Monthly Archives: January 2009

A Great Guide to Outsourcing Risk Management, Part II

Yesterday we discussed the starting point of your outsourcing project and how you go about selecting service providers to issue RFPs to. Today we will discuss proposal evaluation and remind you to check out the full series on outsourcing risk management by Alsbridge, as printed by SourcingMag.com, that this series is partially based on.

So How Do You Evaluate The Proposals?

Before you start, you should have an evaluation plan and a weighting scheme that weights each proposal that meets your minimum requirements on a comparable scale that addresses, at a minimum, solution completeness, solution cost, provider experience, proposal complexity, leadership capability, deal importance, and how. Then, if there is a clear winner, you start negotiations with the pack leader. If two, or three, solutions, are close, you can request additional information in a follow-up RFP, provided you specified in your original RFP that a follow-up round will be held if the organization feels that it does not have enough information to make a final selection. So what are you looking for?

  • Solution Completeness
    To what extent does the solution being proposed meat your requirements?
  • Solution Cost
    How does the cost stack up compared to the other proposals relative to the completeness of the solution being proposed? Be wary of proposals with an extremely low price tag that seem too good to be true — they usually are.
  • Provider Experience
    How much experience does the provider have delivering solutions of the completeness and complexity they are proposing?
  • Proposal Complexity
    Is the organization able to offer the complete solution on its own, or will it need to partner with one or more external organizations? Be wary of proposals that require a team of external participants to deliver … since the communication and coordination challenges increase exponentially with each additional participant.
  • Leadership Capability
    Has the provider led the previous projects of similar complexity, or merely been an understudy? You’re looking for a provider who will take ownership of the processes and systems you’re outsourcing … if you have to guide them every step of the way, you might as well just keep the processes in house!
  • Deal Importance
    How big is this opportunity to the provider and, conversely, how important will you be to them as their customer? If this deal would double their size and represent half of their income, you’ll be pretty damn important. However, if you’d represent less than 1% of their income, you’d be pretty far down on their priority list and the vendor might not be that responsive when problems arose that needed immediate resolution. However, be wary of being too important … if they have to tie up all available resources just to get started, what extra support will be available down the road?
  • How?
    When reviewing every statement of action, be sure to look for How?. If the answer isn’t in the proposal, you might have a problem. For example, if they are proposing that they will open a new support facility just for you near your location, you want to know how they are going to do this in the timeframe allowed. It takes time to hire and train people, and even though the big three can ship servers within a week, it takes time to set them up, and telecom circuits alone can take over 60 days to order and install.

Once you’ve selected you’re preferred provider, you can move on to the contract, which is the subject of the next post in this series.

A Great Guide to Outsourcing Risk Management, Part I

Not that long ago, SourcingMag.com published a great six part series, authored by Alsbridge on managing risk in outsourcing that covered a best-practice approach to reducing your outsourcing risk that is a must-read for anyone considering outsourcing as part of their procurement function, even if (and especially if) it is just the tactical part. Although the article, and the series, focusses primarily on the aspects of IT outsourcing, the reality is that tactical improvements primarily originate from automation and better systems, so you really need to understand the IT trade-offs before you can make an educated and informed decision.

It’s also important to remember that the reality is that even though there is little to be saved on tactical process automation or improvement relative to what can be saved from a well executed strategic sourcing event on a high-dollar category, the reality is that a botched automation of your tactical procurement processes, especially as part of an outsourcing project, can cost you dearly as your team will have to spend all their time fixing the mess … and the opportunity cost of doing such is phenomenal. Moreover, if your systems are not aligned, you’ll never capture all of the savings that your expert sourcerors negotiate. (There’s a reason that most companies capture less than 50% of negotiated cost savings … and that reason is inadequate systems and poor monitoring.) Thus, before you outsource any aspect of your procurement operation, which you should consider doing if an outsourcing provider can offer you better technologies and processes at a lower cost of operation, it’s important that you understand what you are going to outsource, how you’re going to get a return on your investment, and how you’re going to manage the outsourcing project to make sure the savings materialize. In other words, before you embark on a procurement outsourcing project, you need a good strategy.

Where Do You Start?

Start by identifying all of the potential failure points in your plan, determining the probability of failure and the associated cost if a failure occurs, and then develop risk mitigating plans for those risks that have more than a slight chance of occurrence or a high recovery cost. Then you can move on to your search for a service provider partner.

So How Do You Select The Right Service Provider?

Do some research, starting with the industry leading blogs (like Sourcing Innovation) and the free resource sites (like the SI Resource Site) available to you to identify potential providers. Then embark upon an RFX project to help you identify the provider who can meet your needs at the best price point.

Make sure the RFP completely spells out what you want to outsource; the processes you want followed; the people, process, and system interactions you desire; the change management processes that you follow; the frequency with which you inspect system updates and innovation; current process cycle times; and the cycle-time and cost reductions you are expecting; the service levels you require; and the degree of year-over-year improvements that are expected from your service provider. It’s important that the RFP spells out everything the vendor needs to know, otherwise, they won’t be able to put their best foot forward and will have difficulty being successful. It’s not up to them to fret the details, it’s up to you. Penalty clause or not, it’s still your mess to clean up if your vendors don’t get paid the right amount on time or, even worse, they all get overpaid by 10% and you have to fight for refunds and it’s still your liability if financial statements are wrong because the provider screwed up. If you can prove complete ignorance and best-effort to insure financial statement accuracy, you might escape jail, but that will be of little consolation if the resulting fines bankrupt your company and you’re out on your ass without a job. The simple fact of the matter is that the more detail you can provide in your RFP, the better a potential partner can determine whether or not they can provide the solution you need and how much it will likely cost to do so. And if you don’t know how to put together a good RFP, you can always Get Help from an expert. Once the RFPs are in, you start with the evaluation, which is the subject of Part II of our series.

Working with Your Users II: Creating Commodity Structures (in Your Spend Analysis System)

A few basic rules makes it easier than you think.

Today’s guest post is from Bernard Gunther of Lexington Analytics.
He can be reached at bgunther <at> lexingtonanalytics <dot> com.

A key framework for your spend analysis system is your commodity structure. Making decisions about that commodity structure is the perfect opportunity to begin working with users. The process will get them engaged with the system, and give you the information you need to improve the quality of your structure.

Inevitably, there will be different ideas about what makes sense when building the commodity structure. Making decisions is easier if you filter the alternatives through three criteria: increased buying leverage, improved controls, and better user communication. Generally, if the first two criteria aren’t compromised, it won’t hurt to give users what they want. Let’s look at a typical example.

There are basic templates for the structure of commodities in each industry. These will give you a starting point, but they need to be modified for your organization. For example, in banking, the top level structure might look like:

  • Facilities
  • Information Technology
  • Marketing
  • Professional Services
  • HR
  • Travel
  • Office Support
  • Exempt (taxes, intercompany, etc)

This sounds reasonable at the start, but it still requires decisions on where certain items should go. For example,

  • Should IT Labor go under “IT” or “Professional Services”?
  • Should Commercial Print be under “Marketing” or “Office Support”?
  • Should there be a separate top level category for “Operations”?
  • Should the outsourcing arrangement for your student loan processing be in “IT”, “Operations” or “Professional Services”?
  • Should market data go in “IT”, “Office Support” or “Professional Services”?

For each of these questions, there are bound to be disagreements because there is no absolute right or wrong answer. When you reach a decision point, it’s important to ask:

  • Will doing it this way increase or diminish Procurement’s leverage with internal users and /or the external market?
  • Will doing it this way make the management of major spend areas more or less difficult?

If the changes don’t hurt Procurement’s objectives, you will probably come out ahead by doing it the way the business line wants.

From a procurement point of view, the key concern when building a commodity structure is that the commodity exists (e.g. “IT Labor”) and it brings together all the vendors for this type of spending. Where it is within the hierarchy is not as important as having the spending for IT labor consolidated. If the Technology Group wants the “IT Labor” spending in the IT category, put it there. It may move over time to “Professional Services” or it may not. It really doesn’t matter. The more Purchasing engages with the business lines, and gets them to start caring about the quality and organization of their purchasing information, the more Purchasing will ultimately succeed.

An Update on the Kiva Micro-Finance Experiment

Last September, I introduced you to Kiva, the world’s first person-to-person micro-lending initiative in a post where I posed the question Can Micro-Finance Make a Macro-Difference? after being referred to the site by a fellow hoser.

In an attempt to answer that question, I decided to conduct an experiment. Since last July, I have been making two loans a month under the hypothesis that if it works, after a year I will have enough capital in the Kiva system to help a new person every month as previous micro-loans get re-payed. To date, the doctor has made fourteen $25 Kiva micro-loans (which get bundled with other micro-loans to fund loans to individuals and groups through Kiva’s micro-finance partners):

Individual Institution Total Loan Loan Funded Disbursed Repayment Term Repaid to Date*
Gulchehra Rahimova LLC MLO Humo and Partners 1,175 June 28, 2008 July 12, 2008 12 months 33%
Din Ly CREDIT (World Relief) 250 June 28, 2008 July 12, 2008 18 months 22%
Araba Awotwe Christian Rural Aid Network (CRAN) 350 August 14, 2008 August 28, 2008 7 months 43%
Serigne Cisse UIMCEC (Christian Children’s Fund) 975 August 15, 2008 August 29, 2008 12 months 25%
Mavluda Tosheva LLC MLO Humo and Partners 450 September 1, 2008 September 15, 2008 12 months 17%
Mario Aguilar Fundacion Paraguaya 475 September 1, 2008 September 15, 2008 11 months 18%
Irene Microfinanzas PRISMA 1,200 October 11, 2008 October 25, 2008 6 months 17%
Sokhna Sene UIMCEC (Christian Children’s Fund) 300 November 1, 2008 November 15, 2008 12 months 0%
Essoneya Tchindo WAGES 300 November 1, 2008 November 15, 2008 12 months 0%
Guillermo Microfinanzas PRISMA 325 November 1, 2008 November 15, 2008 10 months 0%
Olinda Microfinanzas PRISMA 325 November 27, 2008 October 31, 2008 6 months 0%
Sron Chea Group AMK 200 November 27, 2008 October 28, 2008 4 months 0%
Kayi Lawson Microfund Togo 1,175 January 2, 2009 November 17, 2008 18 months 0%
Abdulhokim Azimov LLC MLO Humo and Partners 600 January 3, 2009 January 17, 2009 10 months 0%
Averages   508     11 months  

The interim verdict? All loans over 3 months old have had partial repayments, and the partial repayments appear to be more-or-less on track with respect to the requested repayment term. With an average requested repayment term of 11 months, repayments starting an average of 3 months after disbursement for most loans, and the very low default rates common to most of Kiva’s partners (the global average default rate is less than 3%), this indicates that one should expect, on average, 5% of all loans three months or older to be repaid on a monthly basis. This indicates that once I reach a point where I have over $500 worth of loans that have been distributed for more than three months, I should expect it to be the case that the monthly repayments are sufficient to cover the minimum micro-loan of $25 to a new individual or group. As I am loaning at a rate of $50 a month, this indicates that I should be able to start making new loans from partial repayments in month 14, which is close to my original expectation of being able to make new loans from repayments on previous investments after 12 months.

Conclusion? Still too early for the final word, but it still appears to work great. The site continues to disclaim (in the footer of every page) that lending to the working poor through Kiva involves risk of principal loss, but so does investing in the stock market and mortgage funds, but if you had invested in Kiva last year, unlike a lot of people, you’d still have your principal this year and the satisfaction of knowing you made someone’s life better.

Thus, I would still encourage you, if you’re still lucky enough to have any discretionary funds, to take part of them and try lending through the Kiva platform. Considering that you can start for $25, or the cost of one good bottle of wine (at the liquor store and not your local 300% mark-up restaurant), it’s an endeavor that the vast majority of us should be able to afford. And if even half of the 1.2B people in the developed world made even one loan a year, think of the sustainable difference it could make. That’s something worth aiming for. And if you do lend, remember to tell them that jeff <at> hosernews <dot> ca sent you (because one should give credit where credit is due). (And if you’re a Nova Scotian, you can even consider joining his team.)

And remember, there is a supply chain lesson here for all of us. If a good supplier is in trouble in these hard financial times, key customers can band together to keep it financially solvent until times improve through faster payments, guaranteed orders, and low-interest loans. And, in addition to the good feeling these customers will get from knowing they did right, they can also secure long-term capacity at a strategic supplier. Let’s face it — most business people want to do the right thing when given the choice, and many will be quite happy to sign a long term contract or guarantee if you bail them out. This means that if you stick by a good supplier when it’s having a bad day, it’ll stick by you through thick and thin.


*As of January 14, 2009

Help! I’m Out of Content! What Do I Do Now? (Part I)

This was the post I was going to run last Saturday until Somebody decided to go ballistic, forcing me to instead give you Tips on Bashing Your Favorite Blogger (which you are free to use if you don’t get the joke).

Apparently writer’s block, or content block, is an epidemic among bloggers, especially at this time of year. I had always thought, based upon personal experience, that we bloggers had the problem of having too much to write about and that the hardest choice was picking the topic of the next post. Apparently I was wrong. Thus, I thought it would be a good idea to write a post elucidating what to do if you are a blogger who is out of content.

But I had a problem, because I couldn’t imagine not having at least a dozen different ideas. Then I realized that the answer was right in front of me! All I had to do is pay close attention to what my fellow bloggers did … and … voila … the ideas were there for the taking. So I give you, culled from the best and brightest, the top fifteen things to do when you’re a blogger who is (temporarily) out of content.

  • 15. A Whole Week of Best-Of
    Have a deep post archive? Do a whole week of “Best of” category lists. It’s quick, easy, and looks like you worked really hard sweating over which posts truly were your best.
  • 14. Global Warming Tirade
    Point out how serious we need to be about global warming, about how we need to think harder about being green, and how we have to take action right away … but don’t offer any useful or substantive suggestions.
  • 13. Another “It Will Work This Time” Post
    Pick a company that is selling the exact same solution as three of its competitors, using the same go-to-market strategy as a competitor that recently went out of business, and gush effusively about how you’re sure they will succeed.
  • 12. List After List After List
    Top 10 sourcing blogs? Check. Top 10 job sites? Check. Top 10 social networks? Check. Top 10 fantasy football sites? Wait, ignore that last one.
  • 11. Comment on the Content Distribution of a Competitor’s Blog
    You could comment on a post, or comment on a comment on a post, but why add to the conversation when you can analyze the distribution of someone else’s posts on risk management vs. best practices vs. auction posts? After all, random statistics are always interesting.
  • 10. Talk about how the latest regional conflict has the potential to threaten supply chains globally
    The India-Pakistan conflict is old news, look for something more obscure like a telephoned threat from the Kahane Chai, a tourist kidnapping in the Sudan, or a bombing by the GSPC. The smaller, the better!
  • 09. Post a Press Release
    It’s free content! After all, the company that issued the release wants as wide a distribution as possible, and they’ll thank you for it. Maybe they’ll even become a sponsor!
  • 08. Post a Resume
    Press releases are a good start, but why stop there when you can continue on your “free content” path and post resumes of your job-seeking friends and colleagues?
  • 07. Invent a New Claim About Best-in-Class Companies
    If others can build analysis companies on this one idea, you should be able to generate months and months of blog content with the same notion. Best-in-Class companies don’t waste money on snake oil — they use whale oil. Best-in-Class companies don’t buy cheap espresso makers — they buy the $5,464.31 Inox. You get the drift.
  • 06. Freak Up the FUD Factor
    Point out how risky life is in general, and how we should be very worried about risk. Find one-in-a-billion examples of freak accidental deaths that can result from everyday activities and then point out why we should not drive over bridges, take elevators, or go golfing on cloudy days. Better yet, raid the Darwin Awards archives and start a campaign against chemistry, clotheslines, and chimneys.
  • 05. Weigh in on an Irrelevant Controversy
    Like why Windows Vista stinks even more than Windows ME.
  • 04. Find Parallels Between Your Personal Life and Your Blog
    Pay too much for that new corkscrew? That’s bad personal spend management. Run out of coffee? That’s bad supply management. Your shoes need to be re-soled? Time for a quality tirade!
  • 03. Poll the Readership On A Random Topic
    Bonus points if it’s a knee-jerk issue guaranteed to elicit a barrage of random musings from the semi-illiterate members of your readership who enjoy “writting on mater’s that don’t effect myeself”.
  • 02. Raid the Trash Bin
    Those half-finished posts that you never finished last month because they didn’t live up to your past editorial standards don’t look so bad any more! Cut and paste paragraphs until you have three quarters of a post, write some random filler on why reverse auctions are the best way to source beer, and … presto … you have a post on good brewery spend management!
  • 01. Recycle Old Posts
    That post you wrote two years ago that everyone forgot about can be tomorrow’s post if you just change the date, and maybe add a new sentence at the beginning or end. Give yourself bonus points if it’s actually someone else’s guest post … what’s the chance they’re still reading your blog anyway if you ran out of meaningful things to say three months ago?

And that, in a nutshell, is my top 15 list of things to do when you’re out of content, courtesy of the blogging elite. In Part II I’ll outline my top 10 list of things I think you should post about if you’re truly out of relevant content and want to at least be creative when you post.

But in the meantime, I’ll use my own Suggestion #3 and troll for comments! Let’s see who can be the first to identify one post in each category from supply and spend management blogs (while limiting himself or herself to a maximum of three posts from any one blog)!