Procurement Incentive Plan Flaws: Part 1
I recently tried to help my sales team land a deal with a large food processing prospect.
We were unsuccessful, unfortunately.
Let’s set the scene: A buyer on the verge of a mistake…
During the sales process, I reviewed the new multi-year agreement the category owner was on the verge of signing, and I knew that this contract was not what the buyer thought it was.
He fundamentally misunderstood certain critical nuances of the agreement, and what he thought was a 40% cost savings was actually going to produce less than 15% savings in year one.
What’s worse, the deal was going to leave his company exposed to significant increases in years two and three, likely eroding all of the year one savings by deal’s end.
If the buyer had done things the right way, it was possible to hammer out 22-25% savings and then make that savings stick. This would have been the optimal result for the company’s bottom line.
But, did the buyer actually have the incentive to make this happen?
A chat with the buyer’s peer…
The following is a near-verbatim conversation I had with one of the buyer’s co-workers (not the buyer’s superior—a peer) when it appeared to me that he was going to charge forward into the bad deal outlined above.
Me: “This deal isn’t what your teammate thinks it is. It’s not what he’s advertising it to be, and it’s going to make him look bad.”
Buyer’s Peer: “Well, I’m not sure if he believes that or not, but I know that you know your stuff in this area. I just don’t think he wants to hear that right now. He’s told everyone about this great new deal he’s on the verge of signing, and he just wants to get the credit and move on to other projects.”
Me: “But if he signs the deal thinking it’s a 40% savings and it turns out to be only 15%, won’t he be disappointed with the ‘credit’ he ultimately gets?”
Buyer’s Peer: “No. He’ll probably get credit for 40%.”
Me: “What?!?! Even if there’s no way that’s going to happen?”
Buyer’s Peer: “Yes, as long as he can get his boss to sign off on whatever projections he’s used to arrive at his 40% estimate, then he’ll get credit for the ‘savings.’”
Me: “So his credit for the deal happens when the deal is signed, not when the company sees the actual results of his work?”
Buyer’s Peer: “Yep.”
Me: “Well, then here’s my question: When your buyer tells his superiors and his field operators that the new contract he’s about to sign is going to save everyone 40%, and then it saves them only 15%, and then it goes significantly backwards from there over the next two years, will that be bad in any way for the buyer?”
Buyer’s Peer: “No, it will probably actually be a good thing for him, because then there will be low-hanging fruit for him to do the whole thing again in three years.”
Whereupon, my head exploded. The buyer went ahead with his plan, probably getting credited for great work on what was positively not a great agreement.
In this one conversation, I caught glimpses of a number of different phenomena we’ve been seeing in the realm of corporate procurement—specifically with respect to incentive plans and how the interests of the company and its bottom line are linked (or not linked) to the activities of its procurement personnel.