In a recent post, Spend Matters addressed a significant issue: handling supplier selection advice from a third party. In that post, editor Jason Busch cautions those in buying roles to be wary of such advice because it may be covertly driven by some type of revenue-sharing arrangement between the advisor and the recommended supplier.
Jason writes that “the onus should be on procurement organizations to ensure that they are representing their organization’s best spending interests by [investigating] any potential conflicts of interest among those influencing — or facilitating — a decision on their behalf.” I agree.
When advised to select a supplier, Jason suggests asking the advisor questions such as:
- Do you (or does your organization) receive any direct or indirect compensation from the supplier for referring business based on product, solution or service recommendations and/or referrals?
- Is this information disclosed (or not) through any public means?
- If “yes,” is the compensation tied directly to volume and revenue generated for the vendor or is there an incentive based on another mechanism?
- Do you currently have any other type of commercial relationship with the supplier that you are recommending, or do you hold any type of equity or other financial upside in this vendor? If so, what is the extent of the relationship and do you work with other competitors to the vendor in question?
- Are there any suppliers that you do not work with commercially that you have referred business to in the past in this supply market? If so, who?
In other words, find out how the advisor and his/her organization would benefit if you selected a supplier based on the advisor’s recommendation.
I feel that this post is one of the most useful ever on Spend Matters and should be bookmarked by every procurement professional. Stay in procurement long enough and you will confront this situation.
However, I also believe that questioning advisors who recommend doing business with certain suppliers is only half of the vigilance that you should employ. The other half is questioning suppliers who recommend against doing business with a supplier.
In those situations, you can ask:
- Why are you recommending against going with that supplier?
- What specific research in this particular market have you done to familiarize yourself with the available suppliers?
- Have you had or observed first-hand a bad experience with that supplier?
- Does this supplier have competitors with whom you have some type of revenue-sharing or referral fee relationship?
In my time, I’ve seen crazy situations such as one in which a buyer who knew his market quite well was recommending doing business with a well-known supplier in that market and presented that recommendation to management. Management – who knew nothing about that market, which is why they have buyers with such expertise – asked an advisor about the supplier. The advisor, who really didn’t know the market yet didn’t want to admit his abject ignorance to a client seeking advice, told management not to do business with that supplier because the advisor had never heard of the supplier. Management listened. And ended up spending more on an inferior service. All because it listened to an advisor that knew nothing instead of a buyer who knew a lot.
My additional advice about supplier selection advice:
- Advisors’ advice should be but one of several inputs that you use to make a decision.
- Don’t rely solely on your advisor – you may be more educated than your advisor.
- Keep the old “trust but verify” adage in mind.
- Do your own homework to see if you reach the same conclusion.
To Your Career,
Charles Dominick, SPSM, SPSM2
President & Chief Procurement Officer
Next Level Purchasing, Inc.
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