In our last post we introduced you to XaaS, Everything as a Service, and told you that this latest craze is going to cause your Supply Management organization nothing but suffering and pain. Why? Because even though, historically, the transformation of a non-core but essential function or utility to a service was a good thing that made your life easier, like all good things, there is an end to the goodness. Taken too far, nothing but chaos will result by handing over a function to a third party that is not well equipped to handle your service needs because they do not have the expertise, cannot achieve the necessary economies of scale, or just can’t be managed effectively.

For example, let’s say sales and marketing decides that IT just isn’t cutting it and decides to outsource IT support for marketing to a third party, and the organization is a CPG company that depends on all communications, orders, and marketing deliverables being properly archived in the ERP and Marketing Procurement system for compliance, cost management, and post-campaign/event analytics. This brings with it a host of problems. One, the systems are not being managed by IT or the support organization IT recommends. This increases 3PM overhead, causes the organization to lose out on better rates that come with more volume, and could result in core systems being bypassed (if the provider is inept and can’t figure out how to push critical data into the core systems). Two, it sets the organization up for a compliance nightmare down the road (when audit trails go cold due to missing data). Three, it opens the door for over billings, duplicate billings, and even fraudulent billings when AP can’t find all of the associated PO and contract data to m-way match an invoice. Four, instead of providing Supply Management with an opportunity to determine why IT isn’t meeting Sales and Marketing needs (which could be due to a misunderstanding, lack of staff, or other issue that could be easily solved by Supply Management) and identify a solution that would benefit the entire organization, it instead opens the door for each OU to hire their own provider (since Sales and Marketing did it), and burden the organization with a 3PM nightmare in IT.

And this is just the tip of the iceberg, as IT has been commoditized for over a decade now, and there are methods to manage this madness. The real problem is when different Business Units decide that anything they don’t feel is critical to manage in-house should be a service and the marketplace adjusts to that mindset. Product Design as a service. (R&D) (Hey, all we need to do is approve a design since we just need something to sell, right?) Supplier Management as a service. (Engineering) (We’ve approved the design, who cares who builds the product and how they do it, right?) 3PL Transportation, Inventory, and Distribution Management as a service. (Logistics) (Who cares how it gets to the shelves as long as it eventually gets to the shelves, right?) Campaign Management as a service. (Marketing) (Once we’ve defined the message we want to get across, we can just hand it off to a local marketing management firm to best tailor the message to the region and produce the ads, right?)

Each of these services can lead to massive headaches, fines, and reputational damage if the service provider does not understand the needs of the organization, does not employ proper processes and procedures necessary to ensure quality and reliability, does not have the right certifications and insurance, does not have a proper focus on sustainability and Corporate Social Responsibility, and does not ensure fair and equitable treatment to workers throughout the supply chain. For example, a design that does not adequately consider product safety and results in an electrical appliance electrocuting a consumer during normal use (due to lack of safeties and blowout circuits) will result in massive lawsuits. Poor supplier management could result in missed deliveries, poor quality, high defect and return rates, and even the inclusion of banned chemicals or compounds in the product which will result in costly recalls or border seizures. Poor logistics management will lead to high stock-outs on the shelves, and lost sales, which, if significant, could make the difference between profitability and impending bankruptcy for the organization. And a poor marketing campaign, that includes phrases or images offensive to members of the local community, will result in a media onslaught that will result in massive damage to your brand. And that’s just the beginning.

Services are good. But Everything-as-a-Service is a ridiculous concept and any organization that buys into it is just asking for trouble.

XaaS, short for Everything as a Service, is the latest craze that is going to cause your Supply Management organization nothing but suffering and pain. While it sounds really cool, because, historically, the transformation of a non-core but essential function (legal, accounting, etc.) or utility (water, electricity, waste disposal, etc.) into a service made your life easier, as with any good thing, it’s always possible to have too much. (A glass of red wine a day is a good thing, unless you are an alcoholic, but the same cannot be said of a bottle. A couple of aspirins are a good thing if you have a headache or a mild heart condition, but a bottle can kill you. Recruiting firms are a good thing, but imagine the chaos if you had to hand over all hiring to a third party who knew nothing about your corporate function or talent needs. Think about that for a minute.)

The right services can provide an organization with considerable advantages that include, but are not limited to:

• Expertise
  that the organization might not have
• Cost Reduction
  from economies of scale when all the service provider does is a certain function (and can amortize solution and personnel costs across multiple clients)
• Efficiency
  that comes with best practices and the focus of personnel on homogenous tasks in an efficient manner (under the right, lean, six-sigma optimized, virtual production line model)

provided the organization does not have the economies of scale, dedicated personnel, or expertise in house. However, the wrong services will burden the organization with a number of considerable disadvantages that may include, but are not limited to:

• Cost Increase
  as cost reductions only materialize if there is enough work on which to achieve a cost reduction (through the provider’s economy of scale) that covers the incremental overhead and management cost that goes with outsourcing a function
• Efficiency Decrease
  since the management and administrative overhead of handing over a small amount of work is more than the efficiency savings achieved by the third party when there is not enough work to take advantage of an economy of scale
• Loss of Control
  which is critical if the task is critical to organizational success (which is the case if the task supports the core business function of the organization)
• Third Party Management (3PM) Nightmare
  if the provider is difficult to work with, in a time-zone that is opposite to normal working hours or the time-zones under which most other third parties operate, or has management requirements that are unduly burdensome to an organization already stretched thin with regards to third party management requirements

And if different business units decide to start outsourcing what they perceive as non-core functions (which are in fact core to the business or which should be managed by Supply Management or a different business unit), functions for which the service provider cannot achieve economy of scale, or functions that have not been optimized for outsourcing (which will result in an efficiency decrease as a best-practice provider will not be able to optimize inefficient workflows) willy-nilly, Supply Management will have quite a third party management mess to deal with.

How so? Come back for Part II.