This is another damnation that should not be unexpected, as the doctor has been proclaiming the dangers and dysfunctions of dashboards since 2007. As per the doctor‘s classic post, a dashboard CAN NOT tell you how well you’re doing. It does not, and can not, know everything your organization is not doing well or how much the lack of efficiency is impacting overall organizational performance. As a result, it can not report on this ever important metric.
As the doctor said in his classic post, the best [a dashboard] can do is capture the data it’s been programmed to capture, roll-up the metrics it’s been programmed to roll up, and do the built in calculations of efficiency based on those roll-ups. Whatever went undefined goes undefined and stays undefined. The best that a dashboard can do is provide an upper bound on how well you’re doing — and this is useless. In particular, a dashboard that says you’re warehouse efficiency is 98% when it is only 92% is useless as it is totally unactionable. (the doctor can tell you that your efficiency is at most 100%, always be correct, and he doesn’t need an overpriced software hack to tell you that!)
And it’s not just the doctor who has this view. About five (5) years ago, Robert D. Austin, author of Measuring and Managing Performance in Organizations, penned an article in Intelligent Enterprise on how metrics can lead [us] in the wrong direction which echoed many of the doctor‘s concerns. Mr. Austin states:
“Kaplan and Norton’s cockpit analogy would be accurate if it included a multitude of tiny gremlins controlling wing flaps, fuel flow, and so on of a plane being buffeted by winds and generally struggling against nature, but with the gremlins always controlling information flow back to the cockpit instruments, for fear that the pilot might find gremlin replacements. It would not be surprising if airplanes guided this way occasionally flew into mountains when they seemed to be progressing smoothly toward their destinations.
It’s as the doctor said. Not only will your staff be lulled into a false sense of security when all of the gages in the dashboard are in the “safe” zone (and not look for the faulty wiring about to spark a devastating explosion), but, and this is especially true if their compensation is based on those numbers, they’ll start to perform dysfunctionally if such behaviour improves the score. For example, many call centres once thought (and some still do) that number of calls processed was a good metric. The result? The reps, who do their best to get you off the phone as soon as possible, don’t take the time to understand the true nature of your problem and instead focus on a “quick fix” to get you going again (even if such a fix, like “reboot”, doesn’t fix the issue and will only result in the problem re-occurring again and again). As a result, not only did the number of calls processed a day increase, but the total number of calls processed by the organization increased, because people have to call multiple times to get their problem solved. Not good. Not good at all.
And while an integrated view is necessary, the doctor was right when he said that integrated dashboards are deadly. Common issues are inconsistent views, propagated errors, and the overconfidence they instill. Despite the fact that they always increase risk, dashboards do not always improve visibility. Unlike a top-of-the-line spend/data analysis tool, dashboards do not give you real intelligence. You should ditch the dashboards before they are your downfall.
Spreadsheets. You can’t run your business off of them. But you still can’t run your business without them. Despite the fact that it’s 2015, and that better, customized, back-office systems exist for every facet of your business, most business still run at least one key aspect of their business on spreadsheets.
This is, literally, the only technology worse to run your business, and supply chain, on than the ERP (which, as we pointed out in a recent post, is a supply chain disaster waiting to happen. Do you have to remind you again that Spreadsheets Will Cost You Billions? That Fidelity lost 2.6 Billion due to a simple spreadsheet error? That 1.13 Billion in Fannie Mae Shareholder Equity went out the window due to an honest spreadsheet mistake?
And do we need to remind you that trying to run a business off of spreadsheets is fraught with peril and could result in your organization tossing 20 Million into the trash on an annual basis? That your new support centre could be woefully understaffed upon switchover? That unavoidable delays will result in your projects as a result of spreadsheet gaps?
You know spreadsheets are a damnation because they still exist, five years after the Harvard Business Review told us why good spreadsheets make bad strategies. There’s just no such thing as good spreedsheets. All spreadsheets of any level of complexity contain errors. The most recent statistic, as reported in Forbes last year in Sorry, Your Spreadsheet Has Errors, 88% contain errors (and the vast majority are human. But what can one expect when one in one hundred keystrokes is erroneous?) And so will 88%+ of spreadsheets going forward as forecasts, models, and financial statements just keep getting more complex.
As long as they exist, spreadsheets will be an eternal damnation that might just burn your business to the ground if the sea of red isn’t detected, due to a human error, until it is too late. If it’s the last thing you do, get rid of them.
Today’s guest post, which is part two of a two-part series, is from Gonzague de Thieulloy, a Managing Director at Xchanging Procurement who manages tail-end spend management programs at Xchanging’s largest European customers.
In yesterday’s post, we defined tail-end spend, which is the 20% or so of spend with the organization’s non-strategic suppliers that, due to its complexity, is typically left unmanaged and which, unaddressed, presents the company with significant risks of the financial and brand variety. In today’s post, we discuss the solution for tail-end spend management which will address the complexity, reduce the risk, and present the organization with an additional savings opportunity.
The Tail-End Spend Solution
Because of the high degree of complexity and risk involved with tail-end spend, companies are increasingly looking at support from specialist external providers to manage their 20%. It’s more efficient to subcontract the management of this tail-end spend rather than to manage it internally and, due to economies of scale, it makes more financial sense.
Key Success Factors when Managing Tail-End Spend
There are several success factors to consider when managing your tail-end spend. Here are three primary ones to consider:
- C-suite buy-in — Senior buy in and support is imperative to the successful implementation of a tail spend management program;
- Visibility and collaboration — The team responsible for implementing the change management process needs to ensure the new strategy is communicated clearly to the rest of the business, as well as ensuring the team is visible and on-site at least 50% of the time to help with any queries. In order to increase the success and adoption of the new processes put in place, they need to advocate it;
- Utilizing procurement expertise and technology solutions as an integrated and managed service — The level of procurement support given to customers throughout the change management process is critical to ensure procurement and processes are fully connected.
Reaping the Benefits
When rolled out properly, a tail-end spend management solution can generate 15-17% savings, which can make a huge addition to the 5-10% savings typically generated from managing traditional spend. But the benefits go much further than just cost savings. Tail-end spend solutions typically:
- Improve supplier management – A large supply base can be paired down to a few approved suppliers, with improved terms and associated cost savings, as well as reduced risk of working with unknown companies;
- Increase spend visibility – Expanding the range of spend under management helps to create transparency around where the money is spent and what it is spent on, and results in new spend rules that strengthen the overall business;
- Enhance spend efficiencies – Although categories of tail-end spend are often low value/high frequency transactions, they also always include high value transactions; managing this spend creates opportunities for companies to effectively allocate and control budget spend from previously unmanaged areas;
- Streamline procurement processes – The key value-add of a tail-end spend management solution is it streamlines the entire tactical buying process associated with low-value spend.
It took more than ten years for leading companies to get the majority of their strategic 80% spend fully under control. We’re just in the early days with tail-end spend management, but by understanding the unique challenges of this 20%, it will take far less than ten years to have 100% of external spend under management.
More information on Tail-End Spend Management can be found on Xchanging’s Tail-End Spend Management page.
Today’s guest post, which is part one of a two-part series, is from Gonzague de Thieulloy, a Managing Director at Xchanging Procurement who manages tail-end spend management programs at Xchanging’s largest European customers.
Tail-end spend management is finally becoming a procurement priority, and for good reason. Historically, procurement organizations have been focused on trying to manage their strategic spend, the 80% of spend that represents around 20% of their suppliers. While companies have been striving to manage those strategic suppliers, they’ve left the myriad of smaller suppliers — the ‘tail-end’ of the spend — unmanaged. But that is starting to change.
Until recently, you would have been hard pressed to find any company managing their full strategic spend properly. Ten years ago, most organizations were only confidently managing 40-60% of that spend, at best. Now, due to procurement’s increased visibility and greater strategic role, many companies are managing their entire strategic spend effectively — the full 80%. This has left more than a few companies wondering what they can do with the remaining 20%, not least because of the financial benefits. Everest Group suggests that inclusion of tail-end spend increases procurement outsourcing savings potential by 1.5 times. But this is just one reason to manage tail-end spend.
Complexities of Tail-End Spend
However companies are discovering that they can’t use the same procurement methodologies for tail-end spend as they have for their strategic spend. For one thing, tail-end spend is far more complex than strategic spend: there are many more suppliers, the spend is very fragmented, and there are a lot more individuals buying. Tail-end spend “buyers” are end-users: people in HR, marketing, finance, IT, and so on — ordering goods and services as needed. They are not professional buyers, in the traditional procurement sense, which means trying to manage this spend requires change management — an added layer of process. As long as the total cost is less than the agreed threshold for tail-end spend, then these “buyers” can place orders with whomever and however they want.
Tail-End Spend Risks
Not only is the 20% tail-end spend complex, it can also be very risky, which is another reason organizations are now starting to pay attention to it. With the 80% spend, companies typically have an experienced buyer managing key suppliers and auditing those suppliers on a number of different aspects. The company that is on the ball knows everything there is to know about their strategic suppliers: whom they work with, their values, their practices, their working conditions, who their suppliers are, etc. With unmanaged tail-end spend, nobody is looking after these suppliers. Companies have no idea who they are buying from, making them susceptible to a number of risks.
One such risk is the potential damage to a company’s reputation. With all of the corporate sustainability issues now in the spotlight, unmanaged spend means companies may be doing business with suppliers that violate their own CSR principles. Imagine the harm it would do to your brand if it were discovered that one of your suppliers was using child labor or heavily polluting the environment. The damage could be irreparable. Beyond brand damage, you would also be responsible for supporting companies carrying out these practices. The reputational impact alone could put your company into a tail-spin.
Another type of risk that is common of unmanaged tail-end spend is a best practice risk. When companies let people from across the business buy from whomever they want, there is a chance that they will just buy from a personal connection, or from a supplier with whom they have a historic relationship. This often results in individuals overpaying for what they are buying which is, of course, financially damaging to the company. But more seriously, they may be in breach of fair practice regulations, putting the company at risk of being sued.
Companies that fail to address this complexity and risk are leaving a lot more on the table than they think. In tomorrow’s post, we will discuss the tail-end spend solution.
More information on Tail-End Spend Management can be found on Xchanging’s Tail-End Spend Management page.