Procurement: The Startup’s New Best Friend?Procurement
A fact has been striking me for a while. Innovation labs and incubators have multiplied in major corporations to try to find the next startup that will rejuvenate their business models. In the last years, this approach been seen as the Holy Grail to unlocking innovation of enterprises. Often, we see suppliers to the enterprise participating in the incubators. Yet, these initiatives are rarely owned by Procurement. On the contrary, Procurement often plays the bad cop role, creating barriers to onboard new and innovative suppliers, asking for endless compliance documents, ending the magic of the incubation. Why is it so? Is Procurement not in the best place to leverage its supplier market expertise to unearth innovative gems?
First of all, one must realize that not all partnerships with startups will go through the typical customer-supplier relationship. They might come in other forms like a joint-venture, an equity investment or a licensing agreement. These are traditionally not in the realm of expertise of Procurement and would rather involve other teams from Finance. According to a survey by KPMG, collaborations involving equity (joint ventures, equity investments, acquisitions, etc.) comprise a total of 40% of collaborations whereas only 24% for customer-supplier relationships and 19% for licensing.
Therefore, it is understandable that Procurement does not necessary take the lead in all cases. However, Procurement remains an asset, especially in identifying potential targets or participating in their due diligences. What is more, for 24% of the cases, it should be on top of these customer-supplier partnerships with startups. That is largely not the case.
I can think of at least three reasons why.
First, Procurement is often not aligned enough with its company’s business and therefore lacks the understanding required to find the next startup or innovation to accelerate business. Indeed, to build relevant partnerships, Procurement must grasp its company’s challenges and its future areas of development, in a few words, get a much broader view beyond the often narrow procurement lens. This kind of mindset must be instilled by the Chief Procurement Officer himself even though business curiosity remains everyone’s duty. This is actually one of the main recommendations produced by Forrester in its Q1 2019 survey about the keys to a successful procurement transformation.
Second, Procurement lacks time and resources to perform this kind of tasks. Its resources are too often consumed in labor-intensive tasks of lower added-value like gathering data from scattered legacy systems. This is where having a powerful digital procurement platform which automates processes and enables actionable analytics is key: you free resources for new value-added tasks. With such a tool, you could even afford to have somebody specifically in charge of supplier-enabled innovation instead of diluting the effort within your team.
But mostly, procurement processes are not designed to work effectively with new startups. They tend to favor larger companies, especially under the dependency criteria or volume concentration strategies.
Let us dig into this aspect of things.
To start with, the time frame within which Procurement and a startup must work is not the same. On a startup point of view, it takes too much time to respond to the typical procurement qualification process which requires tens of documents to browse, hundreds of questions to answer and multiple justification documents to attach. This is even more obvious when these obligations come upon startups prior to knowing about the type of partnership and the benefits that are expected. On the other hand, decision-making about a qualification process or a purchase order is too slow. Startups expect answers in terms of days not weeks.
One shall also keep in mind that resources are scarce in a startup. Startups’ employees must be polyvalent. They find it very time-consuming to deal with enterprises’ complex organizations with numerous specialized points of contacts (one for bidding, one for contracting, one for ordering, one for invoicing, etc.). They want the real decision-maker. Procurement cannot change company’s complex organization. However, they can define a single point of entry for startups: a person with a strong internal network, a deep understanding of the organizational maze and the ability to grasp startups specific challenges and how to solve them.
Also, the gates to become a supplier to a large company are typically designed with bigger organizations in mind: dependency criteria, environmental charters, ethical declaration, quality labels, etc. The idea here is to start simple: a non-disclosure agreement to ensure confidentiality, a letter of intent to ensure motivation and some intellectual property (IP) general rules in case any IP is built jointly.
But, the main concern for startups about Procurement processes is about invoice payment. Big corporations are not renown for being fast at paying supplier invoices. Cash being a matter of survival for startups, this is a critical point to be addressed in a perspective of collaboration. Startups would rather get less money but get it faster. This means that a company with an efficient source-to-pay process will definitely have a competitive advantage over its peers when it comes to working with innovative startups.
How can Procurement adapt its processes to better collaborate with startups?
To start with, there is a need for a change of philosophy. Buyers need to put aside their compliance hats and put on their entrepreneurial ones! This implies accepting to take more risks as entrepreneurs do. Nevertheless, this shall not be done at all costs. These risks need to be measured and approved for a certain return on investment.
This risk evaluation must be part of a true startup incubation strategy: mentorship, legal support, share of master agreement prices, sales development support through their network, shared resources. Procurement can actually offer a lot of know-how and value for startups.
Finally, there is an obvious need for process adaptation. A need for the process to be gated and adapted to the stage of collaboration. Very light enablement shall be embraced at early stages when collaboration conditions and deliverables are quite uncertain. They may become more restrictive further down in the process when mutual benefits are clarified.
Here are a few good practices already implemented by some best-in-class Procurement departments:
–Open a gate for startups. Not only will you identify interesting startups. Some will identify you too and may even come with an innovative idea for your business. This is why it is important to have an open door for them to submit their projects. It may come in the form of a dedicated startup portal. Several Procurement departments have created one based on the Source-to-Pay solution they use and have even interfaced it to some public startup portals. Embedding the qualification criteria that are specific to your business, you shall end up with a pool of startups that you will be able to follow up per incubation stages (“discovery”, “incubating”, “pilot”, “growing”, etc).
–Adapt the contracting process to only focus on the essentials of a collaboration with a startup. This contracting process shall evolve along with the incubation stages of the target that have been defined: non-disclosure agreement for “discovery”, data protection clauses for “incubating”, proof of concept with formal description for “pilot”, for instance. Avoid sending hundred pages standard contractual documents at early stages, otherwise few startups will remain in your game.
–Speed up decision-making, especially by establishing specifically shorter approval workflows for all interactions with startups: contracts, orders, invoice and payment processing.
–Set up accelerated payment terms by default for startups as a major part of speeding up the payment process.
–Appoint a dedicated contact person who will facilitate startups interactions within the organization.
This concludes part one, aiming to position Procurement as a potential driver to bring more innovation into the business, faster. In part 2, we will have a deeper look into use cases from pioneering large companies.