Why is Not for Profit Procurement so Different (article)

Published September 2018

Exploring the Not for Profit procurement differences
  1. Introduction

    This article looks at some of the key differences between For Profit (FP) and Not for Profit organisations (NfP). Looking at the fundamental differences between the organisations in context of those things that could influence supplier selection. At the highest level the distinction between these groups is very clear: FP organizations view their performance in terms of effectiveness in achieving returns to their investors in context of monetary value. However NfP organizations would tend to link the larger notion of organizational performance to the results of their particular programs to improve the lives of a target group or maximising on use of funds from their stakeholders (tax payers and donators for example) to achieve this purpose. This article will look at how this high level distinction impacts procurement and will also dive deeper into some of the resultant differences between these groups that impact on the procurement function. The areas of difference explored in this article are:
    • Goals and Motivations
    • Financials
    • Regulations
    • Risks
    • Processes
    • Skills
    • Ethics
  2. Goals and Motivations

    Where goals and motivations are concerned, the NfP sector is defined by the greater restrictions placed on changes to their goals: this coming from legislation, funding source restrictions and having to adhere closely to their defined purpose. Many of these restrictions on NfP organisations are defined and monitored outside of the organisation by external stakeholders. The NfP also has a greater focus on adding social value to a supply chain. With Government departments motivated towards the public interest and other NfPs motivated towards building social value associated with their fundamental purpose. Whereas when we look at the goals and motivations of the FP sector (commercial businesses) there is more opportunity to re-define goals and change direction, with significantly less influence from external parties. The FP organisation, as you might expect, is primarily financially motivated. Focused on increasing margins, driving profitability and enhancing competitiveness. And ultimately Shareholder value. An increasing motivation towards becoming a more Socially Responsible organisation is apparent across all sectors, though perhaps in the FP sector case this could be said to be responding to minimum legislative requirements, whereas in the NfP domain Social Responsibility will more reflect their purpose and likely exceed any legislative requirements in this context. So how do these differences affect procurement and supply. Certainly NfP organisations will exclude suppliers that are not aligned, and select suppliers that are aligned, to their purpose. In approach there will also be differences in how suppliers are evaluated, with social factors certainly having more emphasis in the selection of NfP suppliers. Most NfP Organizations, for example, would tend to link the larger notion of organizational performance to the results of their particular programs to improve the lives of a target group. At the same time, a majority of NfP organizations would see their performance in terms of their efficiency in deploying resources: this relates to the optimal use of resources to obtain the results desired. In selecting suppliers. The FP organisation, would approach this differently: they would look at supplier engagements that could improve their financial performance as an organisation, as the predominant factor; perhaps more value driven over extended periods and less short term cost focused than NfP groups.
  3. Financials

    The financial factors we will include in this section relate to the different organisations approach to budgets and spend. Typically in NfP organisations budgets are set at a specific time of year, with very precise allocations to defined projects and objectives. There are definite limitations on the flexibility of where this money can be allocated: the funds are typically pre-allocated and earmarked for a very specific purpose and often tied down based on the source of funding. Whereas in FP organisations the budgeted amounts are more open to change and re-allocation based on the current situation within the organisation. Typically these budgets are set based on the expected results of the organisation and if an opportunity is seen to impact on these results monies can be readily re-allocated or re-assigned. Then, when we look at spend in the NfP sector, typically the emphasis is on maximising use of minimum budget: spending money wisely. There is also a high level of scrutiny of spend by wider stakeholders. In the FP sector, Spend is driven by business cases to achieve success and a structure of management level approvals that can affect how project spend occurs. Typically processes are more rapid and responsive as a result. So how do these characteristics affect procurement and supply. Certainly opportunities to supply NfP organisations tend to be fixed by the budget process. They tend to be longer more drawn out processes, as they involve wider scrutiny of process (see later in this article) Whereas for FP organisations there is a more flexible approach, so there is more opportunity to change where money is spent. From a results perspective, in terms of expectations, the NfP domain will typically be focused on the current purchase transaction itself, the costs and the end result in terms of impact in respect of their cause. Whereas the FP will look at overall value delivered, the future ongoing purchase relationship and the strategic benefits, as part of their expectations.
  4. Regulations

    For the NfP sector regulations are often wide ranging and linked to government regulations. With a higher level of uncertainty over how these regulations will change and affect Procurement. NfP procurement is defined and constrained, in some sense, by legislation, transparency and compliance demands. For NfP organizations to stay financially and legally compliant, with the regulations of their sector, all purchases and payments must be carefully tracked, and reported with complete accuracy and an emphasis on ensuring there is an ability for full disclosure and transparency over any transactions. For FP organisations the focus is on conformance to a minimum set of regulations to do effective business. Procurement is constrained only by this minimum set. Tracking of spend is less rigid for the FP sector, though of course good business practice would be to have an audit trail of all spend. The key here though is that there is no obligation to disclose supplier selection and spend levels outside of an FP organisation and this lack of need for transparency does affect the nature of these audit trail requirements and the way that suppliers are engaged.
  5. Risks

    By nature NfP organisations are risk averse. Within NfP organisations there is an expectation that any actions will be challenged and scrutinised and this tends to constrain decisions to those that are safe to be made and easier to move through the processes that are in place. Whereas in the FP organisation the approach to risk depends on the organisation, however in general FP organisations will take measured risks to grow their businesses, enter new markets or compete more effectively in their chosen markets. Taking an element of risk to move the organisation forward is seen as essential within most FP organisations. This different approach to risk, and the expectation of scrutiny over any risk based decision, makes the NfP organisation in general very cautious and conservative on their procurement approach. Whereas the FP organisation does not have the same level of external scrutiny and can make risk based decisions within the organisation, or at worst having to refer to a board of directors only. See example case studies from both For Profit and Not for Profit organizations.
  6. Processes

    NfP procurement processes are typically mechanically driven to meet procedures and regulations and can quite often be set by stakeholders external to the organisation. Whereas the FP procurement process is more flexible and adaptable to the nature of the purchase. Typically the FP procurement activity is a very private process (minimum legal transparency.) Whereas the NfP is a very transparent process. This transparency affects the nature of the NfP procurement process, as it is more likely that there will be open tenders and tenders published to a wide audience of potential suppliers. In contrast, for the FP process the potential vendors can be pre-selected and only these vendors get visibility of the process. NfP organisations will always have an overseeing authority and usually there are multiple stakeholders involved. Governance is a major factor for NfP groups, so detailed records of procurement activity are essential. Whereas for the FP authority it is typically a very clear line to the CFO for any review of a procurement activity. As a result, of all of the above, NfPs rely on the use of very formal processes & arm’s length negotiations to avoid any suggestion of collusion with a supplier. In the vast majority of cases there are competitive tenders. This process tends to discourage long term relationships. However the FP process will encourage strong long term supplier relationships. Particularly in the case of critical supply chains where there can be a very limited group of suppliers. In a process sense the NfP process can be summarised by the following bullet points and it can be assumed that the FP process in contrast would either exclude these steps or at least be more flexible in how they implemented them for each purchasing activity:
NfP Process:
  • there is always an open competitive bidding and sourcing activity
  • there is transparent flow of information
  • there is always an online advertisement of tenders
  • transparency at all stages of the process
  • typically an online requisition process is mandated for organization staff
  • typically there is an online call for proposals to many suppliers
  • online short listing of tenderers is typically mandated and again transparent
  • typically online supplier evaluation occurs and in all cases records of the decision process and scoring are always kept

7: Skills

Perhaps in this domain of all the domains the financial flexibility has more influence. The NfP sector is more constrained by their finances in terms of offers that they can make to potential candidates for roles in their organisation. This means that they struggle to compete to secure the top candidates. NfP organisations typically address this issue by focusing on training current employees. Though they often underestimate the skills needed to deliver on new eProcurement technology. FP organisations can of course compete more effectively on salaries and packages to secure top candidates: they will compete to secure any new skills needed within the organisation. One of the key differences in skills within these organisations relates to the nature of the organisation itself. NfP Leadership skills emphasise knowledge of legislation, funding, cost control and governance processes. They focus on the ability to work within current processes, as opposed to change them, or at least a patience to realise that change is not rapid in NfP organisations. For FP leadership skills, the emphasis is on Analytical thinking, business savvy individuals, creativity, change management, investment strategy and a constant drive to improve.

8: Ethics

Firstly, in this context, it should be emphasised that no responsible organisation sets out to be unethical in their approach to doing business. Therefore in terms of ethics there are no clear differences between the NfP and FP sectors. However, in the case of the NfP organisation there can be a significant influence in a specific ethical domain, driven by the purpose of the organisation. This purpose can influence the choice of supplier based on their ethical alignment to this purpose. As an example, on ethics, consider an NfP organisation that is focused in environmental conservation and the ethical criteria that they would apply to a selection process. Certainly they would apply more strict criteria in this domain in their selection process.

9: Summary Table

NOT FOR PROFIT FOR PROFIT BUDGET Limitation on the flexibility of where money is spent: typically pre-allocated and earmarked and often specific to funding source Flexibility and agility over where money can be spent Budgeting for success SPEND Seeking to maximise use of minimum budget: spend money wisely High level of scrutiny of spend by wider stakeholders Money allocated at budget time and can only be spent for this specific purpose Spend to achieve success Management level approval process Money can be re-allocated and spent for other than the original budget purpose GOALS Restrictions on goal changes coming from legislation, funding sources and defined purpose Opportunity to define goals and change direction MOTIVATION Procurement typically has a larger focus on adding social value to a supply chain. Government departments are motivated for the public interest and other NFPs are motivated towards their purpose Financially driven mindset; increasing margins, driving profitability and enhancing competitiveness. And ultimately Shareholder value. Increasingly Social Responsibility is becoming important, however only in context of profitability OPPORTUNITY Process/purpose/transaction driven not opportunity driven People within organizations will behave opportunistically when it is feasible and profitable REGULATIONS Wide ranging and often linked to government regulations. Procurement is defined and constrained in some sense by legislation, transparency and compliance demands Focus on conformance to minimum set of regulations to do effective business OVERSEEING AUTHORITY Potentially many stakeholders and could involve a disparate group of Trustees. Governance is a major factor. Increased transparency Typically a very clear line to the CFO EXPECTED RESULTS Transactional efficiencies and cost savings Value and strategic benefits to the organisation. Cost is a significant concern, however will focus more on TCO and returns on investment. PROCESS Open. Mechanically driven to meet procedures/regulations and often interfered with politically Private Flexible RISK Risk averse. Expectation will be challenged Risk depends on the organisation, however not in general risk averse SUPPLIER ENGAGEMENT Reliance is on the use of formal processes & arm’s length negotiations to avoid any suggestion of collusion with a supplier. Competitive tenders in all cases. Long term relationships discouraged by process Focused on ensuring strong supplier relationships Long term strategic relationships encouraged for critical supply chains SKILLS LEVEL Constrained by finances. Often reliant on training current employees. Often underestimate skills needed. Competitive on salaries and packages to attract best talent FOCUS Juggling with objectives, outcomes and stakeholders influence. Looking to provide an improved product or service or margin - to ultimately sell more and/or make more profit RESOURCING Resourcing process is slow. Partly due to need for oversight and partly due to slow rate of change towards any changing situation. Access to additional funding is also a complex and slow process. Fast and responsive resourcing process driven by business cases and strategy. The movement of resources and funds is a lot more flexible. PROCUREMENT DEPARTMENT Functional service and typically under-resourced Mostly seen as a key resource in delivering corporate supply objectives PROCUREMENT ACTIVITY Very public process - totally transparent selection process Adequate funding must be attained and disbursed, procurement practices need to be approved by several governing bodies and suppliers often undergo background checks and other investigations, all of which slows down the procurement process considerably. Private process Streamlined process to business ETHICAL VALUES Often set by legislation and often strongly influenced by the purpose of the organisation Set by the organisation in context of legislation LEADERSHIP SKILLS More emphasis on knowledge and understanding of relevant laws. Process knowledge to access funding. Ability to work within processes, as opposed to change them, or at least ability to make change in a slow moving environment involving many stakeholders Analytical thinking, business savvy and creative marketing. Change management and constant drive to improve. See example case studies from both For Profit and Not for Profit organizations.