Can you rationalize risks?

Can you rationalize risks?

September 29, 2019

The commodity trap

‘What is the relationship between the title and Marcel’s digital transformation journey?’, you might think. Before I can tell you more about the title, I need to step back and explain to you the commodity trap. Almost every company, small or big, is confronted with the commodity trap. According to the Roland Berger consultancy group, a “commodity trap” describes a situation where even complex products and services are downgraded to “commodities”, with limited differentiation, and where competition is primarily price-based. This is due to a combination of developments experienced by customers and competitors, and in products/technologies.

With the introduction of digital transformation, many suppliers are convinced that a red ocean (a market with heavy competition) could be changed into a blue ocean, a market where suppliers can find new value propositions and distinguish themselves from the competition. Topics such as OT security, IT/OT convergence or IIoT are new for many companies and therefore they are searching for support.

Implementing a digital transformation program

On a regular basis, I meet customers to talk about their digital transformation program. The commonality among all these meetings is that there is almost no commonality. Every company has a different interpretation of digital transformation and a different plan for implementation. Although there is not a lot of commonality in the interpretation and implementation of digital transformation, most companies have never done such a complex and technical transformation before. This lack of experience often leads to a big confusion. Many customers are struggling with the development of a plan and roll-out. We provide support to our customers by helping them with the master plan or with very specific parts of the plan such as the development and implementation of OT security policies and procedures or integration.

The process of selecting a supplier to provide these consultancy services is not easy for companies. Just selecting a supplier as a partner because it feels good without comparing competitors is considered a risk. There is a strong belief that this risk can be reduced by introducing competition and an assessment of prices. However, these mechanisms do not actually reduce the risk we face, but the degree of uncertainty we feel if we have to quantify the quality of consultancy services, in this case for digital transformation. When you buy a TV, you can make all kinds of comparisons with respect to technology, features, brands, shops, etc. in order to make your final decision. By doing this, we have the feeling that we made a rational decision and therefore we are not uncertain about our choice. Preferable we would like to do the same for everything we buy, including consultancy services.

Minimizing risks

To mitigate this “risk”, procurement takes over the ownership. Their task is to rationalize the selection and procurement process, even if it concerns complex consultancy services for digital transformation. I have seen several tender packages for consultancy services and the conclusion is, they are all different (you can see the struggle). What is common is the attempt to rationalize and quantify these services by means of hourly rates, the number of pages per document, the number of meetings, the duration, references, CV, etc. After the input from all suppliers has been rationalized, procurement makes a commercial decision to contract what is certainly not always the supplier who can bring the most value to the company.

Can you really rationalize consultancy services?

I have serious doubts if you can rationalize the value of consultancy services in order to reduce the risk for a company. First, consultancy services are part of a methodology that has been developed by the supplier. This methodology is supplier specific and cannot just be copied by others. Therefore, also the value creation of a methodology is supplier-specific. Secondly, the success of consultancy services is determined by the experience and competences of the consultant and not the rates.

For a long time, the Dutch government used the lowest price in public tendering for selecting the supplier. Prior to the tender, the project team tried to rationalize the complete process with an extensive amount of specifications and instructions to suppliers not to deviate from these specifications. The result of this tender process were projects with an overrun of cost (you just can’t capture all risk by means of specifications), poor quality and too often a complete failure. Luckily the tender process has been changed by means of incorporating additional selection criteria more focussed on quality.

Is there anything we can do as suppliers? The answer is “yes”. Too many suppliers have problems to translate their services and methodology into real value for the customers. If the translation is too generic, our customers can’t see the real difference among the different suppliers and therefore start to rationalize the risk of paying too much for a service.

Although we try to rationalize our decisions in order to reduce the risk, in fact even with what we believe are logical decisions, the very point of choice is arguably always based on emotion. Therefore, you can ask yourself to what extent it will help you to reduce the risk if you rationalize the supplier selection for consultancy services.

Ultimately it is not the price that determines the success but the value you get out of these consultancy services.

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