New procurement approaches can release value and profit margins in light of reduced oil revenues

PA Consulting Group expert urges regional purchasing departments to adapt current practises to raise value

Dubai, UAE, 5 April 2015: A warning from the International Monetary Fund that lower oil exports could drain $300billion from Middle East and Central Asia economies has led a local management expert to recommend a change in current procurement models to help regional businesses succeed in current market conditions.  

Paul Ellis, a programme delivery expert at PA Consulting Group, believes now is the time for procurement managers to update their commercial models and procurement practices, which he believes carry the unintended consequence of driving costs through non-value adding activities.  

“Adopting ‘turnkey’ contracting, for example, in an attempt to transfer risk and integration efforts to a single contractor for complex projects will almost inevitably attract risk premiums, contingency sums and added management costs,” said Ellis.

“The hoped for reduced management effort and single point of accountability is seldom a reality in such cases, and the buying organisation itself inevitably picks up the consequences when things go wrong.”  

As Middle East businesses recover from the impact of reduced oil revenues, Ellis advises that adopting a more pragmatic and considered approach to managing these risks, placing responsibility and accountability with the party best positioned to manage mitigating actions, would eliminate non-value adding costs and enhance the chances of successful delivery.  But such an approach requires procurement managers to update their purchasing models.

He added: “Many procurement processes widely employed in the region are no longer prevalent in commercial enterprises or governments in other parts of the world.  Bid bonds and performance bonds, for example, are used far more selectively.  

“The very nature of a bond in itself attracts risk premiums, which further widens the gap between cost and delivered value.  Greater efforts to refine business requirements and more active management of the procurement process through market-making, active pre-qualification, imaginative contractual incentives and stronger vendor engagement would produce far better results for the purchasing organisation.”

Ellis agrees with the conclusions of the IMF that it is highly likely the sustained period of low oil prices will impact government budgets and expenditure and result in severe financial pressure on government and businesses across the Middle East to deliver their objectives in the prevailing market conditions.  

Now is the time for procurement departments to take a more strategic role in the management of the market and supplier base.  By adopting an active management of cost rather than leveraging price, procurement managers can optimise their delivered value and strengthen the relationships with their suppliers.

“Organisations that embrace the potential of more active management of integration and risk will also develop transferable commercial, project and programme management skills that will increase competiveness and further enhance the region’s talent pool,” said Ellis.  

“Furthermore, raising the bar for the procurement profession will provide rich career opportunities across all sectors of the economy, repositioning procurement as a strategic driver rather than a service function at the heart of an organisation.”
 
PA Consulting Group has been operating in the Gulf region for the last 30 years, successfully delivering more than 150 projects in 13 Middle Eastern countries, across sectors including financial services, transport, energy, government, defence and security, healthcare, education and manufacturing.