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Procurement differences in Not for Profit vs Profit Organisations

In this article we explore the differences in procurement with Not for Profit and for Profit organisations

Not for Profit (NfP) and for Profit (FP) organisations are of course distinctly different.

Not for Profit are measured in how effective they are in programs that improve areas such as the environment or peoples lives in some way. NfP are normally funded by private and corporate donations and grants, and as such are closely monitored, measured and answerable.

For Profit have various measurables depending on the company objective. But ultimately the goal is to deliver monetary gain to the shareholders.

There are many areas of governance and control for FP and NfP finance and procurement being absolutely key.

So lets explore procurement.

    • Financials
    • Goals and Motivations
    • Processes
    • Regulations
    • Ethics
    • Risks

1. Financials

The financial core factors explored here relate to budgets and spend.

Typically a NfP organisation will set budgets at a specific time of year, with very precise allocations to defined projects and objectives. A NfP will set particular limitations on the flexibility of where this money can be allocated. Each set of funds would normally be pre-allocated for a very specific purpose, and source of funding.

By contrast, a FP organisation will have budgets which can be more open to change and re-allocation based on the organisational needs. Typically FP budgets are set based on the organisational strategy and expected results. The budgets will be set as OpEx (Operational Expenditure) and CapEx (Capital Expenditure). OpEx will cover areas of operational necessity such as people, property, utilities, whereas CapEx will typically look at areas that will help the business grow such as  investment in new systems and marketing initiatives. The CapEx budgets are therefore necessary, but flexible and can be used or reallocated as the business sees fit.

In the NfP sector, typically the emphasis is on maximising use of minimum budget, for example spending money carefully and wisely, and here there is often a high level of scrutiny of spend by wider stakeholders.

In FP organisations, spend is often driven by business cases prepared by management. The management teams will work on initiatives for business progress and improvement, and will submit the costs and benefits to the board for approval.

The two core differences in approach as covered above, define the way in which a NfP and FP manage procurement and supply.

NfP organisations tend to have quite lengthy and specific processes for the selection of prospective suppliers, and tend to be fixed by the budget process.

FP organisations by contrast have a more flexible approach, as a result there is more opportunity to change where money is spent.

From a results perspective, in terms of expectations, a NfP will typically be focused on the current purchase transaction itself, the costs and the end result in terms of impact on the result. The FP however will look at overall value delivered, the future ongoing purchase relationship and the strategic benefits, as part of their expectations.

2. Goals and Motivations

The NfP sector is defined by the greater restrictions placed on changes to their goals. Often this comes from legislation, funding source restrictions and having to adhere closely to their defined purpose. Many of these restrictions on NfP are defined and monitored outside of the organisation by external stakeholders, Non Execs and Trustees. NfP organisations also have a greater focus on adding social value to throughout the supply chain. Government departments are often more motivated towards the public interest, with other NfPs concentrating on building social value associated with their purpose.

Taking a look at the goals and motivations of FP organisations there is more opportunity to re evaluate, assess and re-define goals. This enables the FP to change direction, with significantly less influence from external parties.

The FP organisation as a public or private commercial business is primarily motivated on financial growth and return. Focused on driving profitability, increasing margins, and enhancing competitive edge, ultimately increasing Shareholder value.

Social responsibility is fast becoming a key focus in all organisation types, with almost all having some form of CSR directive and policy. A FP however can have their CSR strategy motivated by legislation or to improve the customer selection process, whereas a NfP will build its core focus and purpose around Social Responsibility so how do these differences affect procurement and supply?

NfP organisations will inevitably select suppliers aligned to the purpose, and exclude suppliers which are not. As a result there will also be differences in how suppliers are evaluated, with social factors certainly having more emphasis in the selection of NfP suppliers. Commercial FP organisations approach supplier selection differently, they review suppliers that could help with the FP strategy and improve financial performance. This is not always based on price but often on the overall value that a supplier can give as a partner.

3. Processes

NfP organisations often apply mechanical procurement processes which are driven to meet procedures and regulations, normally set by external stakeholders.

By comparison the FP procurement process is more flexible and adaptable to the particular nature of the purchase. Often a FP organisation will approach procurement activity as a private transactional process. This is possible as a FP in most cases does not need to provide external transparency as long as it meets company governance.

NfP organisations have to apply transparent process. This transparency affects the NfP procurement process, often having to go through open tenders and tenders published to a wider audience.

The FP process by contrast allows potential vendors to be pre-selected and only these vendors get visibility of the process. Because transparency is key, NfP organisations will always have governance and an overseeing authority, usually with multiple stakeholders involved. Governance is a major factor for NfP organisations, as such it is important to ensure that detailed records of procurement are essential.

In a commercial FP the CFO or FD normally applies the control and governance to review core procurement activity.

As a result, of all of the above NFPs can often suffer from poorer relationship building and trust with suppliers as the process is very formal, with negotiations being managed at arms length. This approach reduces the likelihood of collusion or impropriety with a supplier.

The FP process by contrast will encourage strong long term supplier relationships, and trusted partnerships.

Below I have listed the key points for a NfP, it is fair to assume that the FP would either exclude some of these steps, or at least be more flexible in the process:

NfP Process:

  • there is more likely an online advertisement of tenders
  • there is always an open competitive bidding and sourcing activity
  • there is transparent flow of information
  • for governance and control, transparency at all stages of the process is necessary
  • typically a FP will use an online requisition process with controlled approval
  • the tenderers are often short listed, published online and again transparent
  • typically online supplier evaluation occurs and in all cases records of the decision process and scoring are always kept

4. Regulations

Regulations in the NfP sector are often wide ranging and linked to government regulations. They need careful management and constant review as there is a higher level of uncertainty over how these regulations will change and affect procurement. NfP procurement is largely defined and constrained, by legislation, transparency and compliance.

In order for NfP organisations to stay financially and legally compliant, all purchases and payments must be carefully tracked, and reported with complete accuracy. This ensures that there is the ability on request for full disclosure and transparency over any transactions.

Commercial FP organisations tend to focus on conformance to a minimum set of regulations to do effective business such as ISO standards. Whilst good practice (and the CFO will certainly want control), tracking of spend is less rigid for the FP sector. However whilst there are anti bribery and corruption laws there is no obligation legally to disclose supplier selection and spend levels outside of an FP organisation.

8. Ethics

Ethics is an interesting point, of course it is clear that whether a NfP of FP, would not set out to be unethical in any way. As a result there are no clear differences in either organisational type. However, in the case of the NfP organisation ethics can be a clear focus of the NfP objectives and general purpose. As a result the supplier could be chosen or rejected based upon their ethical beliefs and alignment. To give greater clarity on this point, a NfP with a clear purpose to the improve the environment may align greater to a supplier who also holds the environment as core to their values, using renewable energy, electric or hybrid vehicles and technology to reduce their travel and overall carbon footprint. The opposite would be a firm who are not focused on reduced travel, who do not have an eco friendly car policy and so on.

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