Corporations And The Ethical Three Ring Circus

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Some may say in jest that organizations are reminiscent of a three-ring circus. Well, within those three rings it is the procurement professionals who are the ethical tightrope walkers.

Right now, there are individuals in every corporation who are treading the ethical fine-line because of expediency, undue pressure or perhaps because they don’t know any better. Fear of potential ramifications to career and reputation can, ironically, keep many from questioning clearly inappropriate behavior from someone they perceive to have more power than they do within the organizational environs.

Why is it so difficult for businesses to consistently maintain high ethical standards? As an independent observer, many would sit on the throne of judgment and consider themselves imbued with a much higher moral standard and wax poetic about the failings of others.

But life isn’t black and white. In fact, right is rarely diametrically opposed to wrong. It is sometimes easier to “turn a blind eye” as opposed to following Hamlet’s path and suffer “the slings and arrows of outrageous fortune”. Many situations are cloaked with uncertainty, incomplete information, multiple points of view, contradictory responsibilities and pressure, external or self-imposed.

Procurement is a hot bed of ethical challenges and too often procurement professionals are left feeling that there is no net to catch them when they take the ethically correct stance. Choices made by those in procurement can affect the entire corporation. The processes within purchasing ensure that fair and objective decisions are made. Yet other areas of the enterprise may have another agenda. Yet if procurement waivers on its ethical foundation, it traverses the tightrope without a balance bar, and discovering in the process that there is no net to catch them below.

The ethics of an organization are determined by the actions of the top leadership on down. Ethics are not bottom-up in the enterprise. Leadership and the corporation as a whole must value ethics. If the bending of the rules results in accolades as a result of increased short term revenue, or other perceived benefit, then many in the business will rightly believe that ethics don’t matter, performance does. In other words, the end justifies the means. That is of course until the issue hits the front page of the newspaper and then the organizational navel-gazing commences.

Procurement professionals need to embrace a standard that is above reproach, even when they believe that the rest of the organization is acting like the ethics circus clowns. In some cases it may mean that a job or position needs to be risked. It is important to remember that the perception of reputation is the reality. As Lady Macbeth discovered the taint can’t be washed away when it is perceived that one’s “hands are dirty”. If a job is lost because of an ethical stance, at least neither your reputation is lost, nor are your career options in the procurement field.

Although a myriad of ethical issues await procurement on a daily basis, there are three key ones which provide the basis for many a sleepless night because of the inane pressure to “get with the program” or “turn a blind eye”. These are reciprocal business awards, conflicts of interest and maverick spending.

IN THE FIRST RING… RECIPROCAL BUSINESS

Mention reciprocal business to most procurement professionals and an audible groan can be heard. At its simplest, reciprocal business is any arrangement under which a seller of one product or service buys another product or service from one of his or her customers. It is a basic quid pro quo. However, as many in purchasing can attest, there is often more “quid” than “quo”.

With ever-increasing rapidity and perhaps as a result of the mounting competitiveness in the marketplace, the procurement process is seen as just another opportunity to advance a sale. The “best” decision for the organization, and by default the shareholders, is often over-ridden because of the rallying cry for more revenue. There is often little analysis performed, as assumptions are made that more revenue and an intricately linked customer-supplier relationship, by its very nature, must be good for the corporation.

If the procurement team raises questions, even with all the facts in hand, that this potential reciprocal reward is flawed and does not conform to the standard of mutually beneficial, they are most often shut down, and seen as fear mongering. They are seen as not “understanding” the total corporate picture – just “old wives” making up another tale.

But here’s the rub — it is the sales organization and those that support reciprocal business, without a full analysis that don’t understand the total picture. If the comparator is revenue, then the award will be faulty. Revenue in a client relationship cannot be compared to the cost of a supplier. Profits, instead of revenue, enable the “apples-to-apples” assessment, but this is often the quickest way to raise the ire of the sales organization, because it could stop their elephant stomp cold.

If business is awarded based on questionable measures, then the corporation is exposed to significant ethical and legal concerns, which can irrevocably damage its credibility in the marketplace.

In an ideal world, there would never be cross-contamination between customer and supplier wherein each company would compete on its own merits and be awarded business because of a superior offering. Unfortunately, Utopia is only a concept and hardly a reality. So the question becomes can reciprocal business be done ethically and to benefit the bottom-line of the business?

The answer is a qualified yes, because it requires a significant amount of work and collaboration between sales and procurement.

Sales should not be involved in the initial process of a “buy”. Weighting of the responses, the request for quote/proposal, should be done with no consideration as to whether the supplier is a current customer or potential customer. Once a shortlist has been determined, then the deliberation between sales and procurement can begin. The main consideration should be profit vs. cost, because this is where the heart of shareholder value lies. If the profit and cost equation show a benefit to proceed with an award to a client then such an award is justifiable.

However, some customers believe that by the very fact that they hold this exalted position, they should automatically be given the business. Many procurement professionals have dealt with the undue pressure of sales and senior level leadership attempting to influence the buying decision. As well, some organizations take the view that procurement is just an extension of the sales team – that the purchasing process should be used to strong-arm suppliers into becoming customers. Accepting that premise provides a one-way ticket down the slippery slope of ethical reproach and regret.

IN THE SECOND RING – CONFLICTS OF INTEREST

Procurement is rarely the final decision maker in any buy. Most assuredly procurement is an influencer, negotiator and generally ensures that a fair and objective process has occurred. But most have encountered an illusionist on the evaluation team, who conjures up rationale as to why one supplier should be chosen over the others, often to the bewilderment of the rest of the group.

There are several questions that must be asked to uncover the illusion. Have all the suppliers been vetted through the same process or have some been given preference because of whom they know? When evaluating a potential vendor of goods and/or services, is there a process in place that ensures potential conflicts of your evaluation team are known? Is there a requirement for those evaluating the viability of suppliers to complete a full disclosure form and get the potential vendor to do the same?

Full disclosure ensures that anything provided to the stakeholders within the corporation, such as fact-finding trips or other “enticements”, as well as identifying any pre-existing relationships (business or personal) has potentially affected the impartiality of anyone of the team. It doesn’t mean that it has, but at least full scope information is available to ensure that decisions aren’t tainted and inevitably are defendable.

IN THE THIRD RING – MAVERICK SPENDING

In every circus, and in every corporation, there are the proverbial cowboys. Regardless of the “rules” or defined benefits to the organization that working with procurement will bear, these mavericks continuously ride roughshod over policy and ethics. When asked why they respond with haughty arrogance, that the procurement team doesn’t know what’s best for their business.

These cowboys prance out with examples, from “I can negotiate a better deal” and “I know the best suppliers to work with” to “procurement processes take too long,” each of which can be quickly debunked by the procurement team with facts and figures and shown to be lame excuses. Even when this rogue behavior results in major issues, it is left to procurement to get out the shovels and clean up the results of the cowboys’ act.

Corporations need to bring these cowboys’ to heel because the potential impacts are huge. The issues resultant from such conduct is ethically barren. Even if one was to dismiss the fact that the corporation could obtain positive bottom-line impact from leveraging the rogue spend dollars, these mavericks are often conducting business with suppliers with whom they have a “cozy” relationship, without due diligence of their competitiveness, their long term viability and often without the basic protections of a contract. They’ve often swaggered forward and shot from the lip, committing the organization via a verbal agreement.

Watching this act, the procurement professionals are often side-lined, waiting for the repercussions of this high-risk behavior, but most often the ring master looks at them, rolls his or her eyes and says “Don’t worry, that’s just the way he/she is. I’ll talk to him/her”. And after a quick discussion and a virtual slap on the wrist, they are right back to continuing their dodgy deeds, with procurement having the shovels at the ready.

Lately, a fourth ring has been making itself known with ethical issues being encountered when Offshoring, but that’s for the next curtain call.

The shareholders are ultimately the audience of the corporate three-ring circus. It is for them that the organization should be performing to the best of its ability to ensure the creation of value and ensure that nothing is done that can appear in a negative front-page headline.

Perhaps it is of little solace to procurement professionals, but it is important to remember that the high wire act is the one that always gets the standing ovation!

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write by bennett