Four years between friends?

Former British Prime Minister Harold Wilson once famously said "a week is a long time in politics". That may be true but when it comes to spend analysis it seems that four years is, well, nothing. Back in 2008 this blogger had a little more hair and a few less wrinkles but a bucketful of optimism about the likelihood that business enterprises and public sector organizations alike would embrace spend analysis as a "must-do" cost management capability. Based upon the results of a recent Supply Management survey however it appears that the majority of procurement professionals  - some 68% in fact -must still clamber over the prehistoric landscape of disparate legacy systems, throwing their best-guess bones of fragmented spend data high into the air in the hope that they spin and fall miraculously into some understandable pattern of sourcing decision support. Read Supply Management's survey findings and weep - weep hard, mind - here. 


In the hope that perhaps the majority of the planet did not read the first publishing of my 2008 blog post "Can spend analysis have an ROI" - the only happening that would feasibly explain the unforgivable findings of the the SM survey - I am re-publishing said post below. Earth take heed - if I have to return in another four years to berate your refusal to understand and act upon the value of spend visibility I may not be so understanding....

Can a Spend Analysis Have an ROI?

(originally published in 1Procurement Place on August 25, 2008)

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 aSPEND 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.

The Magic of BBP

Interesting piece in the Pharma Times this week about how the UK's National Health Service (NHS) recently discovered it was paying widely varying prices for the same equipment and supplies. In NHS procurement waste “costs £1 billion a year” John Neilson of NHS Shared Business Services (NHS SBS), an alliance between the NHS and IT services firm Steria, reveals that a new NHS SBS database identified up to 19 different prices for the same pacemaker, and 22 different prices for a surgical tool. The article goes on to suggest that one of the biggest barriers to the NHS achieving significant cost savings in medical equipment & supplies procurement is that physicians are reluctant to participate in initiatives such as strategic sourcing because they fear they will have to compromise on quality and performance.

What jumped out at me from this article was the basic question: did anyone even know the NHS was paying all these different prices for the same product? To be fair, the article does not make it 100% clear whether the different prices being paid are for products with identical manufacturer brand names and specifications or only equivalent specifications from different OEMs. I read it as the former, for example the cardiology department in an NHS hospital in London might be buying a Boston Scientific Altrua Model # S404 Pacemaker for one price while another NHS hospital in Manchester could be buying the same S404 pacemaker for 10% less. This would be a totally believable situation with all the hundreds of NHS locations in the UK that could be buying this and other products with no coordination or communication between them.

If it is indeed the case that the new NHS SBS database has unearthed the previously unknown fact of multiple NHS buyers purchasing identical products at widely varying prices (and often I'd bet from the same supplier) then questioning the willingness of physicians to embrace the principles of strategic sourcing best practices is premature. What has been stumbled upon is actually one of Procurement 101's most basic but also most productive source of quick win cost savings - find out who in your organization is buying this product at the lowest price today and get everyone buying at that price, or "Buying at BBP (Best Buyer's Price)" as some purchasing veterans call the practice.

Buying at BBP is completely non-strategic but in some cases can deliver levels of early savings sufficient to fund the truly strategic investments required to create and sustain value over time such as strategic sourcing, supply chain optimization and demand management. In my opinion it's overlooked in many cases because it's so simple and, well, because let's face it we didn't go to business school to create value for our customers with such trivial solutions.

In the case of the NHS (and the same could apply to any mid or large-sized organization with multiple decentralized buying locations) I would be concerned that nobody is considering the Buy at BBP approach. Someone should be getting hold of those new database reports and identifying the name, rank and serial numbers of the buyers that secured the lowest pricing for those items with the highest annual combined usage across all NHS locations. Two things should then happen. First, these buyers should all be sent generous denomination Marks & Spencers Gift Cards. Second, someone should be assigned responsibility and authority to negotiate with the BBP suppliers to have the lowest price extended to all other NHS buying locations that are buying these same items. Suddenly, simply, almost magically a windfall of hard savings will have showered down upon the NHS without a single physician being asked to consider another brand or back down on a specification.

And one last thing. A new enterprise-wide database is not necessary to identify BBP opportunities. The same outcome can be achieved by pulling accounts payable vendor disbursement data from different locations and consolidating the data into one file. Look for those vendors being used by the most locations within your organization - these will likely be the vendors selling the same products to different buyers at different prices. You can then go the locations those vendors are selling to and pull item level usage and pricing data to identify specific pricing discrepancies and the savings available from buying at your organization's BBP. Sure, this approach requires a bit more manual effort and legwork but do you really want to wait around for one of those enterprise data warehouses to be built before you can create the cost savings? Besides, to quote Booker T. Washington: "Nothing ever comes to one, that is worth having, except as a result of hard work."

Except BBP.

Early to Bed, Early to Rise, Work Like Hell and....Customize?

An invigorating article on Reuters.com Tuesday about Honda's decision to NOT STANDARDIZE components across global auto models. In a strategy guaranteed to drive procurement puritans to drink, Japan's No.2 automaker will develop unique specifications for each of the seven countries where the next generation of the Fit sub-compact will be built and sold. Honda's purchasing head Masaya Yamashita reveals the primary drivers of the bold new sourcing strategy to be country-specific requirements and new design ideas from local suppliers.

The concept of customizing product specifications to the requirements of unique market segments is not new. The issue has always been how to manage purchasing, manufacturing and supply chain costs while doing so. The argument is that unchecked growth in specification variation works against all the traditional drivers of supply chain cost reduction such as purchasing leverage, inventory investment and set-up cost. So is Honda out to lunch with its sourcing approach for the new Fit? No, the company is just adopting the broader view of total cost of ownership to include the benefits of better tailoring the product to end consumer requirements and also down-specifying certain requirements based on country-specific usage environments.

In addition to just making sense I find the Honda article extraordinarily refreshing. Having been around the supply chain block for a few years now I know only too well how easy it is to regard certain strategies and practices as a perpetually and universally applicable best practice. A paradigm. Like any paradigm it makes you feel safe and comfortable, like you'll always have the answer. Thank you Honda for reminding us that paradigms are there for one reason - to break.

Lessons from the Public Sector

I'd like to welcome back to 1 Procurement Place guest blogger Barnali Dasverma. Barnali is a Manager at Treya Partners and has an interesting point of view about where the private sector can look to learn some lessons about improving the effectiveness and efficiency of procurement processes. Some of you may be surprised by Barnali's viewpoint, but then others may not....

Structure & Discipline in Procurement: What the Private Sector Can Learn from the Public Sector

By Barnali Dasverma
Manager, Treya Partners

“Yikes, what a haphazard sourcing process! You would never see this in the public sector!” Believe it or not, this was an observation I made after beginning my first private sector consulting engagement following a series of public sector clients. I was startled to come to the realization that there’s quite a bit the private sector can learn from the public sector. I’ve subsequently had the opportunity to serve more private sector firms and additional state governments and have had this conclusion reaffirmed. Specifically, my experience suggests there is a remarkable amount of structure and discipline in public sector procurement that many mid-market firms can greatly benefit from.


Bureaucracy Has Its Benefits: Processes

Bureaucracy has its benefits (as a consultant frequently engaged to tackle bureaucratic inefficiency, am I even allowed to say that?) and process standardization is one of them. One key public sector procurement practice the private sector can benefit from is a standardized RFP process. Many mid-market firms with unsophisticated procurement departments have an inconsistent approach to RFPs – each procurement staff member has his or her own RFP style and each procurement is run differently based on who leads it. In contrast, state governments typically have a well-defined multi-step process that everyone must follow, newbies and old-timers alike. If you’re a mid-market CPO working to optimize your procurement operations, begin with putting in place a consistent, best-in-class RFP process. Conduct vendor and industry analysis as a critical first step, call for requirements gathering that includes the alignment of specs with needs, require that all high profile procurements have a pre-proposal conference to obtain supplier feedback early on, have cost and non-cost proposals be scored by different evaluators to facilitate unbiased decision-making, and require that the procurement lead serve as single point of contact to limit the flow of information to suppliers. By formally requiring that all RFPs include best-in-class steps like these, you will ensure that your procurements are consistently exceptional.

This Is How We’ve Always Done It: Templates

While “this is how we’ve always done it” is a frequent refrain in state government and rarely music to a consultant’s ears, there is something to be said for not always reinventing the proverbial wheel. Far too often, we come across fledgling procurement departments in the private sector that whip up a new RFP whenever a procurement need arises, patching together portions of old RFPs to the extent possible, with the end result being a messy, incoherent solicitation document. Significantly, state government procurement departments are quite different in this regard and typically have contract and RFP templates (“boilerplates,” as they are often called) that all contracting officers must use. A powerful way to increase the efficiency and consistency of an unseasoned procurement team is to invest the time and effort in developing best-in-class templates for RFPs, RFIs, contracts (including standard terms and conditions that have been approved by your legal department), negotiation materials, and the like. Design the templates with usability in mind, carefully noting which portions must be tailored for each new procurement and which ones can be leveraged with little to no tweaks.

You Can’t Break the Rules Without Having Any: Policies

While procurement rules and regulations are sometimes followed blindly in government when they should in fact be challenged, they serve a valuable purpose and many private sector entities can benefit from them. Specifically, well-defined, and clearly communicated (and needless to say, best-in-class) procurement policies help minimize the gap between the CFO/CPO-level vision and the operational reality. For example, procurement policies defining delegation thresholds ensure that procurement staff members’ limited time is not spent on low-dollar value procurements, while requirements that procurement be involved in all RFPs of a certain contract value make sure that an organization reaps the benefits of having a high level of spend under management (e.g. application of strategic sourcing techniques to a broad range of spend categories, monitoring of supplier performance and internal contract utilization, etc.)

Who Knew? The Public Sector Can Teach the Private Sector A Thing Or Two

Having served as a consultant to six different state governments, I can tell you there are numerous ways in which the public sector can learn from the private sector – but that said, my experiences as a procurement consultant have taught me that it’s a two way street. Without a doubt, the structure and discipline we find in state government procurement is most certainly something that many of our mid-market clients can use.

Trial by Tabloid in Motor City

The Detroit News reported recently how the city's Chief Procurement Officer Andre DuPerry is looking to shake up Motown purchasing by re-examining the preferences Detroit businesses are given during the contract process. DuPerry, appointed by Mayor Dave Bing in December 2009, believes the city could save $22M a year by addressing Detroit's dependence on local third-party companies that charge inflated rates. Two small distributors, T&N Services and Hercules, receive particularly harsh treatment in the article for selling the city everything from office supplies to toilet paper to cleaning services at apparently outrageous markups. T&N CEO Tyrone Talifer understandably defends his company's position, citing as an example the taxes paid by his employees that flow back into the city's coffers.

I have to admit my very first take on reading this article was "go get 'em Andre!" but on reflection I would say T&N and Hercules get shabby treatment in the piece. Can they really be blamed for selling products and services at prices that the market will bear? Is it their fault they've been given the opportunity to operate in an industry structure with weaker competitive forces than those faced by my daughter's lemonade stand? Of course not. The primary driver of the margin extracted by both companies is the local vendor preference policy set in the city's purchasing ordinances. The "felon caught in the flashbulb glare" picture of Hercules President Belinda Jefferson is tawdry journalism, disrespectful of all small business owners who navigate the unpredictably contoured landscape of the monthly cash flow statement.

Now, do I have any problem with DuPerry seeking to drop strategic sourcing depth charges into the still, glassy waters of Detroit's overprotected contracting environment? Heck no! Go for it Andre! The sky high prices paid by Motor City's government typify public sector contracting policies where the protectionism dial's needle has swung way into the red. By all means, get some contracting best practices in place to make the government's scarce budget dollars go further. Leverage the total city spend with national suppliers, negotiate aggressive volume-based discounts & rebates, and implement compliance management measures to ensure government departments use the new agreements. Oh and guess what? It will actually be possible to maintain a targeted level of spend with your city's local suppliers by either setting aside a (sensible) portion of annual requirements for SWMBE vendors and/or requiring that the national providers subcontract a minimum percentage of annual requirements to SWMBE (I'd recommend a combination of both). And with the improved reporting available from today's electronic procurement and contract management systems it will be easy to validate that the big guys are actually fulfilling their contractually committed obligations to Detroit area businesses.

So to repeat, I have no beef with CPO DuPerry setting about his business as city procurement tsar and mending broken public sourcing practices. My only beef is with those who place blame at the feet of the benefactors of these broken sourcing practices.

So Motown, go get the savings dollars and squeeze those markups! Protect local area businesses through best practice strategies such as minimum SWMBE quotas and setting and enforcement of SWMBE subcontracting targets with national suppliers. And T&N and Hercules - get ready for real competition that will initially hit your bottom line but in the long run will transform the efficiency of your operations and create real value for you going forward. And to those media commentators looking for the easy sound bite, show a little respect for those industry participants making hay while the sun shines. As far as the economy is concerned it's like living in New England - enjoy the weather now but wait around another 15 minutes and you'll be scrambling for your coat and umbrella.

The Art of Clanger Avoidance

If you're a consultant - or you've hired consultants - you've probably heard the expression "nobody ever got fired for hiring the Big 6". The idea is that if a big name consulting firm drops a clanger on a client engagement then the person responsible for bringing them in can't really be blamed because I mean, how often do these guys screw up? We must just be unlucky! If a boutique is selected however and something blows up then the hiring individual is likely to be tarred and feathered for leaving the company's valuables in the care of a bunch of fly-by-nights who obviously didn't know their pivot tables from their pyramid principles. Interestingly I was speaking to a grad school buddy of mine just last week who recently left one of the big firms (to go open a beach bar, go figure...attaboy!). He was telling me how a few weeks before he left, he was part of a large team helping a software company shorten their product development cycle, respond quicker to changes in customer needs, and generally become more nimble in the marketplace . To cut a long story short the client ended up firing my friend's firm because they weren't able to respond quickly enough to issues that arose during the project and changes in direction the client wanted to make in scope and approach to address these issues. I thought this ironic (and not a little funny) since the firm had obviously sold itself as being able to help this client turn, spin and triple flip on every dime that came its way. Should they have considered a smaller consulting firm that was more likely to be eating its own dog food when it came to nimbleness and flexibility? Or did that seem too far to extend the neck when the comfy cushions of big firm security were within easy reach? Who knows, sometimes it's not that simple. There are certainly plenty of examples out there of big firms that have successfully oared their clients through rapidly changing currents. It does make me think though that companies looking to hire consultants for engagements that intrinsically are most likely to encounter unexpected pockets of mid-air turbulence should apply considerable weight to evaluating the candidates' abilities to guide their clients through a project's occasional bumpy moments to a smooth landing. Lengthy chain linked methodologies are the ones I've seen most often get wrapped around the axle of a less than smoothly unfolding project work plan. Look for pragmatism, flexibility, a willingness to reconsider the last few steps taken and adjust course if some new data suggests that might be the wisest move. Worried about that small firm risk? Ask for a few more references than you would the big guys to quiet your concerns. Unless of course those Big 6 cushions are looking too comfy....Hey, you want an easy life? I know a beach bar owner who needs a partner....

Plane Wrong

"You don't own that plane, the tax payers do!"
- Top Gun, 1986

In his Toronto Star piece $16 billion for the wrong planes Michael Byers writes how the Canadian government last week sole sourced 65 F-35 fighter jets from Lockheed Martin at $135 million per plane, avoiding a tender process that would have drawn bids from other domestic and foreign companies including Boeing, Eurofighter and Saab. The sole source decision was justified on the basis of what Byers describes as "ridiculously narrow operational requirements" based not on Canada's unique air defense procurement needs but on "...instructions from the Pentagon". In addition to his general argument that the sole source decision has resulted in Canada's taxpayers paying too much money for the wrong aircraft Byers also makes the point that some of the $16 billion could have been invested in other high need areas such high speed rail for the Toronto-Montreal-Ottawa corridor.

Michael obviously feels strongly about this issue and I can see why. It's a classic example of public sector procurement decisions being made wholly on political rather than technical or commercial considerations. But let's check our naivety at the door for a moment and smell the coffee while we're at it - the fact of the matter is that the US and Canadian aerospace industries are joined at the hip AND the wallet. The two countries represent over 50% of each other's aviation exports and imports so to all intents and purposes their aerospace companies conduct business and catch each other's colds as if under one flag. Consequently major equipment buying decisions are going to be inextricably linked to the impact of that decision on one or both of the two countries' aerospace industries. Were Canada to opt for Europe's Typhoon this would not only take a lead pipe to Lockheed Martin's knees but would severely wind a large number of the US defense contractor's Canadian supply base at the same time. So it's the F-35 boys! Even if it does mean running on fumes over the Arctic, tearfully fingering the family photo tucked into your cockpit windshield frame while a Hercules mid-air refueling tanker attempts to cover the 2000-odd miles from Vancouver before your nifty but short range jet runs out of gas over that rather uninviting ice flow below.

So what's a sourcing idealist to do? Well, start by realizing there are going to be times when political or other equally unsavory decision criteria trump your carefully constructed total cost of ownership evaluation model and MOVE ON. Next, introduce some best practice supply risk management principles to counter the impact of the award decision from hell. In the case of the F-35, for example, the Canadian Air Force could implement modified operating procedures to ensure that the shorter range aircraft always operates within a safe distance of mid-air refueling capability. Additionally the plane's range could be extended by retrofit mods such as external fuels tanks, lighter weapons packs, or other configuration modifications that in some cases will produce performance tradeoffs but that will ultimately serve to mitigate the negative impact of the original, technically flawed, sourcing decision.

Whether buying planes or pencils there will be times when the procurement professional's best laid sourcing plans run foul of political exigency or special interests. Don't cry over your spreadsheets at times like these but show the talking suits the right stuff you're made of. Whip out that risk mitigation plan. Look for ways to shield your internal customers from the potential fallout of a bad sourcing decision through outstanding supplier management.

And always carry an extra tank.