Combining the Chocolate and Peanut Butter of your SOW Program – Part 3: Making the Value Case for Pre-Award Controls

152986035In Part 2, we made the connection between spend data visibility as an enabler to sourcing value and demonstrated the impact that visibility has on control effectiveness. In this post, we build on that to identify just what sourcing value looks like and provide some pre-award control strategies to protect that value. But we start back at the Control Landscape Map to revisit the pre award environment relative to the transactional controls…

What are pre award transactional controls?
Transactional controls are those controls that safeguard the operational processes and practices that support the procurement market for acquiring and managing services. Pre-award not only refers to all things left of center in Figure 1, but highlights the concept and anchor objective of this quadrant of the control landscape: Protect procurement preferences from sourcing leakage.



Figure 1–Control Landscape Map

What are procurement preferences?
These are the things (things is a technical term) that sourcing and procurement professionals and the organization in general hold as valuable. They are valuable because of their close alignment with vendor-based savings, operational efficiency gains and preferred risk positions. Known or defined preferences are also typically expected relative to the systematic and practice-driven selection of vendors for SOW-based service engagements. For instance,

  • Vendor rate cards
  • Risk sharing
  • Margin caps
  • Acceptance criteria tied to payment
  • Service level agreements
  • Preferred vendor status
  • Sourcing operational processes
  • Volume-based discounts
  • Cost-plus pricing
  • Preferred legal T&Cs
  • Pre-negotiated SOW template
  • Vendor engagement procedures
  • Holdbacks / bonuses
  • Accelerated delivery

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Pre-award controls preserve and protect procurement preferences
Vendors don’t just hand over these preferences on a silver platter. They are called procurement preferences for a reason. Preferences with an extended shelf life deliver value to the buying organization beyond the present deal. Note that all of the preferences cited above have an implied scalability factor associated to them. That is certainly not by accident.

Negotiating the good deals is not enough, though. There must be awareness of the favorable terms throughout the buying community and there must be supporting policies, processes, technologies, et al to fully operationalize those preferences on behalf of the enterprise. (We will explore this concept later in the post.)

Uncontrolled, procurement preferences are subject to being bypassed or missed during a vendor selection process.This is a risk quite different from the other side of the control landscape – contract leakage. The differentiator is as follows:

  • Dollars of value leak out of a signed contract in the form of inaccurate payments or noncompliance with contract terms – we call this contract leakage;
  • Favorable terms leak out of vendor selection processes in the form of neglected or ignored procurement preferences – we call this sourcing leakage.

Figure 2 presents the formula for calculating sourcing leakage. Note that it can be applied to individual transactions, to vendors, to categories, and it is especially relevant to the business case at the services portfolio level.Negative results indicate leakage. Positive resultsmay indicate new procurement preferences – time to update the denominator!


Figure 2 – Sourcing Leakage Formula

Sourcing Controls for SOW-Based Services
Protecting the value that sourcing has identified in processes and negotiated with vendors is the primary control objective. Key control features include:

  • Policies help control sourcing value by aligning sourcing activities and behaviors (aka the service layer, whether internal or external) with desired sourcing and vendor management practices and outcomes.
  • Technology (preferably a vendor management system) plays a crucial role across the control landscape as an enabler of scale and coverage. A VMS can take virtually any procurement preference (again, refer back to the list above) and communicate it to the organization,as well as place system parameters around it to ensure its engagement, its inclusion, and its compliance in all subsequent SOW engagements.

When a solution integrates the desired service layer (policies, practices, processes) with desired automation (technology-driven workflows and controls) in an effort to ensure adequate engagement and realization of procurement preferences, then we call that operationalization. Of course this concept is also quite helpful on the contract compliance side of the landscape, but that is a later post.

Thought we forgot about our delicious control theme?? Nope…

Think of operationalization as a manufacturing process that combines oh, let’s say… peanut butter with uh, maybe… chocolate, to form some really unique, tasty treat that satisfies a much larger group than either peanut butter or chocolate could do on their own taste merits. Now that sounds like a perfectS OW solution!

In the next part of our series we will put the lid back on the peanut butter jar and dip our cups into some rich, creamy chocolate… aka the post-award control landscape for those of you who may be a tad confused.

MORE: Strong SOW management is key to project success

Michael Matherly

Michael Matherly
Michael Matherly is global services procurement and SOW practice director with IQNavigator.

Michael Matherly

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