LVMH & Early Metrics: Towards a proactive model in innovation procurement
By Anais Masetti - 14 October 2021
The past ten years have seen procurement departments face completely new challenges. That’s especially true when it comes to finding innovative providers who can respond to fast-changing trends. They are no longer just expected to meet the brief provided by the different business units. Those now also look to innovation procurement leaders to answer questions such as ‘what is the best approach to respond to a trend’ and ‘what kind of external partner is best for us’.
Below Christian Galichon, Head of Procurement at LVMH, and Antoine Baschiera, Co-founder of Early Metrics, discuss how the approach to innovation procurement has evolved over the last ten years. They also share their views on how procurement teams can best adapt their strategy to the current times.
Defining and responding to the needs of the company
According to Baschiera, what has changed is mainly how sub-brands or business units express their needs to the procurement team. They used to come to procurement with an idea of the solution they needed for a specific problem; now they think more widely about what needs to be improved in their activities. As a result, they look to the procurement team to find the solution to make this improvement happen.
Baschiera explained: “Before, our clients in procurement departments would give us a list of specifications for the sourcing needed. But recently we have had several instances where the business units had not provided any specifications to the procurement team. As a result, these procurement clients could no longer provide us with detailed briefs for startup sourcing.”
This is true both on digital and product needs. For the latter, business units might have identified a wider market trend they want to act on; but they lack a clear cut idea of the kind of external player they would like to work with. Indeed, Galichon noted that more business unit leaders are coming to his procurement team asking “what do I need?”.
Considering LVMH primarily has a B2C retail offering, Galichon remarked: “The way our clients behave and therefore how our brands interact with them has been deeply disrupted, which presents multiple challenges from a procurement perspective.” The digitisation of retail has led to the multiplication of client communication channels, purchasing channels and payment methods, among other things. The Covid-19 pandemic has only intensified these trends. Hence, the interactions between the brands of the LVMH group and their customers have been complexified, which puts more pressure on innovation procurement. He added:
“Our ecosystem of providers has also become more complex because there are physical, financial, administrative and experiential aspects that have to be addressed differently.”
Galichon explained that his procurement team adopted a phased approach to digital transformation that was in line with the needs and markets of each brand of the group, in order to minimise the risk of losing loyal customers. Now, his team is tackling new issues such as the anti-fraud system for product returns and reimbursements.
Finding potential providers to answer innovation needs
In the past, responsibilities were more siloed: the business unit identified a need and the procurement team was in charge of finding the best supplier. Nowadays, more stakeholders are involved in putting together a panel of potential providers. Business unit leaders might come to the table with an idea of one or several potential providers since startups are increasingly reaching out directly to them.
Baschiera added: “Another change that we at Early Metrics have noticed is that procurement teams will now look for new providers that could replace existing providers to answer to the group’s needs in a more efficient or innovative way. This is something that procurement teams have already been doing for a long time, but now we see business units asking more proactively to challenge incumbent providers.”
On LVMH’s side, each of the 75 Maisons or brands of the group is quite independent and prescriptive in its sourcing approach. Galichon explained that the procurement team at a group level supports each brand through several sourcing channels. One of these is the group’s startup incubator which is hosted in Station F. Another channel lies in the group’s intrapreneurship programme LVMH DARE. For instance, this programme resulted in the creation of Nona Source, an online resale platform that re-values deadstock fabrics and leathers from the Maisons.
A third innovation sourcing option for LVMH is to form partnerships or consortiums with other large companies. For example, blockchain for traceability is an increasingly important topic for LVMH and the group is deploying more efforts to prevent counterfeits from entering the market. A few years ago, LVMH launched the Aura Blockchain Consortium with Microsoft and Consensys. Recently they have decided to open this initiative to other partners that are direct competitors in the luxury market, like Richemont and Prada. Galichon explained:
“We decided to involve new partners because this is an industry-wide challenge so there’s no competition on this topic and we believe that more players could benefit from this blockchain.”
Finally, Baschiera observed that some traditional ways of sourcing providers are gradually losing efficacy due to the changing provider landscape. More specifically, many startups have said that they don’t apply to call to tenders, either because they think it’s a waste of time or because they don’t know how to respond to them properly. Some SMEs are worried that their application will go to waste if they are only used as bargaining chips.
Negotiating and setting up contracts with innovative SMEs
At Early Metrics, we have seen that our corporate clients have different approaches to negotiating with SMEs. Different groups have varying levels of strictness in their negotiation and contract processes. Some use exactly the same process with startups or SMEs as they do with larger suppliers; with the mindset that regardless of its size, any supplier must deliver and conduct itself to the same high standard. But this approach is becoming increasingly rare.
Many others have put in place lighter, dedicated processes for small innovation suppliers. Groups such as Sanofi and Crédit Agricole were among the early adopters of a dedicated negotiation process for startups. Galichon explained that despite keeping a very structured approach, they have also set up contract templates with startups in mind that only include essential clauses. This allows them to go through the negotiation process more quickly, which is beneficial for both the startup and the business unit that needs the solution.
Before the emergence of startups as suppliers, the interactions and expectations were simpler with large, stable suppliers. Indeed, the negotiation was primarily focused on the cost and SLA. Choosing a startup as a supplier implies more negotiation around the product or service that will be delivered. It often entails some customisation of the startup’s product to better fit the group’s needs. Sometimes this goes as far as co-developing a new offering. So the focus is on the value-added rather than on the cost. Another key fact to keep in mind is that startups tend to offer products for specific use cases. Therefore, the procurement team might involve several startups that can each solve a specific part of the problem at hand.
Galichon also stressed the importance of compliance and customer data protection, regardless of the size of the provider. He commented:
“We also have to be careful with how sensitive information is shared with new third-parties, especially when it concerns end-consumers. We need to make sure that we don’t compromise our compliance with GDPR and other regulatory requirements. As we have seen, data leaks can have extremely negative consequences.”
Managing the relationship with innovative purchases
With larger providers, there isn’t really a question of whether the company will survive. Obviously, younger providers have a much higher risk of bankruptcy in the short to mid-term. That is partly why innovation procurement leaders use Early Metrics’ startup ratings. These offer an accurate indication of the level of bankruptcy risk of startups.
Being the client of a startup also means exposing yourself to a novel risk: that the provider may pivot. A young startup may not be completely sure that it is on the right path. Indeed, it may decide to change quickly if it spots new market opportunities. This means they may not be suitable anymore for the corporate client after a few months or years. Baschiera stated:
“While previously procurement teams mainly had to focus on the suitability of the provider’s offer, when it comes to a startup provider, they have to look at the entirety of the company. That means both the risks and opportunities it may have.”
For LVMH, the relationship between the group and startups often entails co-development, which is not the case with most of their larger providers. The procurement team will need to assess the relationship with and performance of a large provider, such as energy suppliers, much less often than for a startup. “Co-developing a solution with startups means that we have a much closer relationship, which is an aspect that Early Metrics has supported us on,” said Galichon. “We have relied on Early Metrics several times to do 360-degree assessments of startups since often their pitch deck may be exciting, but then we find that there’s not much behind.”