Monthly Archives: February 2012

If Your Supply Management Vendor Gets Acquired, Is It A Good Thing?

Over on Software and Services Safari, Brian Sommer recently asked about Cloud Software Consolidation — Is It All Good? It’s a fair question, as there has been a lot of consolidation in this space, between SaaS/Cloud and non-SaaS/Cloud vendors alike, and a lot more is still rumoured.

The companies will always spin it as a good thing, and if the acquisition happens, chances are that the investors (that control the Board of Directors), think it is a good thing, but that doesn’t necessarily mean it is a good thing from an existing customer point of view. As Brian notes, investors are looking for deal synergies, up-sell or cross-sell opportunities, cost reductions/efficiencies, etc. and customers want to know if the product will be around several more years, whether the product will get enhanced over time and what happens to customer support. And the problem is that these two sets of goals are often incompatible.

What usually happens is:

1. Existing Customers Get the Short End of the Stick.
For example, they will be promised new, different, technical architectures that may make some of their prior integration efforts no longer valid.

2. The Acquired Product Often Gets Slated to be Decommissioned.
And the customer has to migrate or lose access to functionality entirely. (And if the innovative start up was bought by the lumbering gorilla, functionality will typically be lost.)

3. The Acquired Product Is Frozen in Time.
It may be supported for the length of time in the newest customer’s original contract, but forget about improvements. The existing customers will be lucky to get bug fixes.

4. Prices Increase
After all, the new company, which probably has a higher overhead, has to make a profit after spending all that dough on the acquisition!

5. But Vendors Still Create Incredible Works of Fiction to Explain How the Products Will Be Rationalized Into Their Product Line.
Which are too amazing to explain in a few short words!

And, most importantly, no one ever discusses the real economics of the transaction and why it was driven in the first place. And Brian does a great job of summarizing what typically drives these deals in Cloud Software Consolidation — Is It All Good? the doctor strongly recommends that you give this post a read. It is worth your time!

Legal Sourcing Requires A Legal Mind

Or at least an understanding of the legal mind! Sourcing Innovation occasionally covers Legal Sourcing, which is one of the sacred cows in many organizations. However, as the doctor has more expertise in Sourcing Technology than in Legal Sourcing, not very often. Thus, when the doctor sees a great article on Legal Sourcing, he points it out.

Last week, over on Spend Matters, he saw such a great article. Cyndi Joiner’s guest post on how you should “Be Smart When Sourcing Legal” is just such an article. You have to do your homework before approaching Legal, because they always do theirs, you have to understand the landscape, and you have to have a strategy. Cases are built on strategy, and firms that might need to argue those cases are selected on strategy, and if Supply Management does not have a strategy, Supply Management will be shown the front of the door before they even get into Legal’s office.

But if Supply Management has a strategy, they will not only be able to work their way into Legal’s offices, but earn their trust. And when they work with legal to execute strategic sourcing, they will not only get the sacred cow under control, but they will see spend leveraged across the enterprise, standardized rates, documented processes for engaging preferred firms for service, improved billing, and complete transparency and visibility into legal spend. And a sustainable savings average of 7-10%, or more, will be achieved.

To find out how your organization can achieve these savings, check out Cyndi Joiner’s guest post on “Be Smart When Sourcing Legal” over on Spend Matters.

Apologies to the Faithful, but Optimized Planning is Good, not God!

Last Tuesday, Trevor Miles published a great post over on the the 21st Century Supply Chain blog on how “Optimized Planning is Good, not God!”. This cannot be understated. Too many companies think that a great plan is the key to unlock the treasure chest that contains the much sought-after savings. It’s the key alright, but you have to fit it in the lock if you want to unlock the treasure chest. And the only way one gets to fit the key in the lock is if one actually reaches the treasure chest, and this requires control. You see, this treasure chest of savings sits on a pedestal at the end of a dark and dangerous dungeon filled with traps, treacherous descents, and natural horrors at every turn. Think of every dungeon and tomb that Indiana Jones had to survive, put them all together, and add in a few dozen more traps and that’s the danger an organization has to evade on a daily basis if it wants to reach the treasurer chest.

As such, an organization requires a lot of control in the form of integrated monitoring and control. At every turn, an organization has to look ahead to see what traps may lie in its path, look back to see what creatures are coming up behind it, and be aware of the foundations crumbling beneath its plan and react quickly, and correctly. The reasons this are the case is simple — nothing every goes according to plan (even if you are the A-Team as you always have to deal with the unexpected wrench to complete the plan) and even if it did, the plan is never right anyway.

Consider the quoted study from Terra Technology that shows that an average forecast is typically no more than 52% accurate. This means that even if the supply forecast was perfect, it would still be, at most, 52% accurate. That’s why an organization has to continuously monitor the plan, and as soon as significant variances arise, respond by re-optimizing the plan. That’s the only way to reach the treasure chest of savings that optimization promises. Otherwise, the savings will never materialize as they were calculated with respect to a plan that was never executed.

So check out Trevor’s post over on the the 21st Century Supply Chain blog on how “Optimized Planning is Good, not God!”. It’s a great read!

How Long Before Your Company Has to Produce an Integrated Report?

Integrated Reporting, defined by the IIRC (International Integrated Reporting Council) as a new approach to corporate reporting that demonstrates the linkages between an organization’s strategy, governance and financial performance and the social, environmental and economic context within which it operates, is on the rise as companies try to demonstrate their focus to sustainability, an increasingly important issue to many consumers.

Of course, producing one is only the first challenges. As noted in this recent ISM article on how “Integrated Reports [are] on the Rise”, there is no universally accepted framework for integrated reporting, and it remains largely a voluntary practice. Given that this report is supposed to show the relationship between financial and non-financial performance, and how strong performance in environmental and social areas contributes to good financial performance, and that this report may include facts regarding potential trade-offs that might occur across financial and non-financial performance, it’s difficult to select an appropriate structure.

But given that some countries are now requiring such reports for public companies, it likely won’t be long before we see such a requirement in North America. For example, South Africa now requires all companies listed on the Johannesburg Stock Exchange to provide integrated reports (or explain why they are not doing so). France passed a law in 2010 for companies with 500 or more employees to include a section in their annual reports that describe the environmental and social consequences of their actions. Denmark requires its largest companies to include similar non-financial information in annual reporting, and the UK is making a push for similar legislation.

Given that about 100 companies from different industries and countries plan to use the IIRC framework to produce their own integrated report, and then provide feedback for future revisions, it’s likely that the IIRC framework will involve into a standard, just like GAAP, but how long it will take will likely depend upon when additional legislation requiring integrated reporting comes into effect in the G-20.

So what does this have to do with Supply Management? As noted in the ISM article, that quoted Robert G. Eccles, Professor of Management Practice at Harvard Business School, Supply Management, by virtue of its function within an organization, is an ideal catalyst to spread integrated reporting. No one knows the impact of organizational activities better than Supply Management, so the requirement for integrated reporting will fall heavy on Supply Management.

The big issue though is how to make such a document a “living report”. As the supply chain evolves, so does the ramifications of the company’s activities on social and environmental ecosystems. Supply Management will need a solution that allows this information to be kept up to date. Will SIM (Supplier Information Management) systems step up to the challenge, or will an entirely new solution be needed?

Too Bad the US Post Office Did Not Follow Royal Mail’s Lead

The US Post Office is in dire straits. So dire that, as per the transcript of this PBS.org Newsmaker Interview from December 5, 2011, on how the “U.S. Postal Service Faces Big Changes Amid [its] Struggle to Deliver on Profitability”, the post office is planning to shutter almost half of the nation’s mail processing centres next spring. Given that it is currently 15 Billion in debt and owes about 5 Billion for retiree health benefits, it needs to save 20 Billion fast and it’s solution is a significant restructuring that it hopes will allow it to save 2 Billion next year and 20 Billion by 2015.

This is pretty drastic, and we’ll talk more about it in a bit, but it’s also surprising given that it’s counterpart across the pond, Royal Mail, at the same time, was discussing the results of its first major Procurement Transformation in “Special Delivery”, which ended in 2009 and saved 300 Million pounds. This was followed by a cost management program that doubled the savings number about a year later, which led into a second major transformation project, currently underway, where Royal Mail expects to save significant dollars yet again. 600 Million pounds, or roughly 1 Billion dollars, is very significant when you consider that the Procurement organization only influences about 1.7 Billion pounds of spend out of the 2.3 Billion pounds spend by Royal Mail. That means that, in roughly a 4 year period, as the transformation initiative was only announced in 2006, the organization averaged about a 9% savings a year in the public sector where it is under tight public procurement law, compliance, and regulatory demands. When you think about it, this is an absolutely amazing result.

In contrast, the U.S. Postal service is projecting a 14 Billion loss this year if it does not get legislative relief. 14 Billion! (Note that last year’s budget gave them 11 Billion legislative relief! Source: Red Dog Report (“obama budget includes 11 billion post office bailout”) And that this year’s budget is recommending another 11 Billion in relief. Source: Washington Post [postal service on tap for 11 billion bailout]) And this is the tip of the 238 Billion budget deficit it is predicting over the next decade if it doesn’t cut costs. (Source: United Liberty [united states postal service faces 238 billion budget deficit]) Given that it’s annual budget is about 68 Billion, based on expected Revenue for 2011, this represents a 20% loss! While Royal Mail was saving 9%, the US Post office was losing 16%, on track to lose 20% this year (and, based upon the projection of a 238 Billion deficit if nothing is done in 10 years, probably 30% plus in a few years).

Now, it’s tough when you have to deal with a drop in regular first class mail that amounts to 27% when compared with volume levels 10 years ago, especially when that is your primary source of revenue, but this drop was visible years ago, and efforts to reduce costs could have been underway years ago. The network should have been optimized 6 years ago, re-evaluated, and then optimized again last year. And, like Royal Mail, which was also dealing with increased competition and revenues declining at 5% a year for similar reasons, it should have focussed on vehicles and operations, business services, facilities management and property, IT and telecoms, and sourcing and demand management to do what it could to keep costs in line as much as possible year over year. Since network reorganizations of the type that the U.S. Post office has to undertake can take years, some losses were unavoidable, but this blogger finds it hard to believe that 14 Billion in losses were unavoidable. And, like Royal Mail, it should be making a hugh effort in Supplier Performance Management to help suppliers keep their costs down.

However, the most fascinating fact that is overlooked in all the news reports is the lack of focus on Supply Management. Back in 2007, the U.S. Postal Service licensed CombineNet’s advanced sourcing platform. While for years this platform, in the doctor‘s view, had usability issues in that self-service just wasn’t an option for most organizations, as per SI’s extensive coverage on CombineNet back in 2006/2007, when they were undergoing their first major transformation of the decade, this was one of the most powerful strategic sourcing decision optimization platforms on the planet. If the U.S. Post Office was properly applying this platform, the doctor believes they should have been saving money hand-over fist. After all, Royal Mail used Iasta, which only introduced its advanced sourcing platform in the 2007 timeframe, about 7 years after CombineNet, and saved big-time. (Note that this is not a knock against Iasta, as the platform they introduced was rock solid, but an attempt to make a point that the platform CombineNet had was seasoned and powerful enough to do what the U.S. Post Office needed it to do, including re-optimizing the entire U.S. Post Office service network.)

Supply Management can save just about any organization, but the organization has to be willing to use Supply Management, and the tools and techniques Supply Management brings to the table, and used Supply Management aggressively if the organization is serious about staying above water.