One Hundred and Sixty Five Years Ago Today …

The Great Exhibition of the Works of Industry of All Nations, the very first World’s Fair, opened in Hyde Park in London (England).

Organized by Henry Cole and Prince Albert, it was attended by numerous notable world figures of the time and contained exhibits from Britain, its ‘colonies and dependencies’, and 44 ‘foreign states’ in Europe and the Americas. With over 13,000 exhibits, it was a tremendous undertaking for the time and inspired a series of world fairs that followed (which still continue to this day, with the next world fair being Expo 2017, taking place in Astana, Kazakhstan [as sanctioned by the Bureau International des Expositions, which has served as the international sanctioning body for world’s fairs of the universal, international, and specialized variety since 1928]).

A special building, The Crystal Palace, designed by Joseph Paxton and which took the form of a massive glass house 1851 feet long and 454 feet high, was built specifically to house the show. After the exhibition, the building was rebuilt in an enlarged form on Penge Common, and stood until its destruction by fire in 1936. However, its legacy lived on as the site was used as the Crystal Palace motor racing circuit between 1927 and 1974 and inspired the Crystal Palace Garden Parties between 1971 and 1980.

And over six million people attended the fair. One has to remember that in 1851, the population of Great Britain and Ireland combined was only 29M-ish (and Britain itself only 19M-ish) and the world population was only slightly over 1 Billion. This contributed to a profit of £186,000 (£18,370,000 in 2015), and that surplus funded the Victoria and Albert Museum, the Science Museum, and the National History Museum as well as an educational trust for scholarships and industrial research which still provides funds today.

Societal Sustentation 45: (A Lack of) Math Competency

While Procurement needs to be able to deal from a full deck of skills (and SI has compiled a list of 52 unique IQ, EQ, and TQ skills a CPO will need to succeed, which will eventually be explored in future posts over on the Spend Matters CPO site once the outside-in issues, agenda items, and value drivers have been adequately addressed), many of the skills that Procurement requires rely on math. In fact, with so many C-Suites demanding savings, if a Procurement Pro can’t adequately, and accurately, compute a cost savings number that the C-Suite will accept, one will be tossed out the door faster than Jazzy Jeff gets tossed out of the Banks’ manner.

But, especially in the US, strong math skills are not in abundant supply. As per a 2010 SI post on how This is Scary! We Have to Fix This that referenced a MSNBC article on Why American Consumers Can’t Add reported on a recent study that found:

  • Only 2 in 5 Americans can pick out two items on a menu, add them, and calculate a tip,
  • Only 1 in 5 Americans can reliably calculate mortgage interest, and, most importantly
  • Only 13% of Americans were deemed “proficient”. That means
    less than 1 in 7 American adults are “proficient” at math.

So even if the Procurement Leader has strong math skills, it’s likely that not everyone on the team does. And even if the Procurement team has decent math skills, the chances of every organizational buyer having decent math skills is pretty slim. So you need to figure out how to ensure poor math skills don’t affect your performance. What should you do?

1. Make sure you know your team’s math competency.

If you need to, have each team member take a math competency test. You need to know their level of capability, and if you can’t get university transcripts, then you need to figure out their university equivalent math competency.

2. If they are not up to snuff, get them the courses they need – at your expense.

You have smart people. You hired them. They have talent, they just need a bit more math. So allow them to enrol in college or university courses, give them the time to improve their skills, and pay for the courses.

3. Acquire systems that make the math easy.

Give them systems where they can collect all the data, run accurate side by side comparisons and analysis, define formulas, and automate computations. The easier it is for them to create the models, analyze them, and make the right decisions, the better.

4. If possible, acquire systems that guide them.

For example, an optimization-backed sourcing system that asks them about the type of constraint, the split in a split award, and any filters and then creates the equation for them, where they only have to approve, vs. your buyers trying to do complex modelling in a spreadsheet is going to be more accurate and save you more money.

For math competency to improve overall, the importance of a math education has to increase overall. That is going to take some time. In the interim, work with what you got.

Benchmarks are Bad — But Don’t Just Take My Word For It!

A decade ago, Jeffrey Pfeffer, the Thomas D. Dee II Professor of Organizational Behaviour at Stanford University’s Graduate School of Business, wrote a book with Robert Sutton called Hard Facts, Dangerous Half-Truths, and Total Nonsense: Profiting from Evidence-Based Management (Kindle), in which they stated there were three inherent problems with benchmarking. Especially external benchmarking.

1. If your business strategy is simply to copy what others do, then the best you can hope for is to be a perfect imitation.

2. When you benchmark, all you see is the most visible and superficial aspects of the company you are benchmarking.

3. When you try to copy, you forget to ask “should I copy this? is it right for me”?

It’s not who’s spending the least on inventory with JiT (Just-in-Time) supply chains, or who has the lowest labour costs (with warehouses in Georgia and Wyoming), or who has the lowest transportation costs (through mega-volume contracts with a single carrier), etc. It’s not even who has the lowest cost supply chain (although that’s a great start, just look at Apple for inspiration). It’s who has the biggest profit and biggest brand reputation — and that is the organization who manages to extract the most value from every dollar spent.

You don’t get value from a benchmark — the most you can get from a benchmark is an idea of where value may lie. And while this is a great start, especially since, if properly defined, it allows the organization to see where it is doing well against it’s defined metrics and goals, it’s only the start.

Moreover, if the benchmark is ill-defined, it can often hide huge over-spend. The organization could easily be over-spending by 10% or more, operating quite inefficiently compared to it’s potential, or focussing its effort on low return activities — something it will never know unless it continually challenges the benchmark and looks for ways to redefine what the baselines should be. But benchmarks, when they turn green, often lull the organization into a false sense of security. Which is scary. Because …

The reality is that benchmarks are filled with traps and hidden dangers. And if you don’t want to step on a landmine, you should download The Dangers of Benchmarking (registration required) today and identify the six major hidden dangers of benchmarks, four of which are easily eliminated with the right application of a(n optimization-backed) sourcing platform.

Sourcing Adoption Addresses Key Procurement Priorities

Earlier this year, the Hackett Group released it’s Procurement Executive Insight on The CPO Agenda: Reduce Purchase Costs, Improve Agility, and Become a Trusted Advisor that summarized the Hackett Group’s annual key issues study that was undertaken to define the top issues that would shape the procurement executive agenda for 2016.

As a result of this study, Hackett identified two major facts:

  1. The Top Four Priorities are, bottom up:
    • improve agility
    • increase spend influence
    • become a trusted advisor
    • reduce and avoid purchase costs

    which is bad, because costs should be well under control by now and Procurement should be seen as a trusted advisor by those that spend the most and

  2. Procurement’s Operating Budget is expected to grow by a mere 1.1%

    which is worse because most Procurement departments are under-staffed, under-resourced (technology wise), and under-funded (even though they can often make the greatest contribution to the bottom line of any department in the organization).

It’s another year of doing more with essentially less (as 1.1% budget increase doesn’t even cover the cost of inflation), which means that you have to be more efficient, and effective, than ever. You need to push your Procurement Value Engine into overdrive.

How do you do that?
(Hint:  It involves heeding the advice in Higher Adoption is Where True Value Lies, and we’ll get to that.)

There are a number of ways to do this, but probably the most critical thing to do is start at the beginning and get your Strategic Sourcing under control, especially for any non-direct category where you are not locked into a very small group (sometimes a very small singular group) of suppliers. And how do you do this? You get your optimization-backed sourcing platform adopted throughout the organization. (Don’t have an optimization-backed sourcing platform, than maybe you need to talk to one of the sourcing samurai.)

The reason Procurement is still in the “dark ages” in most organizations is because less than half (40%-) of organizations have any sort of platform. Of those, some have Sourcing, some have Procurement, some have Contract Management, some have Supplier Management (SIM/SPM/SRM/SxM), and some have another point-based solution that solves one particular pain, but leaves most of the pain of the Procurement organization unaddressed.

The most common solutions are either e-Procurement platforms, typically with some sourcing capability (namely, RFx), or e-Sourcing platforms, typically with Spend Analysis, Contract Management, and/or some procurement capability (usually order or invoice management). However, just because these solutions are in place, it doesn’t mean that they are used. In many organizations with a sourcing platform, only a small team of senior buyers working on the most strategic or highest dollar categories use the tool. This is costing the organization a lot of money, as the opportunity cost of not applying the platforms across the board (and identifying cost savings or cost avoidance across the board) is huge.

Consider our recent post on Why You Need Mass Adoption of an Optimization-Backed Sourcing Platform, a traditional organization without an optimization-backed sourcing platform will typically only source, at best, 9% of spend strategically with optimization and 18% of spend strategically without using the platform, for a total throughput of a mere 27%. For an organization that sources 50% or more of its spend every year, that’s half of its straight-to-the-bottom-line savings opportunity up in smoke!

But if the organization doesn’t use an optimization-backed sourcing platform, instead of an average of 1/4 of spend being strategically sourced in one way, the fraction decreases to 1/5 (or even 1/6). Think of the opportunity costs! Instead of losing 3% against the bottom line, the organization is now losing 5% or 6%! The reason for this is that the sourcing platform is always in the hands of the few. Why? Sometimes it’s a lack of licenses, but often it’s the complexity of the solution, which is seen as too complex by the majority of the buyers who have to push through volume, complex requirements, or special situations that are, in their view, easier to deal with outside of the platform.

That’s why you not only need adoption, but you need a platform that can, and will, be adopted by all of the buyers so that 90%+ of sourced spend goes through the platform. This will not only increase savings, which addresses the top priority of Procurement executives, but also addresses the priorities of spend influence and agility. How? A good platform allows a sourcing team to move faster, and speed up events by weeks or even months, and it allows the organization to tackle critical projects within different organizations that can increase Procurement’s influence.

So to find out how to get your Sourcing Platform adopted, download Higher Adoption is Where True Value Lies today and find out the tips and tricks that will make your sourcing a success.

Technological Sustentation 90: Open Source

Open Source, which not only gives us free software, but some of the best software out there, should be a great thing, and it is, but from a Procurement point of view, it’s a damnation. Why?

  • How do you cost it?

    There’s no free lunch when you have to wash the dishes — for the entire Bawabet Dimashq Restaurant — and there’s no free software. It has to be customized, maintained, and supported. This takes people, and that costs money.

  • How do you defend against it?

    Chances are you will find that the software doesn’t quite do what you need, and then you will need to augment it. But under open source terms, you have to release those modifications. And that will be helping your competitor, won’t it?

  • How do you defend your investment against it?

    When a purveyor of proprietary software comes through the door and offers you its SaaS platform for half of what IT thinks it will cost to maintain your platform, how do you convince the CEO the customized open source software you want is the right way to go?

Now, in our world, it’s not usually the case that open source is the way to go, as modern providers of SaaS platforms, or at least those that aren’t too greedy, have made them such that they can offer better, faster, and cheaper alternatives than in-house open source. But that doesn’t mean proprietary will solve all of your platforms. Every organization is unique, and while SI expects there is a proprietary platform that can be configured to meet the majority of your needs, there might be a situation where something custom is needed, and the best way to build it is on open source technology. So how do you deal with the organizational pushback?

1. Know Your Unique Needs.

The first question is, why do you need it. There has to be a reason besides you want it, you like it, you think it will be cheaper than the alternative, or you think it will be the most flexible. If you’re gravitating towards open source, there should be one or more unique requirements that only open source can meet, these should be well understood, and you should be able to clearly convey why.

2. Know the Risks … and Have a Game Plan to Address Them.

Open Source brings unique advantages, but it also brings unique risk. Who is going to support the platform day to day? Maintain it and fix the bugs? Add new functionality and integration capability as the organizational platforms change? And how can you be sure someone didn’t sneak something proprietary in there, either on purpose or by accident, and you won’t be accused of IP theft or a license infringement and have to tack legal costs onto the bill (as there is no provider to indemnify you)? All of this is addressable, and controllable, but you need to be aware of all the risks, and have a game plan to mitigate them up front, or getting any open source project approved in an organization that still wants a one vendor platform and “one neck to choke” (that is outside the organization) will be an uphill battle.

3. Know the Costs … and the Value of the benefits.

Make sure to understand all of the costs of the solution, both hard and soft, as well as an expected value of the unique benefits that the open source solution brings, and add those to the cost equation of the best non-open source alternative. If the open source will allow for a drastic reduction in the manpower required to complete a workflow, allow for the organization to harvest a lot of market insight without paying for costly, marked up, data subscriptions, or provide some other cost saving, that is extremely relevant and the value ratio of the solution could even out when compared against the best proprietary solution. And having these value models worked out can go a long way to mitigating the “but it costs more for IT to maintain” dissension.