Not long ago, many global companies considered the GCC and broader Middle Eastern market to be somewhat un-charted territory. Despite its plentiful capital and business opportunities, the Gulf region was perceived as being a place where breaking into the inner circle of personal networks and friendships was the only way to tap into the region’s wealth.
This old reputation is changing now among foreign businesspeople who have experience with the ins and outs of the region. Most major GCC and Middle Eastern companies long ago replaced informal controls better suited for small family businesses with modern forms of corporate governance. However, the perception of the GCC and the broader Middle East as a fast-dealing market lingers in the mind of the broader global business community. Such concerns may even add more friction to many deals, by raising the level of due diligence potential foreign partners and investors demand.
One major step local companies can take to mitigate these concerns is to enhance transparency by improving procurement controls. Since most business-related malpractices stem from the awarding of contracts to private institutions, a tighter procurement system can go a long way toward reassuring suppliers, customers and investors that a company is a trusted partner.
A more transparent procurement system encourages stakeholders — customers, investors, employees and suppliers — to see the company as a modern enterprise run according to world-class, professional standards. As other companies in fast-growing emerging markets have found when they make similar improvements, strict procurement systems enhance outsiders’ perception of the company as an enterprise of integrity. This higher level of trust can serve the purpose of multiplying opportunities by reducing the potential partner’s need to conduct extensive due diligence.
Three keys to greater best procurement practices
In our experience with many private and public companies in the Gulf and Middle Eastern region, we have found that developing the higher level of transparency that international business requires of corporate procurement systems demands tightening three different practices: first, contracting processes and buying goods and services; second, supply chain governance; thirdly, improving the control and audit functions. Fortunately, other companies have dealt with these issues before, and have found that three corresponding steps can dramatically increase transparency:
1. Differentiate sourcing from procurement. Technically, sourcing is a matter of planning needs and identifying potential vendors, then negotiating an agreement for supplying the goods. Procurement, on the other hand, is mostly about concluding and fulfilling the transaction previously agreed to in the sourcing stage. A failure to plan often leads to some Gulf and Middle Eastern organizations rushing into the buying stage early and forcing buyers to make a spot purchase at precisely the moment when scrutiny of the product must be given first priority. In other words, most tenders that go out on the markets are already pre-assigned to the suppliers that have the most influence with the company.
2. Watch every purchase throughout the purchase cycle. In many Gulf and broader Middle Eastern organizations, tender boards are set up to be in charge of company purchases. However, tender boards typically engage in the purchase process only at the point of negotiations and award. This means that their role is often limited and their options narrowed by stipulations previously included in the tender. A better way to control purchasing is to create governance throughout the procurement process, beginning with demand definition and ending at the point of product or service delivery. This requires process standardization, more clearly defined authority roles throughout the process and the automation of as many steps as possible to keep the entire transaction under very tight controls.
3. Build auditing capabilities, as establishing boundaries around a process will not guarantee best procurement practices. The recent scandals at Siemens in Germany show that even in a company with world-class processes and systems, malpractice can take place. Yet while it is impossible to eliminate the potential for illicit self-dealing without shutting down a business altogether, auditing and controlling the purchasing system on a regular basis while continuously rotating teams and individuals can significantly reduce the chance of a developing malpractices.
The decision to follow such best practices can have a significant impact on an organization. The most evident, of course, is the impact on the bottom line where the organization and its shareholders have more money flowing in and staying in. Quality tends to increase as well, since suppliers’ choices are based on the vendors’ merits and abilities to support the objective of the company, not on the relationship with the owner or the vendor’s managing director. Even companies with good auditing practices can profit from improving this system: transparent practices create more confidence in the system, thus attracting more vendors and increase competition in the region. Finally, such practices allow GCC and broader Middle Eastern organizations to think strategically, reduce the level of waste and increase their overall efficiency.
Staying competitive
Economic competitiveness of a country is a function of the ability of its public and private sectors to deliver superior returns on their investments. This means that applying best practices is the only way to move forward for a country: competitiveness at the micro level (at the level of the firm) directly impacts competitiveness at the macro level (country level).
Corporations and public enterprises alike normally deliver such returns only when they have the ability to formulate very clear competitive strategies. They also must have the ability to execute such plans. In this networked era this means that strategy is not simply the province of sales and marketing or research and development, it is a broad organizational responsibility. Seamless execution requires the organization to ensure that companies can clearly articulate the role of each institutional or enterprise function.
In addition, good procurement controls can be quite helpful in building a capacity for strategy execution — and not just as a way to keep an eye on the cash register. At Zara, the trendy global clothing store, the role of procurement goes far beyond the simple purchase order. Procurement work includes an assessment of the supply base to ensure that selected suppliers have the capabilities to fulfill the overall strategic objectives of Zara.
In an endless balancing act between cost, quality, and speed, Zara’s procurement department takes the lead in ensuring that the company maximizes its long-term interests. Thanks to careful calibration by procurement, Zara is able to deliver up to 28 new collections a year, ensuring that the supply of cloth and new garments come on time and its new collections are distributed around the world in a seamlessly, while retaining the kind of transparency distribution partners and Western investors demand.
The wrap-up
Increasingly, the GCC and broader Middle East economy is becoming part of the wide world of global business. Cross-border mergers, for instance, have grown from six in 1997 to more than 250 in June 2008.
This growth in openness to the outside world has led to many changes in how GCC and Middle Eastern companies are run. Many Gulf companies have already replaced old informal habits of corporate management — more suited for a cozier era when business was mostly an extension of long-time family relationships — with a number of practices borrowed from the West.
Improving procurement processes is another such step in the long-time quest of GCC and broader Middle Eastern companies to take their place among the world’s great enterprises. Following best practices for procurement allows public and private institutions to be more credible trading partners as they increase their M&A activities, make their home market a less risky destination for foreign capital in search for growth, and ultimately enhance the micro and macro-competitiveness of the region as a whole.
Fabrice Saporito is a Principal at Booz Allen Hamilton
