important of alignment within the organization, as too often organizations were known to say one thing to suppliers, and to act in a way that was completely opposite to agreed on working principals.

There was also a discussion about the challenges of accessing good data necessary for driving SRM initiatives forward.  One executive mentioned to me that “I came from the Sales side of the organization into procurement, and was used to working with CRM software that would provide me with all the information I needed to know about our customer segments, who were in them, how much business we were doing with them, the products and services and pricing structures we had in place, etc.  But when I came over to purchasing, and looked at the SRM technology that was available, I realized it wasn’t able to provide any of the information I need to have a conversation with my suppliers!”

This topic resonated strongly with me, as I had a conversation with Tim Cummins on Monday at the Zycus event in Amelia Island, and the same conversation with my student Scott Frahm earlier in the day.  In fact, the way that organizations manage relationships and contracting has to change, to keep up with the extremely volatile and complex environment we are faced in today’s global economy.  Procurement executives need to re-think how they establish performance metrics, how they evaluate and measure performance against these metrics, and find ways to resolve the inevitable conflicts when they occurred.  Although this sounds like a simplistic solution, my experience has been that companies don’t do this very well, either because they cannot align their internal stakeholders to this way of working, that they fail to properly define the scope of responsibilities during the contracting period, and they are unable to “sell the benefits” of this manner of working to their senior leadership. This is going to have to change.  The likelihood that oil is going to stick around $70 a barrel for some time is high (based on my quick survey of the room)…and I believe that this means thinking long-term, and not simply reverting to beating up on suppliers.  One executive pointed out that “Nobody cares about procurement when oil is at $100/bbl, but all of a sudden they are coming to me saying “we need to run everything through procurement because we have to cut back!””

This is exactly the root cause of the problem.  Procurement needs to re-think how they are selling SRM to executives inside the company, and how they think about effective relationally-based contracting to survive in a period of $70 oil and increased uncertainty on the horizon.