Purchasing shows one face to suppliers

The Principal Financial Group's purchasing operation cuts computer and software costs 25%-35% annually.

By -- Purchasing, 12/22/2000

As technology becomes more intricately entwined in business strategy, a growing number of companies have come to recognize the importance of having purchasing involved in the buying process for computers and software. For the Principal Financial Group, Des Moines, Iowa, this recognition occurred about five years ago, when the provider of financial products and services created a purchasing operation within its Information Systems (IS) group. Now, the Principal Financial Group has merged this operation with other buying activities occurring within the company to create a corporate purchasing organization.

This new organization, headed by Randy Roth, director of corporate purchasing, is essentially adapting some of the strategies that have proven successful in the company's IS purchasing operation.

Applying strategic sourcing principles to the Principal Financial Group's IS purchasing operation has helped to reduce costs by 25% to 35% annually over the past four years. The company spends approximately $500 million annually on goods and services: computer equipment and software, office equipment and furniture, telecommunication services, printing services, paper, security services, and facilities management products and services, among others. About $110 million annually is with suppliers of technology goods and services.

Established in 1879, the Principal Financial Group provides its customers globally with a range of financial products and services. These include retirement and investment services, life and health insurance and mortgage banking. The company, in fact, provides administrative services to more 401(k) plans than any other provider in the U.S. Worldwide, the Principal Financial Group serves more than 11 million customers from more than 250 locations including offices in Asia, Australia, Europe, Latin America and the U.S.

Roth began his career with the company 18 years ago as a programmer, rising through the ranks of the company's IS organization. It was while in a corporate post as manager of an R & D area that looked at programmer productivity tools and methodologies that Roth (he was building an object technology center for the Principal Financial Group aimed at expanding the use of and teaching object technology across the corporation) was buying a lot of services, software and consulting. "There was no one to help me buy anything," he says. "No one really understood software law or could tell me whether these technical contracts were good. I complained one too many times and got a job setting up a strategic sourcing department within our IS purchasing area."

Meanwhile, technology was becoming increasingly important to the Principal Financial Group as well as to many other companies. Explains Roth, "A services company like the Principal Financial Group lives and dies by the information we hold in our databases. That's what we as a financial services company sell and it's controlled by technology."

Creating corporate purchasing

It was four years later that consultants with McKinsey & Co. advised senior management that the company could realize additional savings if it pooled all of its purchases and created a strategic sourcing operation. So, Roth was charged with responsibility for creating such an organization, taking on the post of director of corporate purchasing in April 1999.

At that time, the company combined several purchasing areas. "My charge was to create an area that would add value to the Principal Financial Group through strategic sourcing, combine it with traditional buying that still needed to be done, asset management, and contract administration," says Roth. "Now, we have all of these teams up and running."

As he sees it, the basis of the company's new purchasing strategy is to reduce costs and lower liability in purchasing transactions across the organization using the buying power it has as a Fortune 500 company. "Overall, our intent is to build a global purchasing organization that every company we own around the world can utilize, getting the pricing that would be requisite for a global company and also to allow these companies to purchase goods and services from local suppliers, when it makes sense to do so.

"We are working to consolidate as much of the buy as possible across business units, across service center business units, and across subsidiaries. Since we know what's going on at a corporate level, we can pull many of these deals together."

Take technology, for example. The Principal Financial Group has a decentralized IT organization, with a corporate group "owning" all infrastructure, the glass house and desktops." Application areas across the organization have their own IT organizations. These groups are internal customers of corporate purchasing. "For all of their applications they all tend to want similar things at approximately the same time, and we bring that together," says Roth.

Corporate purchasing has a full organizational view of what's being bought and can pull together disparate IT areas to do that. "IT people are really no different from a lot of other business people in that when they see something they want, they want it now and they don't necessarily think about how much it costs and whether you're signing a good agreement," says Roth. "With our group in there being concerned about that we can help make sure the organization gets exactly what it needs for any given transaction and that it is a fair deal for both sides and also a fair deal from a contractual standpoint for both sides."

Management support

In the past 18 months, corporate purchasing has become a highly visible, highly supported organization at the Principal Financial Group. The company's CEO signed off on the purchasing policy, delivering it to his direct reports as well as to other leaders within the organization. Without that support, Roth says that "it would be hard to succeed."

The company's corporate purchasing staff now numbers 35, with Roth reporting to the vice president of administrative services. These buyers have responsibility for contracting on a global basis.

"Staffing has reached an optimum level, and our policy has gone out that states that the corporation needs to use corporate purchasing for all contracting for goods and services. (The IS portion of the policy was sent three years ago.) "Now, everything purchased across the organization needs to go through us. To make negotiations go faster, we use our collection of more than 60 template contracts that cover software licensing, trademark licensing, services, consulting, development, Internet alliances, our own RFP template and many others. What we intend to do is show one face to our supplier community by standardizing the process across the organization."

At the same time, the Principal Financial Group is in the process of implementing an e-procurement system (from PeopleSoft). When the system is up and running, details on the organization's global agreements will be available to its local business units. Then, purchasing's internal customers will have better access to the buying process, without having to have a buyer there physically pushing a requisition and a PO back and forth. "That's why we will end up with as small a department as we will because we are focusing on doing the contracting and getting the agreements into the system that can be accessed nationwide and around the world to buy those goods and services," says Roth.

Eleven members of the staff are full-time negotiators who work with project teams within the company when they need to purchase goods and services. For the post, Roth looks for an individual with a variety of skills. "Obviously, a negotiator needs to be a good communicator. It's paramount that a negotiator be able to get his or her point across to the most technical person in the room as well as to the company CEO. A negotiator needs a strong personality and the technical expertise necessary to understand contract law, because that person is not going to have a lawyer sitting next to them when they're negotiating these agreements every day. They also need to know enough about technology so that they can be believed and trusted by the technical people they're buying for."

They also need to be highly organized, be able to multitask with many projects going simultaneously, think fast on their feet, and be a quick learner.

A contract administration team is responsible for the "post-in-force" portion of the deal. These individuals keep track of the obligations of both parties after the contract is signed. For a software development contract, for instance, "the contract administrator puts the major obligations of both sides into contract management software where actions will be triggered by dates," says Roth. "For example, when the date comes up that the project team owes the supplier a certain amount of test data by a certain date, the contract administrator will make sure that the project team delivers by that date or at least that the project lead knows about it, otherwise the supplier may not owe us back their first deliverable. That's how they work with the project teams and then they also review a lot of the invoices coming in, ensuring that we've been invoiced correctly, making sure that the annual increases haven't exceeded what the contract pricing would state."

An asset administration or management team is responsible for IT asset management across the corporation, making sure the company tracks the PCs and peripherals that are sitting on every desktop and eliminate those as they are no longer useful to the company. This team also tracks software assets throughout the corporation, ensuring the company is in compliance with its licensing for software assets.

There is also a traditional buying team that accepts requisitions from areas throughout the company, issues POs, and makes sure that the good or service gets to the desktop of the requester.

A sister department to corporate purchasing called supplier relations (for which Roth has no responsibility) is staffed with professional relationship managers who manage

day-to-day relationships with corporate-level suppliers. These managers handle questions from employees within the company, questions from suppliers regarding agreements for such services as corporate travel, food service and delivery. Plus, there are relationship managers both formal and informal across the company and around the world. "There's no way we can staff enough people in this department to manage relationships with every supplier across this organization," says Roth.

Enterprise Sourcing Process

Roth's teams have developed a purchasing methodology called the Enterprise Sourcing Process. The ESP is a process that all of the company's negotiators use to work with project teams throughout the company to deliver goods and services to the organization.

"When I was in IS purchasing, we called it the high-tech acquisition process or Hi TAP," says Roth. "After I moved into corporate purchasing, we made it more generic so that it doesn't have such a technical bent. Now, the process works for just about any good or service purchased across the organization.

Using the concepts of RFIs (request for information) and RFPs (request for proposal), ESP details the information considered reasonable to move from a project team to suppliers the company is considering and from suppliers back to the project teams. The process communicates to the project teams the information the Principal Financial Group needs as well as information the suppliers have to have in order to provide the company with a good proposal.

The process also advises the project teams on the information that team members should keep to themselves. "There's a lot of information that every supplier wants that they should not have because it gives them a competitive advantage," says Roth, "either when negotiating with us or negotiating in competition with the others." At the same time, corporate purchasing is formalizing some of this training as well.

As a project team gets started in its process, the negotiator meets with team members. There are four main questions, Roth says, that a supplier asks that the project teams are not going to answer: "What's your budget? What's your time frame? What's your project team makeup? And, what's your management makeup?" As he sees it, if suppliers have the answers to these questions, which they don't need to give the company a good proposal, "then they know essentially what we are going to pay for the product or service, they know our time frame so they can delay our decisions until the final hour when we are most vulnerable, rather than us managing the project to our own time. Really what it means is that we take the responsibility for running the project and the process rather than allowing the supplier to do it, whereas the supplier generally wants to run the process for you."

To date, the operation has been successful at communicating its policy across the organization. "It started through word of mouth," says Roth. When word got out that he was a good negotiator, he became buried with projects. So, he started hiring people and working on strategy. Eventually, IS purchasing was assigned a lawyer full time who taught the negotiators contract law and software law. The negotiators, in turn, taught her about IS and some of the business issues related to purchasing computers and software.

"It was a grassroots effort," says Roth. "Once word got around that we were doing this, people were more than willing to stop doing it themselves. There are a lot of people who don't like to negotiate or work with contracts, and we were willing to deal with both contracts and negotiating and allow the business units to work on their relationships with suppliers."

As Roth sees it, to be successful in the negotiating process, a negotiator needs to consider current and future business requirements. In other words, the negotiator needs to build flexibility into the deal so that future requirements can be accommodated. If you get senior management buy-in for a strategic sourcing area and are successful in the deals you complete, the business areas will come asking for your services. There is just too much money to be saved to not do it."

Selecting suppliers

The supplier-selection process at the Principal Financial Group is a joint effort between corporate purchasing and the business unit. When a negotiator gets assigned to a project he or she works with the project team to determine criteria. The negotiator then will assist the project team with research via the Internet or Lexis-Nexis, or other sources to come up with companies that could be solicited including a list of companies from our Supplier Diversity Program. Many times the business area already knows which companies it wants to look at so the project team will take that into consideration along with any other research that might get done. Purchasing is here to advise the corporation and to own the process. "We certainly have the ability to consult and we help or just do the due diligence necessary to say whether or not we think this company is a viable option," says Roth. "Most of the time we do it in conjunction with the business unit that is asking for the service. There is no one set of criteria: It changes from project to project."

Roth and his team are working at developing a formal supplier measurement and rating process. Right now, he says that his operation informally rates suppliers on any number of criteria. "It's more of a knowledge-based process, ensuring that suppliers are meeting the terms of their contracts and that the relationship is a reasonable one for both parties. We don't want to tear our suppliers to pieces, but we don't want them to walk out with any more than they need to make a reasonable profit on what we're doing."

As for the process purchasing's internal customers use to order goods and services, Roth says that "it isn't as easy to buy from our department now, under an existing contract, as it will be a year from now because the requisition process that we are now using is not as user-friendly as we'd like." As he gets the new e-procurement system up and running, the process will be much easier to use, allowing more of the corporation around the world to take part in the savings and ease of use that an Internet-based purchasing process can deliver.