02 February 2024

Disrupting Procurement Practices to Face Climate Change

If we're serious about climate action, we must change procurement mindsets from a traditional value-based model to an outcome-based model. Traditional value-based procurement, focused primarily on price and short-term economic value, falls short in considering the long-term environmental and social impacts of procurement decisions. Such an approach overlooks sustainability criteria, hinders supplier collaboration, and neglects the importance of building resilience in supply chains. Additionally, it often fails to account for the total cost of ownership, which includes maintenance, longevity, and environmental impact over a product or service’s lifecycle. To tackle climate change effectively, organizations must adopt a holistic approach that considers long-term sustainability and resilience, fosters collaboration with suppliers, and incorporates environmental and opportunity costs. This shift can mitigate risks, drive innovation, achieve cost savings, and contribute to a more sustainable future.

Resource-based sourcing often fails to consider the long-term impacts of procurement decisions on our environment, society and a brand's long-term viability. It focuses solely on the organization's immediate needs without considering the broader implications.

Understanding Outcome-Based Procurement

While traditional procurement is tactical and focuses on short-term savings, outcome-based procurement is forward-thinking and strategic. It views long-term sustainability and profitability as inseparable.

Outcome-based procurement focuses on desired outcomes rather than specific solutions. Instead of prescribing a particular product or service, procurement professionals define the desired outcomes and allow suppliers to propose their solutions.

This approach encourages suppliers to think creatively and develop innovative solutions that may not have been considered otherwise. It also fosters collaboration and partnership between the organization and its suppliers, leading to more effective and sustainable outcomes.

Example of Traditional vs Value vs Outcome-Based Procurement

To illustrate the idea, let's imagine that you have multiple events that you exhibit at each year.

Traditional resource-based procurement primarily focuses on obtaining event supplies at the best price. In this approach, suppliers are evaluated based on their ability to provide the required items within the allocated budget. The supplier that offers the lowest cost, assuming other factors such as quality and timeliness meet minimum requirements, is typically selected.

On the other hand, value-based procurement begins by identifying the specific needs and requirements for the event supplies. Instead of evaluating suppliers solely based on individual items, the focus is on seeking suppliers who can provide a comprehensive solution that meets those needs. Proposals are evaluated based on the ability to deliver a complete solution, considering factors such as quality, cost, and timeliness of delivery. The supplier that offers the best overall solution is chosen. Sustainability may be a component, but the weighting is likely low, and the decision has little transparency regarding sustainability weighting.

Outcome-based procurement focuses on both the environmental and business objectives of the company. Here's how an outcome-based procurement might work in this scenario:

Marketing Goals: Increase brand visibility and audience engagement.

Sustainability Goals: Reduce the event's carbon footprint, and use sustainable materials.

In a traditional procurement process, the exhibitor might specify the marketing materials they want (like banners and brochures) and specify that they should be made from recycled paper. They might also select the exact kind of booth setup they want.

However, in an outcome-based procurement approach, the exhibitor would instead define their desired outcomes:

Increase brand visibility to at least 80% of event attendees
Engage at least 40% of event attendees
Reduce carbon footprint by 50% compared to previous events
Use of 100% sustainable materials in booth setup

In outcome-based procurement, sustainability is a crucial consideration strategically integrated into the process. This is achieved through implementing sustainable supply chains, prioritizing environmentally friendly practices and reducing energy consumption. However, this forward-thinking approach also prioritizes long-term economic sustainability. Rather than solely focusing on reducing short-term costs, this approach emphasizes selecting solutions that will reduce environmental impact and ensure long-term profitability.

The Need for a Shift: Resource-Based vs Outcome-Based Procurement

Traditionally, procurement has been focused on resource-based sourcing, where the primary goal is to secure the necessary resources at the best possible price. While this mindset may have served organizations well in the past, it is no longer sufficient in the face of climate change.

Focus on Results

This model focuses on the desired results or outcomes rather than just the process. It offers suppliers a new level of freedom to innovate and suggest unique solutions that might not have been contemplated within a traditional framework.

Sustainability

Sustainability is strategically woven into this procurement process, ensuring environmentally friendly practices and fostering long-term economic sustainability.

Cost Efficiency

While not exclusively focusing on cost, an outcome-based model can result in superior cost efficiency over time. By emphasizing desired outcomes and sustainability in the long run, it is feasible to obtain better value for money.

Risk Sharing

In this procurement model, suppliers are more directly engaged in the risk associated with delivering the desired outcomes. This shared responsibility can enhance risk management and mitigation practices.

Enhanced Supplier Relationships

Collaborating closely with suppliers to achieve specific outcomes can help organizations forge stronger, more cooperative relationships with their suppliers. This can facilitate better understanding, improved communication, and ultimately superior results.

Improved Quality

With a clear emphasis on outcomes, suppliers are motivated to provide high-quality products or services that meet or surpass those expectations. This can result in improved quality of procured goods and services.

Innovation and Competitive Advantage

Outcome-based sourcing cultivates collaboration and innovation among suppliers. By allowing suppliers the latitude to propose their own solutions, organizations can leverage the expertise and creativity of their suppliers. This leads to creating innovative products and services, providing organizations with a competitive edge in the marketplace.

Cost Savings

Contrary to widespread belief, sustainable procurement practices can yield cost savings in the long run. Organizations can pinpoint cost-effective solutions that minimize environmental impact while saving money by considering energy efficiency, waste reduction, and product lifespan. Additionally, by considering the total lifecycle costs of products and services, organizations can make more informed decisions that reduce the total cost of ownership.

The Business Case for Outcome-Based Procurement

The case for switching from a traditional value-based procurement model to an outcome-based procurement model can be substantiated by the following key advantages:

a. Opportunity Cost

Opportunity cost refers to the potential benefits forgone when one alternative is chosen over another. In the procurement context, this means considering the missed opportunities for sustainability and resilience if resource-based sourcing is prioritized over outcome-based sourcing. Organizations can make more informed decisions that maximize overall value by understanding and quantifying these opportunity costs.

b. Environmental Costs

Environmental costs refer to the negative impacts of procurement decisions on our environment. This includes greenhouse gas emissions, resource depletion, pollution, and habitat destruction. By evaluating and incorporating these costs into procurement decisions, organizations can make more sustainable choices that minimize their environmental footprint, avoid reputational damage, risk manage potential litigation, and reduce non-compliance costs.

Conclusion

In light of the escalating climate crisis, it is no longer just an option but a necessity for organizations to shift their procurement mindsets. The traditional value-based model, heavily reliant on short-term cost efficiency, is inadequate to tackle the multi-faceted challenges of climate change. Outcome-based procurement offers a fresh perspective, placing emphasis not only on desired results but also on long-term sustainability and resilience. This approach encourages innovative solutions from suppliers, fosters stronger relationships, and, importantly, integrates sustainability into the core of procurement strategies.

By incorporating opportunity and environmental costs into procurement decisions, organizations become better equipped to make choices that minimize environmental impact, manage risks, and contribute to overall sustainability. This shift in mindset also paves the way for effective collaboration with suppliers to achieve shared sustainability goals.

The benefits of outcome-based procurement extend beyond environmental considerations. By focusing on long-term value rather than short-term cost savings, organizations can achieve better quality products, foster innovation, gain a competitive advantage, and ultimately ensure their own long-term economic sustainability.

In conclusion, embracing outcome-based procurement is essential for organizations committed to climate action. It's not just about procuring goods or services—it's about investing in the future of our planet. By prioritizing sustainability and long-term value in procurement decisions, we can collectively drive meaningful action against climate change and work towards a more sustainable future.

FAQ on Procurement Practices

What are traditional resource-based procurement practices?

Traditional resource-based procurement practices focus on meeting an organization's immediate needs by obtaining supplies at the best price, focusing on short-term cost savings without considering broader implications.

How do traditional procurement practices differ from outcome-based procurement practices?

Traditional procurement practices are tactical and short-term focused. In contrast, outcome-based procurement practices are strategic, considering long-term sustainability and profitability as inseparable and focusing on desired outcomes rather than specific solutions.

What are the key characteristics of outcome-based procurement practices?

Outcome-based procurement practices are forward-thinking, encourage supplier creativity, foster collaboration, integrate environmental considerations and emphasize long-term economic sustainability.

Can you give an example of how outcome-based procurement practices work?

In an event setup, instead of specifying the exact marketing materials and booth setup, outcome-based procurement would define goals such as increasing brand visibility to a certain percentage of attendees, engaging a specific number of attendees, reducing carbon footprint by a set percentage, and using sustainable materials.

Why is outcome-based procurement considered more sustainable?

Outcome-based procurement strategically integrates sustainability by implementing sustainable supply chains, prioritizing environmentally friendly practices, and reducing energy consumption while ensuring long-term profitability.

How do procurement practices impact a brand's long-term viability?

Procurement practices that fail to consider long-term impacts can harm the environment and society, potentially damaging a brand's reputation and future profitability. Sustainable procurement practices help ensure a brand's long-term viability by being responsible and forward-thinking.

What role do suppliers play in outcome-based procurement?

Suppliers are encouraged to think creatively and propose innovative solutions to meet the defined outcomes, fostering a partnership that leads to more effective and sustainable procurement practices.

Is cost still a factor in outcome-based procurement?

While cost is still a consideration, it is not the sole factor. Outcome-based procurement practices evaluate the overall solution's effectiveness in meeting the desired outcomes, including sustainability and long-term economic benefits.

How does value-based procurement compare to outcome-based procurement?

Value-based procurement meets specific needs with comprehensive solutions considering quality, cost, and timeliness. Outcome-based procurement goes further by integrating strategic goals such as sustainability and long-term profitability into the decision-making process.

What goals might be included in outcome-based procurement for event planning?

Goals might include increasing brand visibility to a high percentage of attendees, engaging a substantial number of attendees, significantly reducing the event's carbon footprint, and using only sustainable materials for booth setups.

Incorporating Opportunity Cost and Environmental Costs into Procurement Decisions

In addition to considering the direct economic costs of procurement decisions, it is essential also to incorporate opportunity costs and environmental costs.