Daily Archives: August 28, 2006

The Sourcing Innovation Series: Part V

Today I’d like to welcome a special guest columnist to Sourcing Innovation, Eric Strovink, President and CEO of biq. Eric has some interesting takes on the future of sourcing. I hope you enjoy them.

Thanks for inviting me to contribute to your round table discussion.

I try to spend time with our customers and our consulting partners, understanding what they are doing, how successful they’ve been, and what techniques and software products have or haven’t worked for them. Here are a few “future of sourcing” predictions that I’ve (correctly or incorrectly) internalized from those discussions.

  1. With respect to consulting, the end of “credenza-ware” is in sight. It will no longer be possible for sourcing consultants — no matter who they are — to put savings recommendations into a binder, deliver a presentation, and walk away. They will have to manage the implementation of their recommendations, as many are already doing today. Smarter firms will price for procurement re-engineering approaches, i.e. sustainable longer term savings as opposed to one off sourcing events.
  2. As a corollary to (1), gain-share compensation models will become more widespread. This will require innovative compensation models that provide for equitable outcomes when fee calculations are excessive (i.e., when savings are above maximum anticipated levels), or when savings are partially attributable to changes in market conditions that are unrelated to the sourcing initiative.
  3. Price erosion in e-sourcing and e-commerce software will continue, driven both by decreased tools costs and by a new generation of rapidly-maturing and far less expensive solutions. Mainstream ERP vendors, who previously perceived significant revenue opportunity in the sourcing space, may become disinterested as margins fall.
  4. Knowledge is the dog; software is the tail. E-sourcing vendors who place a primary focus on knowledge management and on innovative technologies to improve data visibility will trump vendors who focus on process. For example, many consultants still use Excel spreadsheets and the email system as their RFx mechanism, yet they achieve remarkable results. Clearly, the job can be done without software-assisted process management — what’s required is the knowledge of what to ask, how to ask it, and how to measure and evaluate the responses. Creating mechanisms to help companies derive value from data, and then combining that with well-engineered knowledge transfer, will win the day.
  5. In-house sourcing consulting services at e-sourcing and e-commerce vendors will be hard to maintain. It’s difficult structurally for vendors to pay consultant-level wages/bonuses to an FTE, and they typically won’t — so thought leaders in the sourcing space tend to drift back to the consulting sector. I therefore suspect that vendors who succeed in building partnerships with independent consulting firms will be able to provide higher value to their customers than vendors who try to maintain an in-house consulting capability.
  6. Compliance will become a more important source of savings. The way that compliance is done today — “Do we have a contract with this supplier?” — is not effective. We need to confirm that the terms of the contract are being followed. Is anyone checking line item charges on the invoices? Is the rate card being compared to the actual charges? If we’re buying office supplies, who is auditing the item substitution logic that we so carefully negotiated? Is our price for an off-contract item higher than current retail? I’ve seen an off-contract Palm Pilot for $700 on a supplier’s invoice, at the same time that it was listed on their web site for $325. Conventional A/P audits, when they can be performed, will find rate card variances, but they miss inappropriate charges. There may be a valid rate card entry for a five-pound package, and an automated audit will verify that the package was billed at the correct rate. But was it, in fact, a five-pound package, or was it really a five-ounce letter? The key to success will be to identify mechanisms by specific commodity that lead to effective identification of invalid charges, along with sustainable means for controlling the issues operationally.
  7. Demand reduction is an under-utilized savings mechanism that will become increasingly important. Sometimes demand reduction can be achieved with simple measures. For example, it’s said that deploying a T&E system reduces demand by about 10%, because employees self-regulate spending if they believe they can be audited. So, even if we stipulate that no other benefit is forthcoming, deciding whether to deploy a T&E system is straightforward. A similar argument can be made around the implementation of e-commerce systems. There are other actions that can be taken to reduce demand, such as asset management and re-use (which includes, as a component, intelligent purchasing — buying near the top end of the PC market, for example, results in an asset that is useful three years out). Internal benchmarking and measurement are some way from realization, but provide the best means of controlling spend in all categories.
  8. The Balkanization of sourcing by category will accelerate, and highly specialized approaches will evolve in key commodity areas. In some categories, aggregation may be the answer; in others, such as commercial print, point software solutions may be appropriate. Specialty outsourcers already exist for contract labor, mailroom, and other categories. Consulting firms as well as e-sourcing vendors will increasingly find themselves “brokering” category-specific approaches on behalf of disclosed or undisclosed specialty partners.

I could go on, but I’ll leave it there. Some of the predictions I haven’t included are related to innovative work that is underway in various places, which I’m not able to discuss. Suffice it to say I think there will be some interesting surprises in our space.

Thanks for the great post, Eric!

Stay tuned … I have a feeling there are more great guest posts to come!