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By: IBISWorld Content Marketer, Ashley McKay
As indirect procurement continues climbing — growing $4.9 trillion per year as of 2017 — and roughly $649 billion of all indirect spend gets wasted, the need for market intelligence is obvious. Making informed decisions is a crucial aspect of the procurement role, as is minimizing time spent researching, becoming a market expert and go-to resource for internal stakeholders, mitigating supply risks, increasing spend under management and reducing overall costs for your business. Fortunately, all this becomes easier with a third-party research tool!
Many indirect categories aren’t given much priority because they aren’t regarded as valuable enough to source strategically; however, having an understanding of all markets and their dynamics is a required prerequisite to becoming the next best in class operator and is necessary
to reduce tail spend. Does that mean you, like other companies, are leaving money on the table? If you think there is even a slight opportunity that you are, fear not: there are a multitude of opportunities and resources out there that can help you find the necessary research needed to budget properly, effectively engage with stakeholders and adequately prepare yourself for the negotiation table. These resources are designed to help drive a better understanding of the marketplace and position you in the best way with internal stakeholders and suppliers, ultimately providing supporting evidence to substantiate internal recommendations, support negotiations with suppliers and create a win-win situation for all parties involved.
Before deciding against the use of a market research tool to aid the procurement process, ask yourself these three questions:
- Am I missing out on any market information I need to help me drive strategy?
Your search engine of choice won’t always have the answers you’re looking for, especially for more niche markets. If the answers are out there, it can take days of sifting through pages and pages of information to find the credible analysis that fits your needs. Market intelligence allows procurement professionals to quickly become category experts across several products and services without having to waste precious man-hours.
Saving time upfront will allow you more time to spend during the latter — and often lengthier and more critical — stages of the sourcing process. You’ll have more time and knowledge available to put toward proactively identifying opportunities for cost savings, developing better sourcing strategies, pro ling suppliers and preparing for negotiations. Without market research and the comfort of knowing that a market’s information is easily discoverable, you may become overwhelmed and struggle to meet tight deadlines or find the right information and resources needed to make the informed decisions that come during those later stages.
- Am I effectively enhancing stakeholder engagement and improving my credibility through the use of market intelligence?
Yes, engaging with stakeholders is one of the most difficult tasks for procurement. However, it becomes even more difficult when you’re not a subject matter expert on the indirect categories being purchased. Overcoming this often difficult task requires that you either be a specialist or have instant access to relevant, o -the- shelf market information. Luckily, market intelligence allows you to become an “overnight” expert! Market intelligence helps support your role as a subject matter expert, and the knowledge gained helps support discussions when meeting with stakeholders.
With an understanding of the market dynamics influencing the product or service being purchased, you’ll have a greater understanding of market trends that indicate which projects need to be prioritized, as well as strategies to receive discounts (such as bundling and purchasing complementary products through the same supplier). You’ll also have a better understanding of buyer leverage. Arming yourself with this market knowledge will attract internal stakeholders to your services and encourage them to perceive you as a value-added source and enabler. You’ll even have a better chance at negotiating with suppliers, which could mean a better chance at winning over stakeholders and increasing spend under management.
- Am I adequately preparing myself for the negotiation table, or am I relying on what I have always relied on, but expecting different results?
Many organizations have come to realize that basing decisions and negotiations solely on their own interests is no longer an effective method of achieving the goals or savings they set out to accomplish. As a result, more companies are now driving internal decisions based on forward looking market data combined with internal needs and spend analytics. At the moment, organizations have processes, systems and knowledge of what’s happening internally (i.e. internal needs and internal spend). However, businesses that are also taking into account what’s happening externally (e.g. the economy, politics, regulations, etc.) are realizing more savings because they are aware of how those external factors impact the market dynamics for the indirect categories from which they are purchasing. For example, some companies feel that because they’ve purchased the same product several times in the past and have always spent a specific amount, they should always spend that same amount when it’s time for contract renewal. On the other hand, those that understand market dynamics and how external factors can impact their purchases are better positioned to obtain savings in areas where they had not previously been able to do so. For instance, if a supplier’s input costs are decreasing, the informed buyer will know to use that leverage to negotiate better pricing.
In addition to internal processes and systems knowledge, an in-depth understanding of the product or service you’re about to purchase plays a major role during this step of the procurement process. Getting a better idea of pricing, for example, is crucial for effective negotiation. While it can take days to scour through vendor sites and other webpages to find out the average price of a product or service, a market research tool can provide you with that information upfront. This kind of knowledge will give you the confidence needed during supplier meetings and will position you as a product expert. Building credibility by asking the right questions, as well as laying out your expectations upfront, will give you the upper hand in even the most difficult negotiations.
Porter’s Five Forces Analysis
With market research at your fingertips, it becomes easier to decipher which market- specific dynamics matter most to gain leverage in a negotiation. Furthermore, if you are using Porter’s Five Forces analysis, an external market research tool can make analyzing easy for you by laying out most of the information. This will give you a better idea of how much negotiation leverage you have and allow you to negotiate the best contract terms based on specific market trends. Gathering the information needed for a Porter’s Five Forces analysis usually requires a significant amount of time and effort, but with market research, in a matter of minutes you can learn:
With the time saved during the research process, you can learn more about suppliers in the market and gather information about them (such as their pricing practices, business structure, possible risks, etc.) to use as further leverage and secure the best deal. By examining key factors like their supply chain, you will be able to anticipate problems and opportunities well in advance, and leverage that information to minimize risks and improve your relationship with the supplier.
Just When You Thought There Wasn’t a Need for Third-Party Research
Procurement isn’t just about saving money. It’s also about understanding the market dynamics needed to become a market expert, developing relationships with stakeholders and suppliers, negotiating the best deal for your company and, most importantly, positioning your department as a go-to resource for all departments. Almost every procurement department needs more research, and investing in market research can help your department transition from a cost center to a profit center, increasing your company’s profit margins.
Now, are you falling behind, or are you preparing for the next step?