What does it take to have a good category strategy?

Failing to reject it. And if you really do not have time to read more – the first sentence sums it all up. You can take it as a fact and go back to doing your day job. Or… If you want to understand why it is better to try rejecting strategies as opposed to trying to prove them, please read on (I actually do care if you read. Or comment.).

It is not a secret, that behavioural economics is now the fashion. Neuroeconomics is a science branch. Scientists observe human brain responses to economical triggers. For instance, buying things cheaper, achieving savings actually causes a reaction in the pleasure centre of human brain. Procurement, just like any other specialist area (HR, government) could be learning from scientists. My most recent re-discovery was a confirmation bias. This post is about it’s impact on business and main ways to eliminate it.

Confirmation bias

Confirmation bias is not something you never knew existed. I am pretty sure you have experienced it more than once in your life: falling in love, focusing on something special that you care about very strongly. The moment is nice. But what tends to happen – people get blind to anything else around them. Defining new category strategy is like falling in love all over again. If you selected a strategy and are working on it’s analysis, your naughty (lazy) brain will do everything to help you achieve just that: prove, that the selected strategy is the right one. It will kindly switch on other mechanisms: availability heuristic, selective hearing / understanding / reading, halo effect and many other “tools”. You cannot blame your brain – it is just trying to protect you from having to work more finding a different strategy.

Impact on business

A lot of times, category managers tend to overestimate potential good outcomes and underestimate the bad ones. Then businesses find themselves running procurement (HR / IT / Operations) projects with budgets, which are higher than anticipated benefits. Or implementing changes that have lost their meaning along the way. Adapting changes, that are useful for only one function, and bring harm to the business. To put it shortly – activities end up in failures (or, if you prefer, “lessons learned”) and wasted resource.

Failing to reject it

It is a lesson from scientists. For ages, to prove something, scientists form hypothesis and focus their efforts to reject it. My approach is to form the strategy and try to find the weak spots  – that helps “think differently”.

Another method is adapted be various top management people. Successful leaders ask a question: “imagine you are in time two years in the future. Your strategy has failed. Why?”. Similarly as the example above, this exercise will help you focus on things that might go wrong. Let’s admit, in a real world, if something can go wrong, it will most definitely do so.

Another tool you could use murder boards. Agree with your colleagues, that you will be polite in the meeting room while questioning the selected strategy, but leave the political correctness behind the board room door. You do not want to find yourself implementing big project only because it was not politically correct to say, that you do not agree or do not understand assumptions or conclusions.

Be brave enough to admit that things can and do go wrong. Be strong enough to resist doing things for the sake of doing it, without seeing the benefits. Falling in love is great. Becoming blinded by biases in business is dangerous.

 

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What does it take to have a good category strategy?

Halo Effect Impact for Tender Evaluation (and Ways to Fix It)

The Phenomenon

Halo effect is a type of cognitive bias. Cognitive biases are errors in thinking that influence how we make decisions. This phenomenon affects us both at conscious and sub-conscious levels. It affects personal and professional life decisions. Nobody is an exception. Not recruitment specialists, not IT and not procurement or any other specialist area. Procurement professionals, however, are exposed to it even more – they have to deal with multiple external sources of influence every day. This subject is very wide, but this time let’s look into a very narrow area: tenders and their evaluation.

Cognitive bias in procurement

“Procurement Academy” provides some very simple and good explanations of the most common biases. According to them, cognitive biases appear during the negotiation process or in daily communication with suppliers and would not apply to tender process. Therefore, the tender would make your buying process efficient. That is not necessarily so. Let’s leave all the malevolent intentions aside – this time we talk only about unintentional cognitive bias.

Cognitive bias in tenders

There are a lot of different types of biases. Too many to analyse all of them here. Also, tender processes vary across different companies. However, here are the examples how, without even knowing about it, your decisions on supplier / product / service selection might be influenced:

  • Overconfidence. I wrote about it some time ago. I loved Jennifer M Wood’s article on similar subject, where she points out: “Experts are more prone to this bias than laypeople, since they are more convinced that they are right”. How is the connected with the tenders? Well, WHO is running your tenders for you?
  • Halo effect: the tendency for an impression created in one area to influence opinion in another area. Think about Account sales manager David. During the tender presentation meeting, he was charming: professional, knowledgeable, personable. Did you not automatically expect the whole company to be just as David is? Another example is the sequence of replies to the questions. It is proven, that if the first questions are replied extremely well, the evaluator tends to evaluate the following replies much higher. Was there a time pressure to submit the tender proposal? Most likely the greatest effort was put into replying the first questions.
  • Framing effects: You will tend to make different conclusions from the same information, based on it’s layout: sequence of words, mathematical representation. Think about it: would you rather have a half-empty or a half-full glass of water? Would you choose 90% fat free or 10% fat yogurt? All tender submission documents will be “adjusted” to communicate “the right” message.
  • Base-rate neglect: it is a tendency to ignore base rate information (say, historical supplier performance information) and focus on specific information (a tender submission data). I did my own small research on this: results are here. We are all guilty of this.
  • Confirmation bias: I tend to call it selective hearing or memory. People tend to search for, focus and remember information in a way that confirms their perceptions. The questions asked in tender documents here become critical. Compare: “Is Sam friendly?” and “Is Sam unfriendly?” These questions are about the same thing, but the answers would give you a different picture.
  • Post-purchase rationalization. It is not a joke. There is such a thing.

 

Ways To De-Bias Tenders

First of all, we need to remember, that as long as there are people involved, there will always be various types of communication and thinking variations. Also, the tender itself is a very limited tool to ensure procurement efficiency. However, sometimes you will have to use them. When you find yourself running a tender:

  • Consider confidence calibration. No, I am not suggesting NOT hiring experts overall. I am suggesting calibrating your experts. And, sometimes, to can ask yourself: why exactly am I hiring a SME? What do I expect from him / her? Why do I think, that having run a tender for OTHERS several times means they will know what is best for OUR company? What exactly am I looking for?
  • Evaluate the company, not the person that is representing it. Meet all of the team (or the core team), that will be running your account and servicing your company. Use testing platforms to get some data to back up your impressions. OR do not meet anyone at all.
  • Remove the supplier names from their replies before handing tender submissions for the evaluation.
  • Improve question evaluation process: split the questions and evaluate so that you can compare question 1 from supplier A with question 1 from supplier B as opposed to firstly evaluating all questions from supplier A prior to moving on to supplier B.
  • Use reframing techniques: challenge assumptions; ask wicked questions (create paradoxes); use “5 Why?” process; adopt multiple stakeholder perspectives).
  • Scientists and philosophers by-pass confirmation bias by trying to disprove theories. Challenge and doubt all sales claims. It is better, if you have historical data which you can analyse. If your suppliers provided you with 10 statements of how well they will meet your business requirements, try to disprove all. If you succeed in half of them… well, then should your tender evaluation reflect that?
  • On the other hand – be critical about the questions you ask in your tender questionnaires.
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Knowing how our brain works helps us not to only avoid our own errors. You can use this knowledge to your advantage. Are you taking any exams any time soon? Reply firstly the questions you know best. And make sure to make a magnificent impression for all of the further questions.

Halo Effect Impact for Tender Evaluation (and Ways to Fix It)