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Three Reasons to Use AHP for Procurement.

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Apr 28, 2015 10:11:00 AM

Trade-offs in ProcurementYou buy stuff. It’s simple, really.

Except it’s not.

The days of purchasing being only about lowest cost are long gone. Procurement is strategic and that means it has to help deliver on strategic goals. One of those goals is often about reducing cost – that’s the pigeonhole many put procurement in – but cost is not usually the most important goal.

This blog will explore how to find the right balance between these, often contradictory, business goals and will help your next vendor selection decision add even more value!


So what makes procurement so difficult?

Buying decisions are complex. Most purchases;

  • Have multiple drivers and a “good decision” is when you find a good set of trade-offs between those factors
  • Involve multiple stakeholders, each of whom has their own set of goals, biases and prejudices

Unfortunately, people are not very good at making good decisions in situations like this. Cognitive neuroscience researchers have identified around 150 different biases that creep into these decisions and one huge limitation on human decision making known as “bounded rationality”.

Bounded rationality sounds like a particularly aggressive type of fish; “Hey, I caught me a huge bounded rationality down the river!” Or is it a disease?

No. It’s just a fancy way of saying that humans are no good at juggling complex decisions with multiple factors and lots of data… like just about every purchasing decision. We just can't hold it all in our heads.

Add to that the fact you have multiple stakeholders and life gets really... “interesting”. Diffrent people from different departments speak “different languages”, have non-aligned goals, “follow-the-leader”, play politics or stay quiet when they should speak out.

Little wonder an increasing number of organizations turn to a more structured way to make this kind of decision, a method called analytic hierarchy process (AHP). I’m not going to spend time describing AHP here. No, I’m going to spend the rest of the blog exploring why AHP makes for a better procurement process for both procurement teams and their stakeholders.

Find the strategic balance

Very few purchasing decisions are as simple as “pick the cheapest”. In fact, depending on the impact of that the "thing you’re buying" can have on the business, price might be the least important factor in the purchasing decision. Each stakeholder will bring with them their own goals, some of which will be strategic, some of which will be personal. Some goals are explicit and some are hidden.

AHP brings structure to this mess.

The first step is to agree a goal (e.g. increase sales through deploying a new CRM system) and then to define which criteria can be used to make a decision consistent with that goal. The criteria typically reflect the business drivers of the decision. Even better, there’s no room here for criteria like, “Will this decision help my career or not?” Because the criteria are explicit and visible, “hidden criteria” are all-but eliminated.

In the example of a CRM system, the key drivers might be increasing sales productivity (number of completed calls/hour), forecasting / sales effectiveness, compliance, customer suppot, reducing cost and more. Reducing costs might push you towards “self service”, but that might reduce sales close-rates. Spending more time with each prospect might increase close rates, but will reduce calls/hour.

AHP allows you to make these trade-offs in a structured way, one that is totally transparent and which helps you to build understanding and buy-in… which brings us to the next major benefit of AHP in procurement.

Build consensus and buy-in

During the AHP process, each person looks at each trade-off in turn and notes their own preferences. The team can then review all the stakeholders’ preferences and look for areas of consensus and areas of disagreement.

And it’s the disagreements that are interesting.

By spending a little time on these areas, the stakeholders learn about each others’ needs. They build a common language and a common understanding of the decision and its trade-offs. Each little step builds consensus for the final decision even before it’s made.

And consensus really matters. Research from Stanford University shows that confidence in a decision has a major effect on its outcome. It’s obvious really, but a team that doesn’t have confidence that the CRM system you just selected is the “right one” is unlikely to try very hard to make it work.

They may even try to torpedo the project. Ouch!

This process also means that, if you need executive approval for your decision (or if your decision is ever subject to audit or oversight), you can show exactly why you made the decision you did, and can present it in a quantitative way with supporting data and charts.

Avoid gaming

And then there’s gaming.

Trying to game the procurement process is a real contact sport in many organization. Sometimes it’s about trying to achieve an outcome that’s beneficial to "me or my team". Sometimes it’s about politics. Sometimes it’s about technical “religions” (e.g. Java vs. .NET, Microsoft vs. Oracle…).

Sometimes it’s about corruption.

Whatever the motivation, stakeholders often try to “game the system”. AHP makes this very difficult. The process of making criteria explicit and then reviewing everyone’s preferences means that anyone gaming the system is likely to “stand out”. This will be visible and, typically, stakeholders whose votes “stand out” will be asked to justify their vote… and if you’re gaming the system, that’s going to be difficult.

Of course, there are some very positive reasons that someone’s vote might be different. Differences in language, genuine differences in priorities, special knowledge, genuine mistakes; these are all good reasons for someone’s vote to stand out. But gamers will find it hard to justify their position and will be found out.

Next steps

So there you go; AHP helps you make better trade-offs, helps you build buy-in with transparency and dramatically reduces gaming. This translates into better business outcomes.

So next time you’re involved in a procurement decision, why not try AHP. It is an inexpensive way to improve the quality of your buying decision, to make good trade-offs with high levels of buy-in and support from all stakeholders and to deliver real value to the business.

To get started, why not take a free trial and explore the CRM example used in this blog. You’ll see the criteria that are used, the votes that were made and the final recommendation. All transparent.