People, by nature, love recommendations says Edmund Zagorin, CEO and Founder of Arkestro. In this article, he explores how recommendations can be incorporated into the procurement process to help team members make better decisions and provides helpful tips to leverage the collective wisdom your various business teams have accumulated over the years.
Today’s procurement systems are not as sophisticated as they should be, as they fail to incorporate basic tenets of human psychology.
What do we mean by this?
As of now, the primary means of surfacing suppliers in the course of a search selection remains very arbitrary – qualify the suppliers then pick the lowest price. This process does very little to ensure the quality of the supplier and does not reflect what other business teams’ experience with the supplier might have been.
The simple fact is that when making supplier selections, team members care most about who in their organization made similar purchases in a similar context. But do you know who your organization’s most trustworthy employees buy from? There’s got to be a way to factor this into supplier rankings.
Why Not Just Ask?
Why don’t you just ask your fellow employees who they prefer to buy from? Well, it’s not that simple. Humans are highly prone to a phenomenon known as “stated preferences.” This means when you ask a colleague who is their preferred supplier or who they’d choose, they are likely to give an answer that they think would be most acceptable to you.
In many ways this is like voting. When you ask someone who they are voting for, people often respond with the answer they think would be most palatable to who is posing the question. In fact, the tendency for people to lie in answering polls is well documented.
Stated preferences are often very different from “revealed preferences,” or who the person is really planning to vote for. Just as people make their true preferences known in the privacy of the voting booth, procurement professionals tend to make their true preferences known when they actually spend money – the ultimate truth serum.
Leveraging Collective Wisdom
If you’re making the decision on who to buy from based on stated preferences, you’re unfortunately basing these decisions on unreliable data. So how do we get revealed preferences from across business teams in your organization factored in? In other words, how do we leverage the collective wisdom and experience from across our organizations in order to amplify the impact of the entire organization’s best purchasing decisions?
We may want to start by taking a lesson from Google’s playbook. While certain elements of Google’s search algorithm remain a mystery, we do know that pages that are visited more often than others as well as pages that achieve “repeat visited” status are elevated in search rankings.
This is how Google taps into the “Wisdom of Crowds,” a concept we’ll get to in a minute. Similarly, purchasing systems need to better elevate and surface those suppliers chosen more often by an organization’s employees. This is a vital element that needs to be reflected in supplier rankings, as this approach extends the life of the best purchasing decisions across the organization.
This approach can drive significant cost-savings from more advantageous contracts as business dealings are consolidated down to those suppliers who are truly preferred. And these cost-savings can increase exponentially when teams incorporate such tactics as predictive pricing – leveraging AI to guide them on a fair price for a particular product or service, to initiate negotiations – and when all manual back-and-forth processes are automated.
In his best-selling book, “The Wisdom of Crowds,” James Surowiecki explores a deceptively simple idea: large groups of people are smarter than an elite few, no matter how brilliant, and better at solving problems, fostering innovation and coming to wise decisions. The collective judgment of a diverse group can compensate for the bias of a small group.
Surowiecki draws on examples from popular culture, ant biology, military history, politics and more to demonstrate the validity of this idea. It turns out that “consensus culture,” as Larry Page called it, is not always a bad thing, and can actually be quite beneficial in procurement.
In summary, the decision-making process in procurement is and should be a team sport. People tend to make the best decisions and feel most confident about those decisions when they receive recommendations from people they trust. Therefore, the supplier surfacing process must be based on the conditions that foster the best decision-making. And the process must be fast and automatic – because when decisions are made too slowly, good opportunities might pass you by.
The bottom line is that unless you are incorporating revealed preferences into supplier rankings, you may be using unreliable data to guide your most critical purchasing decisions. As a result, you may be failing to leverage the collective wisdom your various business teams have accumulated over the years, and that’s clearly a missed opportunity.