Sunday, December 28, 2008

Will This Bailout End in Tiers?

Many of you will have learnt from the auto bailout news coverage that GM, Chrysler and Ford between them owe about $10B to their suppliers. You may also have learnt if you did not know already facts such as the following:

-Parts and components provided by auto suppliers (car seats, dashboard consoles, doors, windows, axles, wheels, brakes, etc.) constitute over 70% of the cost of a vehicle rolling off the production line in Detroit.

-While GM, Ford and Chrysler employ 239,000 people in the United States, the country’s 3,000 or so auto suppliers employ more than 600,000 workers

The "so what" about the above two nuggets is that the "auto industry" DOES NOT EQUAL GM + Chrysler + Ford although you would never have thought so from either the news coverage or the way that the recent $17.4B emergency bailout package was doled out. The Big 3 comprise CONSIDERABLY LESS THAN ONE HALF of the auto industry by either of the two measures above. And yet there is absolutely no guarantee that those auto suppliers in the greatest financial distress and/or those that are most critical to the auto industry supply chain will receive one penny of the initial $13.4B to be distributed to GM and Chrysler. Them two's got their own executive salaries and UAW wages to pay first. Auto suppliers will be paid strictly on a "what's left over" basis.

By way of an additional industry insight, I was speaking to a friend of mine who works at one of the auto industry's major tier one suppliers (i.e. one that sells auto assemblies and components directly to one of the Big 3) who told me that of the $10B owed to the auto suppliers over 50% consists of payables that are aged over 90 days. He also told me that many of the industry's lower tier suppliers (those that sell to the tier ones) are facing payment terms of net 120 days or worse (payment term lengths magnify as you go further down the supply chain). In other words they just don't get paid. It's not surprising then that hundreds of these lower tier suppliers have either gone out of business or will be out of business in the early part of 2009. To make matters worse many of these suppliers produce critical parts and/or tooling that could bring the entire auto supply chain to a halt if they are delivered late (or worse, not delivered at all) to a tier one vendor.

Okay so I'm being long winded again, what is my point here? My point is that surely there should be some type of strategy in place to guide the bailout funds to those parts of the auto industry supply chain that are most critical to driving higher levels of financial and operating performance for the industry as a whole. Sure, a substantial part of this should go to GM and Chrysler. But from my argument above, less than half. When President Elect Obama takes office he should form a Bailout Funds Distribution Team of auto industry experts to define a financial rescue package that ensures money is distributed among the Big 3, key tier one suppliers and supply chain-critical lower tier suppliers in a way that positively impacts holistic demand/supply chain performance metrics. Leave the distribution of bailout money up to the executive suites of GM and Chrysler and with what's left for auto suppliers you'd be lucky to be able to afford a year's subscription to the Jelly of the Month club.

Sunday, December 21, 2008

A Lesson in Sourcing from Hugh Grant

Last night I was watching one of my favorite holiday season movies "Love Actually" and was watching the part where Hugh Grant (playing the British Prime Minister) is giving a press conference following meetings with the U.S. President (played excellently by Billy Bob Thornton). In these meetings the President has said that he will give the Prime Minister anything he wants unless "it is something he doesn't want to give". In the press conference Grant's character calls the President on his bullying tactics saying that the formerly special relationship between their countries has become a bad relationship for Britain. From now on the Prime Minister will make his own demands clear and stand firm on issues that are important to Britain. Go Hugh!

I was reminded while watching this scene of my time as a procurement practitioner in one particular company when I was often invited by user departments to provide assistance with sourcing activities. My relationship with this department was considered "special" from the department's point of view so long as my involvement was limited to providing general guidance on procurement best practices such as RFP procedures, contract templates and the like. On those occasions, however, where I challenged the rationale behind a supplier selection decision (especially when it involved an incumbent vendor) it was made clear that I was going outside of my area of responsibility. So, in effect, the relationship with procurement was only special from the department's point of view if I did not ask for something that they would not give.

What had happened in this instance was that the relationship was not "special" at all but had become a bad relationship for everyone - the user department, procurement, and the company. The user department was making supplier selection decisions based on entrenched histories with certain suppliers rather than an objective evaluation of total cost of ownership. Procurement (in this case, me) was not being assertive enough in challenging user departments with data-driven arguments for considering alternative supply options. And the company was suffering from the relationship because ultimately there were sourcing decisions being made that were not necessarily in the best interests of the organization or its shareholders.

So if you are a procurement practitioner facing the same issues I did how can you turn the relationship you have with your user departments from bad to truly special? Take a leaf out of Hugh's book and hold a press conference. Step out into the spotlight and tell your user departments and your company's senior management that the relationship you have with your internal customers is currently dysfunctional. Tell them that for your company to realize maximum value from its supply relationships there must be open and honest evaluations and communications about the relative merits of alternative vendors. There must be crucial conversations about whether incumbents still offer the most compelling value propositions for total cost of ownership, quality, service and supply risk. There must be a global recognition among internal customers, procurement, senior management and suppliers that the correct sourcing decision is not necessarily the most popular.

For sourcing insights that can be gleaned from "National Lampoon's Christmas Vacation", stay tuned for my next post.

Saturday, October 25, 2008

e-RFx: It's Not Just About the TCO

The most generally accepted value proposition for e-RFx solutions (whether reverse auction, optimization, or online RFP) is their ability to rapidly and effectively drive lowest total cost sourcing decisions through whizz-bangs such as “competition-inducing online bidding environments”, “optimization tools facilitating real-time multi-attribute evaluation”, or one of my personal favorites “a geography-negating virtual collaboration medium where buyers and suppliers can participatively create value-maximizing supply solutions”. Phew, I’d buy it.

The above is all true of course; e-RFx solutions really do help procurement organizations identify and implement lower TCO sourcing strategies than they could before and in less time. One of the oft-overlooked additional advantages of e-RFx technology however is that it also supports the implementation and consistent use of a single, consistent, best practice strategic sourcing process. As an example I have been working recently with a company that decided to transform its procurement department from a tactically focused buying function to a best-in-class strategic sourcing organization. One of the problems that this customer faced was that the quality of the contracts developed by its procurement department varied tremendously depending upon who was doing the contracting. This was because each buyer followed a different sourcing process. One buyer would gather detailed usage and requirements information, develop a structured RFP document, and then follow a formal process to issue the RFP, evaluate responses and make the contract award. Another buyer, for the same or a similar commodity, would follow a far more informal process involving only very rudimentary requirements gathering, issuance of a short bid document to suppliers via email, and a rapid award of business to the successful vendor. The point is not that either sourcing approach is necessarily wrong but that there had been no attempt at this company to define and implement a single process that was agreed to be the best practice sourcing method for that commodity.

The beauty of today’s leading e-RFx tools is that they provide functionality that effectively guides (one could even whisper softly “force”) the buyer through each step of a sourcing process that has been pre-defined as being “best practice” for that commodity. So for a price focused commodity like office supplies a leading e-RFx tool will “guide” the buyer through a sequence of steps including completion of a requirements template that provides suppliers with key data such as projected usage and delivery locations, execution of a reverse auction to set core list prices and off-core discounts, collection of key supplier information, and post-auction evaluation of price and non-price factors. For a more complex commodity such as print, the set of steps could include optimizing the award of business by print sub-category to take into account the fact that one printer can be more cost effective in certain types of print processes than another. For an organization that currently has fragmented and inconsistent approaches to sourcing, e-RFx tools provide an excellent way to define and formalize standard processes for these and other types of commodities.

Of course, e-RFx technology alone will not drive the creation of best-in-class contract and supplier relationships. In many cases there will also need to be a step change increase in buyer skills sets to enable effective management of the underlying sourcing process. That being said, I would recommend that any organization currently seeking to implement strategic sourcing best practices consider the role that today’s e-RFX tools (and also e-RFx’s “sister” e-tools of spend analysis, e-procurement and contract management) can play in helping to support the roll-out and consistent use of a standardized, high quality procurement process. Don’t get me wrong, TCO is clearly king when it comes to the business case for these tools. But the comfort of knowing that everyone in the company responsible for making major supply decisions is using the same high quality process is surely a BIG bonus. dear ole Ted Turner would say, or sort of....."Early to bed, early to rise, work like hell and standardize!"

Saturday, September 27, 2008

Sourcing Innovation Cross-Blog Series: Seven Grand Challenges for Supply and Spend Management

Michael Lamoureux, the "Doctor of Sourcing Innovation", is currently sponsoring a cross-blog series on the Seven Grand Challenges of Supply and Spend Management. It is with great humility and not a little London pride that I submit the United Kingdom's entry to this esteemed competition.


1. Continue the Strategic Elevation of Procurement

Although much progress has been made in this area there is a lot more to do, particularly in the mid-market and in the public sector. The motherhood and apple pie statement here is “procurement strategy must be an integral component of corporate strategy” or something similar. This is the truism but the hard fact of life is that procurement must do the work internally to make itself worthy of such a lofty positioning. Technical and leadership skill levels must dramatically improve in many procurement departments, salaries must be raised to attract talent, and ultimately the procurement function must be respected and held in awe by internal stakeholders and suppliers alike as a focal point of bleeding edge sourcing practices.

2. Achieve a Truly Seamless Cross-Functional Strategic Sourcing Process

What I DO NOT mean here is inventing another seven-step consulting methodology. What I do mean is reaching a state where the right organizational players are facilitated smoothly into the strategic sourcing process at the exact time that their respective value-adds are required. This could be Engineering during specification rationalization, Manufacturing during supplier capability assessments, or Legal during contract development just to give a few examples. Procurement with its overall end to end responsibility for the sourcing process is in the perfect position to perform this facilitation activity, provided of course it possesses the skills and organizational credibility to perform this task effectively.

3. Optimize the Outsourcing of Indirect Materials

Enterprises will continue to evaluate their investments in the indirect procurement area. Some of the decisions they will ponder include which spend categories to outsource, which processes to outsource for these categories (sourcing? spot buying? purchase order processing? category management?) and whether to utilize “semi-outsourcing” strategies such as Group Purchasing Organizations. My personal belief is that very few organizations will outsource procurement “lock, stock and barrel” but that many will outsource selective processes for selective categories on an as-needed basis, sometimes utilizing more of a staff augmentation model than true outsourcing (“hiring commodity mercenaries” as one of my customers termed it). I also predict more use of accelerated, quasi- outsourcing techniques such as pre-negotiated contracts, particularly in the mid-market and private equity sectors.

4. Pursue Enterprise-Wide Spend Visibility

Organizations will continue to struggle in their quest to obtain visibility of who buys what from whom at what price across the enterprise. Without this knowledge they will be unable to effectively leverage their total spend with suppliers. Some enterprises will continue to believe mistakenly that they will be able to drive all spend through a single e-procurement system and achieve global visibility that way. The leaders in this area will realize that they need a tool to consolidate and analyze data from all systems that could potentially contain valuable spend information whether they be e-procurement systems, accounts payable, p-card or other sources. Oh, and the smart organizations will also realize that you don’t pre-select spend data for analysis based on accounting codes (see A Cautionary Tale of Zero Investment )!

5. Pragmatically Manage All Elements of Supply Risk

Talk about buzz. This one has rattle & hum. Personally, I see a little too much talk of virtual reality dashboards and not enough about what is really important. This means identifying the 20% of uncertainties in the supply chain that drive 80% of service and cost performance and figuring out how to provide accurate and timely information on these uncertainties to commodity managers to guide them in their supply management decisions. I would be ecstatic if organizations would simply improve internal reporting of incumbent performance, routinely subscribe to third party supply risk data sources, and implement formal methodologies for assessing the total cost impact of alternative global sourcing strategies that holistically consider all financial, quality and physical supply chain variables. I agree that the sky is the limit in this area, but let’s get the basics nailed down first.

6. Maximize the ROI of Sourcing and Procurement Technology

Oh so much to relate, so little space. The ongoing headaches here will include answering such questions as “Why do I need an e-sourcing tool if I always get good results with a traditional RFP?” or “Do I really need a spend analysis tool if I have an analyst who’s a wizard with pivot tables?” or “should I buy e-procurement or use my ERP purchasing module?” Those organizations that realize the greatest ROI from their procurement technology investments will be those that ground their decision-making in good old Procurement 101 fundamentals. If your solicitation meets the criteria for a low risk, competitive bid commodity like office supplies then try out a price-focused reverse auction. If you are preparing for a complex RFP such as LTL freight then ask an e-sourcing provider to demo an e-sourcing optimization event. Take stock of where the tool adds value over your standard approach and where it doesn’t. If it doesn’t, stay with what works (though you may be surprised). As for e-procurement, stay grounded in what will ultimately drive most spend through your preferred supplier contracts. Compliance is all about users finding what they want quickly and easily, not about the color of the swoosh or the sound of the bells and whistles. If you are in a state of paralysis by analysis, consider a hybrid approach that utilizes the best of the ERP and the e-procurement worlds (see The Age of e-PERP ).

7. Make Procurement “Chill” or “Tight”

The supply management profession must make itself attractive to young, degreed job seekers who would typically shun a career in Procurement for something more Generation X/Y such as, well, almost anything really. This challenge will revolve around positioning Procurement as a business function that someone can use as a launching pad to progress to the highest echelons of an organization, even the top job itself. This is still a far cry from how “Purchasing” is viewed today, with the exception of a few leading “Medal of Excellence” companies such as United Technologies, Proctor & Gamble and Hewlett Packard. I won’t be satisfied with our progression in this area until the day my college-bound daughter comes home excitedly babbling to me about how she is so, like, awesomely looking forward to embarking upon her Ivy League college experience in the field of Strategic Supply Management.

Monday, September 15, 2008

The Age of e-PERP: ERP and E-Procurement - Can't We Just Get Along?

One of the most common misconceptions since "eggs are bad for you" or "England can win the next World Cup" is that, when it comes to selecting an automated purchasing system, an organization must choose between ERP and e-Procurement. A large number of Fortune 500 companies that have implemented best-of-breed e-Procurement systems over the last few years have shelved or are considering shelving their software due to problems pushing enough spend through the system. On the flip side, a considerable number of mid-sized companies (and state governments, who often track the mid-market sector in technology adoption) are, like their Fortune 500 counterparts did in the late 90s/early 2000s, considering the switch to e-Procurement due to its perceived functionality superiority over ERP purchasing applications.

What many Fortune 500 enterprises, mid-market companies and state governments fail to realize (with the exception of a few progressive organizations that I will case study in the weeks ahead) is that your e-Procurement system can peacefully (nay, productively!) co-exist with your ERP purchasing module. The secret lies in what each player brings to the table. Your ERP purchasing application brings purchasing transaction workflow that is, by definition, integrated seamlessly with your accounts payable, general ledger, and inventory systems. Your e-Procurement system on the other hand delivers the best-in-breed catalog and content management capability that ultimately represents the secret sauce for driving maximum potential spend through your preferred supplier contracts.

After making a presentation at my local ISM chapter recently I was talking to a VP of Procurement of a local Fortune 500 company who was relating their use of a "hybrid" e-Procurement/ERP approach (let's call it e-PERP, shall we?) that they had been using successfully for nearly a year. In this company's model, users select the products and services they need from multiple online catalogs all hosted in one consolidated "common look and feel" environment by a best-in-breed e-Procurement provider (at least a provider you would think of as an e-Procurement provider although in this model it is their catalog functionality, not their workflow functionality, that is being taken advantage of). But what is key is that once they have made their selection, the complete requisition through payment workflow is conducted within the ERP application. Sounds a bit like the old e-Procurement punch-out, right? Well it does a bit but with e-PERP there are two critical differences, these being:

1. Punch-out (or "round trip" for those of us who remember CommerceOne!) has historically been a method for bringing catalog item data from a supplier's web site into e-Procurement for PO creation purposes. An organization would then need e-Procurement/ERP integration to bring the item data into ERP for reconciliation, payment, posting and inventory purposes. The e-PERP model brings item data directly into ERP, bypassing e-Procurement workflow which is not being utilized. This accomplished by the best-of-breed e-Procurement/catalog provider implementing XML integration directly with the ERP application (Oracle/PeopleSoft and SciQuest do this today as part of their partnership).

2. Whereas punch-out only worked (effectively) for the larger vendors like Grainger and Corporate Express who had the resources to build punch-out compatible web sites, the e-PERP model works even for "Mom and Pop" vendors. This is because the best-in-breed catalog providers have built core competencies for creating and maintaining web catalogs for any supplier (even small local vendors that have never had a web presence before). This means that by using e-PERP an organization - with the help of its best-in-breed provider - can upload all of its preferred supplier contract content to the web catalogs in as little as 2-3 weeks, leading to rapid and effective utilization of its agreements by users and very high levels of contract compliance. This is in contrast to the ERP-only approach where an organization would have to build and maintain supplier catalogs behind its firewall, a far more lengthy and costly endeavor. And the e-Procurement-only approach? Well here you have the integration issue and the need to explain to your CEO why you are not using the ERP system you spent millions of dollars implementing!

Over the next few weeks I will be researching additional case studies of e-PERP in practice. I will be reaching out to companies, public sector entities, e-Procurement and ERP vendors to validate that I am not "smoking something" in thinking that such historically fierce adversaries can co-exist in value-added harmony. I will be looking for further examples of organizations who have realized that you really can have your ERP Purchasing cake, eat it, and enjoy lashings of e-Procurement ROI for dessert.

Oh, and England's chances in the 2010 World Cup? Not a hope.

Monday, September 8, 2008

Surefire Strategy #8 For Producing a Consulting Train Wreck: “Just Focus on What You Can Control, You Can’t be Blamed for the Actions of Others”

The next of my guaranteed approaches for driving the 4:55 to Deliverable City off the tracks at Milestone Curve is “Just Focus on What You Can Control, You Can’t be Blamed for the Actions of Others”. Strategy #8 typically unfolds something like this –

During the development of your strategic sourcing consulting proposal you include a section, usually somewhere near the back, called “Project Assumptions and Risks” (or something similar) where you lay out all the things that could possibly go wrong on the project and define all the assumptions that must be true for these things not to happen (e.g. business unit buy-in to ensure adequate spend is available to negotiate best possible pricing with suppliers, availability of client resources to support collection of all required data, etc.). You might even define a proactive risk management plan describing actions that can be taken to doubly ensure that the dark events do not occur. This could include steps such as forming executive steering committees, cross-functional project work teams and stakeholder focus groups. You submit your proposal, win the work, and arrive at the client site. You engage first gear and start rolling down the work plan track, confident that (i) you have every possible eventuality covered and (ii) that if something does go wrong it must be some force majeure, the fault for which cannot possibly be laid at your door…..

About six weeks into the project disaster strikes. One of the client’s largest business units decides it will withdraw from the project and instead renegotiate with its incumbent supplier (who had declined to respond to the RFP), effectively removing over 40% of your spend base. Within 48 hours, five of your shortlisted supplier candidates have got wind of the spend that has “left the table” and not surprisingly become much less willing to extend the type of pricing you were hoping for. At a hastily convened executive steering committee meeting, some key of the key dialogue includes:

CLIENT CFO: Quite frankly I was concerned about something like this happening. The complete value proposition of the sourcing exercise was always questionable if we lost business unit support.

YOU: I have to admit I’m very surprised. Sarah seemed completely on board at the kick-off meeting. I guess their supplier decided to do what it took to keep the business.

CLIENT VP PROCUREMENT: Colin tells me that our five shortlisted suppliers from the RFP first round have rescinded their pricing based upon the lower spend. The average contract savings is now only 3% - hardly the solid business case for persuading the other business units to switch….

CLIENT CFO (turning to you): I thought your risk management plan was designed to address every contingency. Don’t we have a plan B? I put my neck out for this project – really hyped it to the business units and the board.

YOU: Well, we did specify that a major assumption was having full business unit support, and like I said Sarah was saying all the right words at the kick-off. I don’t know what else we could have done...

(CLIENT CFO shakes his head in frustration).

Shortly after this meeting takes place the client cancels the sourcing project, pays your firm for services rendered to date and you are left scratching your head about whether you could have done anything differently. Well, could you have? Sarah turning to the Dark Side was outside of your control wasn’t it? Well, it turns out that you could have done something different and you might even have been able to prevent Sarah succumbing to the siren call of her incumbent’s bargain basement pricing. What? You could (in fact, should) have implemented a Stakeholder Management Plan.

A stakeholder management plan is the only way to deal with those pesky client folks who sneak up on you and drop grenades into your project team’s bunker just as you are all enjoying the idyllic peacefulness of a smoothly unfolding work plan. A stakeholder management plan is an approach to unmask these individuals in the earliest stages of project planning so that you can understand their motivations, their objectives and – most importantly - their ability to derail your engagement. A best practice stakeholder management plan should be incorporated into any consulting project that requires the involvement and support of influential individuals that are not members of the core project team. This will certainly be the case in the majority of strategic sourcing projects, particularly those addressing categories where procurement has not historically enjoyed a strong decision-making role. In these cases the following steps should be taken:

Step 1: Immediately post-sale, work with your client’s project sponsor to map key stakeholders on a matrix of “Influence (low or high)” against “Support (low or high)”. Utilize your sponsor’s knowledge of his/her organization to surface issues that may not be instantly apparent such as Sarah’s long term relationship with her business unit’s largest incumbent supplier and the ease with which her support might crumble if the supplier moved to aggressively protect its business.

Step 2: For stakeholders like Sarah you should work with your sponsor to secure her support by suggesting ways that her objectives could be met by supporting the project. For example this could involve asking her to persuade her incumbent to participate in the RFP, or perhaps to more aggressively market the impact that the sourcing project’s savings will have on her business unit’s P&L.

Step 3: Enlist the help of high influence/high support stakeholders to market the positive aspects of the project to the “Sarahs” of the organization, particularly those in similar situations, e.g. ones that have their own incumbent suppliers who stand to be impacted by the sourcing project. Ask these stakeholders to explain why they are supporting the project – task them to bring Sarah into the “high support” camp.

Step 4: Monitor stakeholders like Sarah closely during the project to make sure they stay committed. If they waver, do the work to understand their concerns and leverage your supportive stakeholders as needed to help her maintain her resolve.

Follow the steps above and you will avoid the derailing of your project by client stakeholders over whom you have no control. In fact, by following the steps above – by proactively identifying and managing these stakeholders – you will in fact have a large measure of control over any individual who could foil the success of your project.

In other words – yes, AVOID AT ALL COSTS Surefire Strategy #8 for Producing a Consulting Project Train Wreck “Just Focus on what You Can Control, You Can’t be Blamed for the Actions of Others”!! Implement the antithesis of Strategy #8 instead! Always include Stakeholder Assessment & Management as a formal, integrated component of your project work plan.

Sunday, August 31, 2008

A Cautionary Tale of Zero Investment (Originally Released in England Under the Title: "I Didn't Do a Spend Analysis But I Sourced Anyway")

(Note: the names, client details and even spend categories in this post have been changed to protect the “not so innocent”!)

Following on the heels of my posting “Can a Spend Analysis Have an ROI?” I feel obligated to provide a living breathing example of a situation where someone – in this case a consulting firm - decided NOT to do a spend analysis but plow ahead with sourcing. Okay, it wasn’t just any consulting firm – it was the firm that yours truly was working for at the time (but I’ve worked for so many you’ll never guess which one). And okay, it wasn’t just any project at this consulting firm but it was the project that I was working on at the time. Shame on you, Mark. But hey - I was young and I definitely needed the money!

Anyway here’s the back-story. Our firm had just won a major strategic sourcing project for a $5B consumer products company. Big – about $1.5M in total fees for sourcing of seven spend categories including office supplies, MRO, temps, janitorial services, PCs, corrugated packaging, and travel. How do you think we picked the Magnificent Seven? They sound the typical band of villains, right? Well, it was a very scientific process that unfolded late one Thursday afternoon in the middle of a mid-west summer. I know it was a Thursday afternoon because we would fly in to the client on Monday mornings and fly home Thursday night, and I remember the meeting where the Seven were picked took place just before we all grabbed our taxis for the airport. My Partner and I were sitting with the client’s VP Procurement and a snippet of the conversation went something like this:

CONSULTING FIRM PARTNER: Well Chris, looking at the GL numbers from Charlie (Charlie was a Financial Analyst in Accounting) I’d say we have seven candidates that look perfect for strategic sourcing.

CLIENT VP OF PROCUREMENT: What’s the rationale, Brian?

CONSULTING FIRM PARTNER: Well we usually find that the best categories to pursue are the ones with reasonable spend that haven’t been sourced – that means higher savings – and ones that also don’t present too much of a challenge from a complexity or stakeholder resistance point of view. That way you stand the best chance of capturing some decent benefits while also building the skills and confidence in your organization for taking on more challenging categories later.

CLIENT VP OF PROCUREMENT: Makes sense. So these are the categories? (Looks at the list of the Magnificent Seven). Total spend about $100 million…….that would net us about $10-15 million savings from your estimates, right? I like it. What’s next? Your team will create the detailed work plan?


What happened next? Well it turned out that three of the categories proved to be massive disappointments after we found that the spend available for sourcing in each of these categories was much less than what had originally been thought. Embarrassingly less, in fact. The reason for this was very simple – the accounting data used to make the sourcing decisions (spend by general ledger code with a few cuts of spend by supplier) had failed to provide the necessary detail and accuracy to make an informed decision. What should have happened? We should have conducted a spend analysis to cleanse the accounting data and classify it into commodity groups based on all the clues available such as vendor name, GL code and cost center. Where we didn’t have enough clues in the data to break out a commodity we should have asked the using departments to help clarify what had been spent with whom. Oh, and we should also have asked whether there were any planned reductions in usage in any of the categories. If we’d done that we would never have picked three of the Magnificent Seven, would never have wasted months of our time and the client’s time chasing minuscule benefits (one category was canned early on, but the other two were continued largely to save face) and – most important – would not have disappointed our client.

What really happened in this case? We believed Charlie from Accounting! Now Charlie is a good guy and does good work. His accounting data works fine for financial reporting and budget planning. But in its raw form it just doesn’t cut it for making effective major resource deployment decisions during the planning of a strategic sourcing program. To accomplish this you need to invest in a spend analysis to transform Charlie’s numbers into meaningful purchasing intelligence. Ignore this advice while recruiting your next “Magnificent Seven” and you may find yourself riding into Sourcingville firing blanks with Charlie watching safely from the saloon.

Monday, August 25, 2008

Can a Spend Analysis Have an ROI?

Would a private equity firm ever think about investing in a company without conducting a comprehensive analysis of its ability to generate an attractive future return? Of course not! A friend of mine in private equity once told me that for every one hundred million dollars a PE firm invests it has spent a million dollars in internal salaries and due diligence consulting fees analyzing the deal prior to pulling the trigger.

In a somewhat similar vein, would you ever think about buying a new or used car without carrying out at least a rudimentary analysis of the comparative reliability and performance of the various models? I didn’t think so. If you’re like me, in addition to burying yourself in Consumer Reports you also spend all the weekends between February and July test driving every vehicle under the sun until your significant other finally explodes “enough already – make up your mind!”

What about hiring someone for your company? You wouldn’t make an offer to a person without a rigorous evaluation of their capability to perform the job would you? You pick apart resumes, fly candidates in for interviews, give them case studies, call their references, and conduct drug screens and background checks before extending an offer.

What’s the common theme in each of the above examples? It’s that in each case someone is making an investment of money (the due diligence consulting fees, the job candidate travel expenses) or time (lost family time at weekends doing test drives, lost work time interviewing candidates) to gather information critical to a particular decision making process. The return on the investment is an increased probability of a favorable outcome from the decision – a higher profit when the PE firm sells the company three years later, a pleasurable ownership experience for the car buyer, and a high performing employee for the hiring company.

So Mark, I hear you all saying exasperatingly, what the Sam Hill does all this have to do with spend analysis? Quite simply, numerous companies of all sizes across many industries are making high dollar resource deployment decisions in procurement while having little or no access to a piece of information that is critical to the procurement decision making process. That piece of information would be about SPEND. Information providing answers to massively important questions such as: What is total spend? What is spend by commodity, supplier, and department? How much spend is currently under contract, in total and within each commodity? How many suppliers account for the top 80% of spend in each commodity? With how many different departments are your highest spend suppliers doing business? How much spend in each commodity is with non-approved suppliers? Which departments are responsible for the non-approved spend? Only by having answers to these type of questions will an organization be able to identify those commodities, suppliers and departments where the application of scarce procurement resources will yield the highest return.

How does an organization get these answers? By conducting a SPEND ANALYSIS, a process for producing a consolidated and accurate view of an organization’s purchasing expenditures by commodity, supplier and department. I won’t go into the intricate details of the spend analysis process here or the various tools available in the market to conduct one but, yes, to perform a spend analysis you will need to….make an investment! Depending on the approach you take the investment will take the form of people cost to conduct an internal analysis, software license fees for a tool, consultant fees, or a combination of all of these. The key is to perform an effective spend analysis that allows your procurement organization to focus its people, processes and technologies in the areas that will yield the greatest benefits. Examples of such areas are commodities with the highest total spend across the enterprise, commodities with too many suppliers, suppliers doing high volumes of business with different departments, and departments spending large amounts with non-approved vendors.

One of my clients with $500M of total spend recently conducted a spend analysis that identified just over $100M of spend with opportunities for sourcing, incumbent renegotiation and maverick spend reduction. Following the spend analysis this company focused its best and brightest commodity managers exclusively on this $100M and realized $28M of annualized cost savings. Without the spend analysis the same talent would have been wandering blind amongst the $500M and would have been very lucky to have found half of the $28M. Let’s say they were very lucky and found over half, say $18M. That would still mean that conducting the spend analysis had led to an additional $10M of savings. And what did the spend analysis cost? Less than $100K in software and services. Guess what, there’s a spend analysis ROI. And an attractive one at that.

You would be surprised (unless you get to see as many procurement departments as I do) just how many companies today are not able to identify the opportunity areas described above, and by inference are not able to prioritize the deployment of their procurement resources. Many of these companies will tell you they know where the cost savings are. They’ll tell you they know their business and that they know where to look. But they don’t really. They guess where to focus their people. They roll the dice on where to conduct a reverse auction. And they come up with dry holes again and again. Why? Because they haven’t invested. They haven’t done the due diligence. They haven’t test driven the commodities. They haven’t fully evaluated the candidates. They haven’t done a spend analysis.

Thursday, July 31, 2008

A State Gets Smart

Those of you who follow the public sector space may know that the State of Georgia recently selected SciQuest's e-procurement tool. State agency employees in Georgia who need to buy anything from pens to asphalt will shop in SciQuest's web-hosted electronic catalogs which will be populated with pre-priced goods and services from the State's existing supplier agreements. This decision by the State of Georgia is notable for two reasons - (i) it is another example of an organization electing to carry out its purchasing transactions in a best-of-breed e-procurement tool as opposed to the purchasing module its existing ERP system (numerous Fortune 500 companies have gone the EP route following sunk ERP investments and the State of Georgia already has PeopleSoft) and (ii) it is also an example of another state government that is moving ahead strongly with a strategic procurement initiative (other states moving to transform their procurement function include Virginia and Indiana to name just two).

The shunning of ERP's historically much-maligned inbuilt purchasing functionality in favor of e-procurement is a trend that I would expect to continue both in the private and public sectors. Not so much due to application functionality (a gap that that I would say doesn't really exist anymore since the ERP vendors have refined the workflow in their own e-procurement modules) but due to the fundamentally different way that the best-in-breed providers and ERP vendors handle catalog content. All of the e-procurement providers utilize web-hosted catalogs pre-populated with many of the vendors and products that most buying organization will need (and with the capability to have the organization's specific contract pricing built in). And if a customer has vendors that are not already in the pre-populated catalog it is a simple task for the e-procurement provider to request product and pricing from those vendors and load them into their web catalog. With an ERP provider's e-procurement solution, however, you are most likely going to have to build your catalogs behind your firewall, involving considerably much more time and expense. And now that the best-in-breed e-procurement providers all integrate so perfectly with ERP (e.g. with accounts payable to enable payment reconciliation), why would you ever go the ERP purchasing route? I wouldn't.

As regards Georgia's general procurement transformation initiative, expect to see a lot more of this from state governments in the next 2-5 years. State governments have long presented a massive challenge for creating value from procurement due to their extreme decentralization. Often hundreds of state agencies within a state making their own procurement decisions and developing their own price agreements with suppliers. To complicate matters even more, agencies usually have their own financial and purchasing systems meaning there is no centralized store of data from which to build a consolidated picture of total state spend by category, supplier and agency - key information for identifying and developing aggressively discounted price agreements with suppliers. Rounding out the challenges for states in the this area are a lack of a strong mission/vision/strategy for a center-led approach to procurement and a shortage of strategic sourcing skills among current state procurement staff.

As regards my state procurement crystal ball I would expect to see (or would HOPE to see) state governments address the following five areas:

- Develop and broadly communicate a center-led strategy for procurement in the state with the centerpiece being a strategically focused, "center of excellence"-based central procurement group

- Conducting a best practice spend analysis to develop a consolidated cross-state picture of spend by agency, supplier and agency

- Based on the spend analysis, develop and implement a sourcing roadmap with the objective of maximizing the amount of state spend under cross-agency ("state-wide") leveraged price agreements

- Upskill the central procurement group with the required training in best practice strategic sourcing methods (or hire where needed)

- Implement a state e-procurement system with web-hosted electronic catalogs to drive maximum spend through the new price agreements

Thursday, July 17, 2008

Guest Starring on E-Sourcing Forum

Just a heads up to my global audience that for a while I will be guest blogging regularly on E-Sourcing Forum, one of the most widely read blogs on procurement and spend management. E-Sourcing Forum is written by my friend David Bush, CEO of Iasta. Iasta is one of the leading providers of e-sourcing software and services, providing solutions for spend analysis, strategic sourcing and contract management. I'm not sure that Dave knows what he's letting himself in for, and I fully expect to be fired when Dave realizes how much my posts are lowering the tone of the place. Nevertheless, ESF will be where you can find me. Some of my upcoming posts will include:

Can Spend Analysis Have an ROI?

".....Numerous companies of all sizes across many industries are making high dollar resource deployment decisions in procurement while having little or no access to a piece of information that is critical to the procurement decision making process....."

A Cautionary Tale of Zero Investment (Released in the UK under the title "I Didn't Do a Spend Analysis but I Sourced Anyway")

A tale of dry holes and those who drilled them.

Surefire Strategy #8 For Producing a Consulting Train Wreck: "Just Focus on what You Can Control, You Can't be Blamed for Someone Else's Actions"

The pitfalls of assuming that you will not be held accountable for the mis-deeds of those over which you hold no sway.

Sunday, July 6, 2008

Can a Spend Analysis Have an ROI?

First of all I hope everyone had a great 4th of July holiday! To those of you who spend much of your work week waiting in airport security lines I also hope you were able to take valuable time out to spend with your loved ones.

This is a just a quick line to give some some early warning that one of the subjects I will be diatribing about next week will be the oft-asked question "how do I quantify the ROI of a spend analysis?". Now come on, admit it, you've asked this question at least as many times as "what happened to the equity in my home?" or "how do I get hold of a Prius?".

See you in the week...

Monday, June 30, 2008

Surefire Strategy #9 For Producing A Consulting Train Wreck - "Sub Out the Work, Go Do Something Else, then Check in with the Contractor at the End"

Welcome to my next surefire strategy for bewildering your customer with your ability to snatch defeat from the jaws of consulting project victory. Strategy #9 is an oft-followed approach that goes something like this

1. Prime contractor wins a major piece of business following an RFP process

2. Prime contractor now realizes that he won't be able to do all (or in some cases ANY) of the work that he so creatively described himself as being able to do in his RFP response. This could be for a number of reasons including but not limited to:

- he doesn't have the expertise required
- he doesn't have the bandwidth or the staff to do the work himself
- he would rather spend time selling the next piece of work rather than deliver this one

3. Prime contractor rapidly finds and hires a subcontractor (who is generally an expert in the work that has been sold) to do the work. Prime contractor reviews proposal with subcontractor, provides cursory explanation of promised deliverables, and negotiates hourly rate for subcontractor to complete the work while still leaving a fairly attractive profit margin for himself.

4. Prime contractor leaves subcontractor to do the work while he, well, does something else.

............................TWELVE WEEKS LATER............................

5. Prime contractor returns from Maui and drives directly from LAX to client site to meet with subcontractor for review of final deliverables. On arrival at client, prime contractor is horrified to learn that:

- Project is four weeks behind schedule
- Subcontractor has already billed an amount equal to your budget and is demanding additional payment to complete the project
- Subcontractor's travel expenses are equal to 40% of project fees
- Customer is withholding your final payment pending delivery and acceptance of the final deliverable, still four weeks away

6. Prime contractor fires subcontractor and completes the work himself. In some cases the prime contractor will even need to hire another sub if the work requires expertise completely outside of his comfort zone, making the project economics even worse. Results? Late and sub-par deliverables, miserable profit margin, and - perhaps worst of all - a very unimpressed client who will likely hire their mother-in-law rather than you the next time they need a consultant.

What went wrong? Well, by following "Surefire Strategy #9 for Producing a Consulting Train Wreck" the prime contractor above completely failed to adhere to some of the cardinal rules of SUBCONTRACTOR MANAGEMENT, namely:

Rule 1: Clearly identify subcontractor requirements for your project DURING THE SALES PROCESS and identify and shortlist subcontractor candidates well in advance of you winning the work and certainly well before kicking the project off.

Rule 2: Should you win the work, interview your shortlisted subcontractor candidates. Evaluate them based on their understanding of the project's deliverables (which you will VERY clearly define for them) and their ability to persuade you of their expertise and capability to deliver.

Rule 3: Negotiate compensation with your selected subcontractor whereby payment is tied to the SUBCONTRACTOR COMPLETING DELIVERABLES THAT ARE ACCEPTED BY THE CUSTOMER. That way, even if you are indeed in Maui, the sub has an incentive to produce high quality and timely deliverables.

Rule 4: For goodness sake, demand at least twice-weekly status reports from your subcontractor during the project. Preferably, visit the project site at least every other week.

Rule 5: STAY IN TOUCH WITH THE CUSTOMER. Although you are outsourcing the delivery of the work, NEVER OUTSOURCE THE CUSTOMER RELATIONSHIP. Put in at least a weekly call to your main client sponsor to make sure that she is happy with the progress of the project. Remember, the customer doesn't necessarily need to know that your subcontractor is actually a subcontractor (unless, of course, you are bound by the terms of your contract with the customer to disclose this) - for all they know the subcontractor is one of your employees. And you would always keep on top of the work of one of your employees, wouldn't you?

In other words, AVOID AT ALL COSTS Surefire Strategy #9 for Producing a Consulting Project Train Wreck – “Sub Out Major Parts of the Work, Go Do Something Else, and then Check in With the Contractor at the End”!! Implement the antithesis of Strategy #9 instead! In this particular case, this means following the CARDINAL RULES OF SUBCONTRACTOR MANAGEMENT above.

Are you getting into the swing of this "Implement the Antithesis" thing yet? Good!!

Next week, visit 1Procurement Place for Surefire Strategy #8 for Producing a Consulting Train Wreck - "Just Focus on Things You Can Control - You Can't Be Blamed for the Actions of Others".

Friday, June 27, 2008

Is There Such a Thing as Knowledge Transfer?

This consultant was talking with one of his clients this week about knowledge transfer on consulting projects. Specifically, does it ever actually happen? The standard vanilla consultant script on this subject (which I have personally delivered OH so many times) is something like:

"Well, there are a three main ways we could make knowledge transfer happen for you, Steve. One approach is for us to lead the engagement and for one of your guys to shadow the consultant lead on each category team. That way, your people will pick up the skills as they watch our consultants do the work. A second way is formal classroom training courses which we would deliver to your folks. At the completion of the training your staff would have the skills to execute the work themselves. A third way is to use a combination of the two". (Have you noticed how the third way is always a combination of the first two? Hmm.)

What do you all think? Which is the best way to transfer knowledge to client staff on consulting projects? Do any of them really work? I have my views. I want to know yours. Let's discuss next week.

Also next week - a little late I know, but what's new (Hey! I'm Working Here!) - Surefire Strategy #9 for Producing a Consulting Project Trainwreck - "Sub Out Major Parts of the Work, Go Do Other Stuff, then Check in with the Contractor at the End".

Friday, June 20, 2008

Surefire Strategy #10 For Producing A Consulting Project Train Wreck - "Have Faith That Everyone Will Know What This Project Was All About At The End"

So here we are folks, the first of my proven strategies for ensuring that your consulting project never actually delivers a single ounce of value for your client. And remember, the key is to ultimately identify the antithesis of this strategy and implement THAT instead! Surreal I know but then the writer of this blog is British and very much a fan of all things Monty Python.

The "Have Faith That Everyone Will Know What This Project Was All About At The End" strategy refers to the approach of never actually letting the client in on the secret of what you are planning to deliver by the project's end. These projects generally start out well enough but invariably reach a point where client and consultant have a conversation something like the one below:

CLIENT PROJECT SPONSOR: Thanks for meeting with me at short notice, Jim, but I have a concern about something. I’m sure it’ll only take a minute to clear up.

CONSULTANT PROJECT MANAGER: Sure, Susan. What’s the problem?

CLIENT PROJECT SPONSOR: Well, I dropped in on Rob this morning to get an update on the project and he showed me the Phase 1 deliverable document you guys have just finished. I was a bit confused. It wasn’t quite what I expected.


CLIENT PROJECT SPONSOR: Well quite frankly I’d been expecting more from eight weeks of work than a PowerPoint document with a few tables on observations and issues. Didn’t we talk about “as is” process flows? And what about the item level savings analysis? All I saw were some industry average percentages applied to the same numbers our accounts payable group gave you in June. There’s more detail behind what Rob showed me, right?

CONSULTANT PROJECT MANAGER: Hmmm, well not really Susan. I think we talked about process flows being something that could be done in some situations but that what made more sense here was working with stakeholders to get to key issues. We’d then structure the to-be vision to directly address these issues. As for the savings analysis, well we always said that the ability to go the item level would hinge on being able to collect the data. Unfortunately we just couldn’t get the data from the field so we had to use the accounts payable numbers.

CLIENT PROJECT SPONSOR: I have to admit, Jim, I’m not happy about this. I had a very different picture of where we would be at this stage of the project. Until I feel expectations have been better met I’m going to delay signing off on the Phase 1 deliverable. Let’s pull the project team together at 2 o’ clock and figure out how to fill in the missing pieces.

What eventually transpired in the project above? Susan found out in the meeting that the field had indeed been unable to provide the required data and that the smartest and most resourceful consultant in the world would never have been able to generate the “promised” item level savings analysis. And the as-is process flows? If producing these flows had been expressed as a must-have requirement at the beginning of the project it had never been documented. Susan ultimately became resigned to the fact that she had no clear grounds to deny payment to the consultants for the Phase 1 work. What she did do, however, was to exercise her right to terminate the project before embarking upon Phase 2. Losers all round – the client received no value from its perspective and the consultant lost the remaining revenue as well as the chance to ever do business with that particular client again.

What went wrong? First, it is clear that the major work products and deliverables for this project were not clearly defined up front. It was the responsibility of Jim to provide clear and unambiguous definitions of these to Susan before the start of the project. It would then have been clear whether or not process flows were to be produced or not. Secondly, expectations were not set with the client about potential project risks and the impact of these risks on project deliverables. If Jim had explained to Susan up front about the risk and impact of not being able to collect the item data then Susan could have made an informed decision about whether to move forward with the project or not. But because the risks were never explained she never had the chance to make that decision.

The takeaway from the above is:

Always define clear and unambiguous work products and deliverables for your project and, in addition, set clear expectations about potential project risks and the impact of these risks upon the work products and deliverables.

In other words, AVOID AT ALL COSTS Surefire Strategy #10 for Producing a Consulting Project Train Wreck – “Have Faith That Everyone Will Know What This Project Is All About At The End”!! Implement the antithesis of Strategy #10 instead! Get the idea? Good!

Coming next week – Surefire Strategy #9 for Producing a Consulting Project Train Wreck:

“Sub Out Major Parts of the Work, Get On With Other Stuff Then Check In With The Contractor At The End”

Monday, June 16, 2008


So I'll admit this has been a very inauspicious start for the 1 Procurement Place blog. Nearly two weeks late for our own opening! To the millions of you worldwide in sourcing & procurement land who were awaiting the inaugural post there are no grand excuses except.........we were busy. Busy selling and delivering, selling and delivering...or perhaps I should say....selling and wondering how to deliver? No just joking. But my colleagues and I have indeed been doing what we all love to do which is spending time with our customers, potential customers, alliance partners, and other members of our industry peer network. Which is to say that we - or rather I (as I was the original instigator in our firm of the "non-traditional and controversial procurement blog" idea) have not been able to light the blue touch paper on this thing. That is about to change however......I promise! For this week, 1 Procurement Place will unveil the first of its TOP TEN SUREFIRE STRATEGIES FOR PRODUCING A CONSULTING PROJECT TRAIN WRECK. Any one of these strategies, if implemented by a consultant, will guarantee the unequivocal and stunningly visual failure of your consulting project and in the process also ensure that zero value is created for your client. Conversely, and infinitely more sensibly, recognizing and implementing the antithesis of these strategies will delight your customers and elevate your standing to that of "Value Creator"! Can't wait? You'll have to, but only a little longer.........

Thursday, May 1, 2008

Welcome to 1 Procurement Place!

Welcome to 1 Procurement Place. Beginning on Monday June 2nd 2008 this will be your stop for a refreshingly different take on the worlds of procurement and consulting. Join us for controversial opinions, insights and actionable takeaways in subject areas where the founders of this firm have spent way too much of their lives! We will deliver our points of view on subjects such as:

What is this spend analysis thing anyway? Will it increase my bonus?

What the Sam Hill is leveraged procurement and what does it have to do with private equity?

Okay, I've strategically sourced - where did my freaking savings go?

You want me to use a GPO? Do I look like I need a doctor or something?

It's going to be fun. And we may even help you identify, capture and sustain some greenbacks while we're at it. Or was that find, get and keep? I can never remember....

Mark Usher
Co-Founder and Partner
Treya Partners