Internal management sources on reading list

Answer

Introduction

Several studies have linked organisational buying behaviour (OBB) with positive value for money outcomes from suppliers (Dimitri 2013, p.149) as well as ancillary benefits on firms’ value chain (Barrientos 2013, pp.44-46). Progressive value for money outcomes are principally encapsulated in a raft of “internal governance” mechanisms aimed at streamlining procurement functions by discouraging maverick buying. These programs may also include stakeholder education on good commercial practice and assimilation of human resource functions in procurement, among other measures as the context may dictate. Internal governance measures are instrumental in curbing corporate fraud and larceny and frees up funds for continual product development, research and development programs and portfolio expansion (Barrientos 2013, pp.44-51). So, the principal object of “organisational buying behaviour” is creation of appropriate internal conditions for preservation of value for money outcomes in future dealings with suppliers (Burger and Hawkesworth 2011, p.91). This paper discusses the role of OBB on value for money outcomes through qualitative analysis of potential problems with internal management, the consequences of such problems and what good internal management might look like. In addition, an exploration of reasons why internal management problems might occur within buying organisations is made. Whereas internal stakeholder conduct affects procurement functions in diverse ways, they are characteristically applicable to demand management problems, they should be streamlining imperative for positive value for money outcomes with suppliers.

• Potential Problems with Internal Management/ Organisational Buying Behaviour

1.1 Product or Service Over-Specification

Over-Specification emanates from a general propensity of the organisation’s internal client to specify product design or service required in excessive detail. According to Shmueli, Pliskin and Fink (2015, pp380-381), over-specification or “gold plating” of requirements, occurs when product or service specifications exceed actual market requirements and customer needs. Essentially, over-specification stonewalls demand management as over-specified products or services attract additional customization costs (Bianchi, Marzi, Zollo and Patrucco 2019, p. 7190).

1.2 Premature Establishment of the Specification

An exploratory survey by Cox, Chicksand and Ireland (2005, para 6) connects internal client behaviour patterns with supplier monopolistic advantage. This phenomenon may be attributed to premature adoption of supplier’s products before conclusive purchase negotiations are done. Such impulsive behaviour by staff may “lock” the client organisation into the supplier’s plans. Additionally, the bullish supplier may be harder to deal with in situations where the buyer has accrued sunk costs (Cox, Chicksand and Ireland 2005, para 6).

1.3 Frequent Changes in Specification

Procurement of “high involvement purchase” goods and services characteristically attract considerable levels of specification changes (Cox, Chicksand and Ireland 2005, para 8).  Whereas such adjustments may be instigated at any stage of the procurement process, with varying ramifications, the greatest loss typically results from substantial amounts in sunk costs. Makkonen, Olkkonen and Halinen (2012, p. 778) argue that the buying organization’s weakened position may render the buyer susceptible opportunistic tendencies even at the pre-contractual phase. Furthermore, an elevated nuisance value to the supplier from last ditch design alteration demands may attract additional costs.

1.4 Poor Demand Information

Several studies associate poor organizational buying behaviour with demand management problems. For instance, Cox, Chicksand and Ireland (2005, para 11) notes that poor demand information hampers organisational capacity to access and analyse reputable demand information. From risk analysis perspective, poor demand data necessitates risk mitigation measures, namely, increased insurance inventory (Giunipero and Patterson 2009). The foregoing situation is classified as an antithesis to lean supply doctrine. Moreover, poor demand information leads to delayed placement of orders and additional costs on suppliers which they diligently transfer to the buyer (Burger and Hawkesworth 2011, p. 92). In the final analysis, poor demand information evidently disadvantages the organisation by strengthening the supplier.

1.5 Fragmentation of Spend

Typical behavioral organisational characteristics may muddle demand management processes, particularly through fragmented expenditure (Rothkopf and Pibernik 2016, p. 78). It emanates from preferential tendencies for purchasing officers from various departments to procure ‘equivalent’ products from a large array of suppliers. Fiscal implications of this conduct are high number of orders placed at increased frequency. Common attribution of fragmented expenditure is individual predilection of procurement officers for certain products and favourite suppliers (Cox, Chicksand and Ireland 2005, para 12). Limitations in value of goods transacted and replication of similar transactions leads to elevated transaction costs and reduced buyer standing in the purview of the supplier.

1.6 Maverick Buying

Prudential necessity of demand management is that all purchases are to be encapsulated in due diligence frameworks (Karjalainen, Kemppainen and Van Raaij 2009, p. 245), contractual setups (Lehto      2016, para 15) and in line with attainment of value for money (Burger and Hawkesworth 2011, p.91). However, in practice, most organisations still perpetuate gross violations of procurements dictates. Such violators, hereafter referred to as maverick buyers, often transact without necessary demand management knowhow as well as supply information as well as lack of experience in sealing contracts and negotiating prices with suppliers (Cox, Chicksand and Ireland 2005, para 14).

1.7 Inter-Departmental Power and Politics

Demarcation of power centers in business-to-business buyer–seller relationships is an ongoing discourse in power theory. A multi-case study investigation by Meehan and Wright (2012, p. 672) on 10 focus groups delineates corporate power as pluralistic regardless of antique conceptualizations that constrained it to organisational or individual elements. In practice, power and politics have been assimilated into tools for achieving organisational control, cohesion, and conflict resolution (Ronchetto Jr, Hutt and Reingen 1989, p. 55-58). A structural analysis by Ronchetto Jr, Hutt and Reingen (1989, p. 57) on organizational influence by employees in organisations confirms the effectiveness of vertical and horizontal power assets to instigate support, harm, and corporate change.  Further, Watson, Chicksand and Lonsdale (2013, pp. 950-951) conceptualize this phenomenon using the principal-agent analogy. This theory characterizes departmental managers as possessing and displaying varying degrees of allegiance at any time: loyalty to the organisation, department, and themselves and their careers. It further stipulates that in case three loyalties conflict, resolution will invariably favour the latter. The aforestated phenomenon agrees with findings of Smeltzer and Goel (1995) who surmise that internal clients will intrinsically make demand management decisions that promote their own interests at the expense of the organisation. Further, Ciliberti, De Haan, De Groot and Pontrandolfo 2011, p. 888-893) argue organization-level power permutations carry tacit ramifications on demand management capable of promoting internal demand management process or upending it.

1.8 Risk Adverse Nature and Culture of an Organisation

Efficacy of demand and supply management practices is also moderated by risk aversion and organisational culture. Empirical studies by Cox, Chicksand and Ireland (2005, para 17) delineates typical organisational characteristics such as risk aversion, present greater intransigence to corporate change and a general proclivity to resist reformation of organisational demand practices (Juma 2016). Although there is no evidence from extant literature on causality between risk aversion and demand management maladies, sufficient data suggest that principal organisational culture can still present significant barrier to change (Cox, Chicksand and Ireland 2005, para 19). To elucidate further, the internal demand management bottlenecks reduce the buying organisation’s utility to the supplier, and a corresponding increase to the supplier’s bargaining power. These factors also defer attainment of value for money, unless the restrictions are removed. Therefore for maximization of value for money to be attained, internal demand problems have to be overcome first, followed by appropriate procurement options to regain leverage over suppliers (Cox, Chicksand and Ireland 2005, para 20).

• Consequences of such Problems

2.1 Consequences Arising from Product or Service over-specification

Shmueli, Pliskin and Fink (2015, pp380-381) considers over-specification of product or services may be antecedents of intrinsic characteristics of individual members of the purchasing team. Product or service over-specification relates to demand management in three ways: First, an over specified product will tend to be more expensive, as it may require customization (Bianchi, Marzi, Zollo and Patrucco 2019, p. 7192). Second, the procuring entity may have limited technical skills to decipher functional needs of the product. Finally, psychological bias may cause protracted exchanges with the technical team, causing further delay to purchase functions.

2.2 Consequences arising from Maverick Buying and Concomitant Fragmentation of Spend

Maverick buying perpetuates fragmentation spend, abating the firm’s leverage over suppliers, and additional cost of doing business (Rothkopf and Pibernik 2016, p. 82).  It further diminishes volume and value of purchases, casts existing contractual agreements into doubt, destroying the organisation’s integrity and reputation. A qualitative review by Lehto (2016, para 11) concedes to the impact of maverick buying to the supplier as well. For instance, consider a hypothetical situation in which a supplier agrees to reduce prices on the understanding that the buyer will procure high volumes of goods.  The deal may collapse if the buyer resorts to maverick buying tendencies and concomitant fragmentation of spend. The impact of Organisational Buying Behaviour problems on a firm’s capacity to obtain value for money can be gleaned from an empirical case study by Cox, Chicksand and Ireland (2005, para 20). The study which delineates National Health Services (UK) as a case study, notes that fragmentation of spend relates to higher total cost of ownership of procured goods, and other negative consequences of maverick buying as well.

            Similarly, maverick buying increases unit cost of procurement goods. Karjalainen, Kemppainen, and Van Raaij (2009, p.245) affirms this correlation by analyzing the role of non-purchasing employees in heavily decentralised demand management contexts. The dearth of supply chain management expertise or lack of it negates the “value for money” principle; and further escalates maverick spending and accompanying fragmentation of spend (Dimitri 2013, p. 98). Purchasing expertise, as encapsulated in sound demand management paradigms, has associated imperatives, namely, sourcing for optimal prices from reputable suppliers, in depth understanding of tendering procedures, and capacity to negotiate and conclude a contract successfully. Maverick buyer limitations can also be speculated from possible absence of relevant demand knowledge such as interpretation of supply market data, limited ability to interpret current contractual engagements and sheer incompetence (Lehto 2016).

2.3 Consequences Arising from Increased Total Cost of Ownership (TCO)

            Systematic review of literature by Karjalainen, Kemppainen and Van Raaij (2009, p. 245) on non-compliant behaviour in purchasing unearths additional cost implications of ineffectual procurement and purchasing teams. From demand management perspective, total cost of ownership accrues from initial and maintenance costs which may prove unsustainable in the long term. Rothkopf and Pibernik (2016, p. 84) associates the apparent incapacity to forecast TCO estimates as an enduring heritage of organisational buyer behaviour problems and presents real danger to organisation’s bottom line.

• What Good Internal Management/OBB Looks Like

3.1 Employee Involvement and Team Processes

            A cross-sectional study, Driedonks, Gevers and van Weele (2010, pp.109-117) reveals the importance of procurement team effectiveness and the impact of their debilitation on organisational procurement functions. The findings report that lack of team perspective in purchasing entities does reduce firm’s capacity to source competitively by reducing value for money outcomes. A similar study by Ahmed, Ntayi, Ngoboka, Ndahiro and Eyaa (2013) involving large-scale survey on “Leadership ethical orientations, mindfulness and procurement contract performance” concluded that procurement officers should inculcate employee involvement and team processes, to enable teams to actually meet and even surpass the expectations placed on them (Crespin-Mazet.and Dontenwill 2012, pp. 207-217). A corresponding study by Jelodar, Yiu and Wilkinson (2016) links “collaborative team culture” and “formulized team building” with positive value for money outcomes from suppliers. Further, the study recommends a five-tier approach to relationship quality status as transaction, action, strategy, attribute, and relationship.

3.2 Use of Technology to Moderate Centralised and Decentralised

            Systematic reviews by Smith (2014, para 1-3) of organisational purchasing structures reveal overemphasis on two demand management models: Centre Led Action Network (CLAN) and Strategically Controlled Action Network (SCAN). An analysis of pros and cons of both models is a subject of mixed reviews. However, qualitative research findings by Arya, Frimor and Mittendorf (2015, p. 580) also suggest that centralised procurement regimes facilitate concentration of power in the procurement teams and produces moderated success in both small and medium sized organisations. In large corporations centralised procurement models have proved ineffective as attendant portfolio sizes whittle down the influence of procurement teams. Ineffectual procurement processes further escalate corporate maladies such as rising total cost of ownership for procured goods and services (Arya, Frimor and Mittendorf 2015, p.580). In mitigating circumstances, it may be necessary to devolve procurement functions to various portfolios. Yet, actuation of devolution has associated with cessation of procurement control and value for the organisation. As organisations oscillate between centralised and devolved models of procurement, a third, technology-mediated “hybrid” model has been prescribed with specificity to unique organisational situations. Smith (2014, para1-3) conceptualizes the improved model as panacea for specific demand management problems as its wide spectrum design is applicable to both SCAN and CLAN mediated models. Secondly, technological mediation ameliorates demand management by retaining control to procurement teams and ceding it at the same time to stakeholders. From demand chain perspective, technological applications facilitate “squaring the circle” by amalgamating both SCAN and CLAN models (Smith 2014, para1-3). This approach has the extra advantage of availing control levers to relevant persons in both centralised and decentralised procurement programs. The net effect is a streamlined procurement process. Technology also improves demand management through ancillary benefits as it buttresses oversight functions, namely buyer-supplier contracts, access to and management of spend information, and supply chain data (Smith 2014, para1-3). It also provides indelible trails of supplier performance data which is essential for future procurement decisions. Moreover, operational aspects of procurement department such as purchasing and aspects of decision making authority can be safely devolved (Smith 2014, para1-3; Arya, Frimor and Mittendorf 2015, p.580).

3.3 Application of Network Approach to Sustainable Procurement

            Synergetic relationships between organisations with non-business actors are a distinguishing mark of ideal internal management practice. It aims to strategically legitimize the business in the public eye and is today considered as an imperative for successful procurement. According to Crespin-Mazet and Dontenwill (2012), the process assigns legitimacy in three ways, namely offer legitimacy, the corporate legitimacy and the cause legitimacy without which the organisation cannot attain value for money from suppliers. However such collaborations with non-business actors seems novel and can only be sustained through risk-taking entrepreneurial approach to business.

• Reasons why Organisational Buying Behaviour problems might occur within Buying Organisations

4.1 Mediation of Conflict, Politics, and Individual Limitations

            A comparative analysis by Watson, Chicksand and Lonsdale (2013, p.950) of internal demand management issues reveals that most business procurements are conducted in environments where mediating factors such as conflict, politics and individual limitations are prevalent. In such dynamically disparate settings, implementation of drastic changes to the procurement plan may yield resentment and opposition from internal stakeholders. Watson and Lonsdale, 2016, para 12) recommends incremental approach to demand change management through compromise, bargaining and experimentation. To sum up, Organisational Buying Behaviour problems have been found to emanate from conflicting preferences due to bounded rationality, functional cultures and the principal-agent problem. The aforesaid influences indicate that internal clients have dissimilar and incompatible preferences in the sourcing of products and services from the external supply market leading to the adoption of inappropriate supply relationships.

4.2 Utilisation of Public Procurement as Private Sector Policy Innovation Instrument

            A cross-sequential study by Rolfstam (2013) confirms potential problems with public procurement as precursor to purchasing innovation in private sectors. Whereas may countries, namely, United States, China (US-China Business council 2010; Li 2010), and Japan (Myoken 2010) have recommended this model for escalation to other parts of the world, characteristic challenges in public procurement have effectively stonewalled anticipated benefits of this approach. Rolfstam (2013) identifies five dilemmas from the public procurement-private sector innovation conundrum as practical attributions of organisational buying failure, in general. First, challenges emanating from accountability in public procurement effectively hinder development of flexible procurement systems while rendering attainment of accountability whimsical at best.  Structural differences between public and private procurement entities as manifest through variations of inter-organizational network and the public service provided have also exposed a gulf of technical and procedural differences which are difficult to bridge especially in developing counties Lehto (2016).  However, the natures of accountability and regulation frameworks remain the most glaring challenge.

            Similarly, spillover effects of fraud and red tape dilemma orchestrated by operatives from public sector has been credited with intensification of Organisational Buying Behaviour problems (Rolfstam 2013). Considering emerging economies, attempts to limit opportunities for graft by reducing operational bottlenecks have been largely ineffectual. Further espousals of risk-management models into public procurement has achieved nominal success, and it is yet uncertain as to what metrics will be used to estimate quantitative values of economic productivity against qualitative aspects of public transparency and accountability (Rolfstam 2013). Further, there are no models to measure the latter values.

4.3 The Principal-agent Dilemma

            Persistent principle-agent dilemma in public and private procurement obstructs achievement of   “value for money outcomes” in light of selfish interest of purchasing agents trumping departmental needs. Due to discretionary nature of pricing, costing and valuation, the exercise of accountability may be difficult as principal-agent relationship in procurement thrives from asymmetric knowledge and superior training of the purchasing-agent (García, Rodriguez‐Sánchez and Fdez‐Valdivia 2015, p. 301). Inferentially, the purchasing agent’s pursuit of own interest reinforces the latitude to exercise full freedom in ways that disadvantage the principal. Such derelictions and indiscretions as may be exercised by the agent, usually purchasing agents, bastardize due diligence procedures in procurement (García, Rodriguez‐Sánchez and Fdez‐Valdivia 2015, p. 301).

4.4 Short-term benefits vs long term Cost Conundrum

            Short-term spending that does not require elaborate procurement procedures may be necessary to maintain operational efficiency.  Yet, short-term economic efficiency requirements in relation to long-term austerity controls are characteristic corporate dilemmas. Besides, they are tools for pursuing operational efficiency (Cox, Chicksand and Ireland 2005, p16). They are both actuated by reliable financial reporting paradigms, and require ratification of applicable statutes and pursuit of administrative edits, rules, policies, and procedures (McCue, Prier and Swanson 2015). In theory, tradeoff between short-term benefits and long-term austerity controls should be precluded. However, in practice, this precondition is difficult to implement. Therefore, a general concession in operational spending is necessary: that a trade-off between immediate short-term expenditure and long-term cost controls be implemented. But this trajectory presents other problems. However, cross-sectional study by García, Rodriguez‐Sánchez and Fdez‐Valdivia (2015, p.299) avers latitude in spending of small things may precipitate maverick spending, fragmentation spend and orders, unethical procurement practices. This may lead to extension of favours to associates and family members, and unauthorized spending on personal items.

4.5 The Cost of Empowerment Problem

Implementation of customer-focused approaches into the value chain may call for decentralization of procurement functions (McCue, Prier and Swanson 2015, para 5). However, such actions may lead to increased training and assessment costs as decentralization of purchasing function is synonymous with functional reorganization. Such internal adjustments may affect procurement as the organisation bends to meet the needs of the customer. The impacts of such reorganizations tend to impact public entities most. From public procurement perspective, such changes do not always nullify prior commitments the agencies executed. Thus, such terminations have been found to be counterproductive as they increase costs in both the short and the long-run because of devolution of related functions into other departments (McCue 2015, para 6). Numerous empirical and qualitative studies also associate higher short-term costs procurement adjustments.

Conclusion

From the foregoing discussion, internal governance has been linked with value for money outcomes. To put it into perspective, organisational buying behaviour affects all procurement aspects and their streamlining remains critical for realization of value form money from dealings with suppliers. Problems with organisational buying behaviour, consequences, and ideal internal management prerequisites as well as an understanding of underlying causes organisational behaviour problems should be deciphered and solved as they reduce capacity to attain value for money outcomes.