How Many Billions Are Lost Each Year to Dumb Sourcing?

Today I saw an article entitled E-Sourcing is Dead, Long Live Intelligent Sourcing Systems and all I could say is what parallel world did this article materialize from? Given that we’ve had Strategic Sourcing Decision Optimization with multi-line item support, freight brackets, and carrier support for 17 years, advanced analytics algorithms with smart trend projection and outlier analysis for just as long, and easy access to pretty much all market and public sector buy data in e-friendly countries for over a decade, this should be the case. But it’s not.

We’re not even in a position to say half of mid-size or larger organizations even have anything resembling a modern e-Sourcing solution, and only a small fraction of those have embedded optimization capability, and only a small fraction of their customers actually use it. In reality, e-Sourcing is barely alive and just coming into it’s own. After all, the oompa-loompa empire is only valued at about Two point Five Billion … and in software terms, that’s pretty puny when you consider the market valuations of companies like SAP (approx 107B) and Oracle (approx 220B) … either of these companies could easily buy out the oompa-loompas and put them back in the chocolate factory on a whim! (Which would be a shame since they make great coders.)

But regular readers will know this to be the case, as it’s been SI’s core lament for a decade now — and the market still doesn’t look poised to change. Even though, as SI has stated over and over (and over) again, the average year-over-year savings from the proper application of optimization backed sourcing is 10% across the board. That means if you’re sourcing 105M, that’s 10.5M in savings that could be yours, as soon as you can attack all 100M of spend. If it takes an average of 3 years to get through all spend, that’s 3.5M a year for easy taking. But you’re probably sourcing closer to 1.05 Billion, which means you’re overspending by an average of 105 million, or 35 Million each year. That’s a lot of money, but obviously not enough to take notice.

So obviously we need bigger numbers. How much money is lost in the economy overall each year due to the lack of application of advanced, optimization backed, sourcing? While it’s pretty hard to get a firm grasp on OPEX in the US, and how much of that is addressable by optimization-backed sourcing (as payroll can’t be optimized, only outsourced services, and taxes are taxes), the US Census keeps good data on CAPEX, and in 2015, CAPEX was 1.65 Trillion! Ten Percent of that is 165 Billion. If, and this is an overly aggressive estimate, 10% of that was optimized, that still leaves 149 Billion on the table in the US alone. The US is about one forth of the global market, and assuming CAPEX / OPEX ratios are about equal, this says, globally, that’s about 600 Billion from CAPEX alone left on the table each year because companies aren’t optimizing spend. SIX HUNDRED BILLION. And that’s a lower, lower bound estimate. Is that number big enough for you???