Author Archives: thedoctor

Source-to-Pay+ part 2: End-to-End Risk Management

In Part 1 we noted that Risk Management goes much beyond Supplier Risk, and a primitive Supplier “Risk” Management application (which we prefer to label Supplier Uncertainty Management since it’s not full blown risk management, and there’s uncertainty as to how much it will actually do for you) is only the beginning of what your organization will likely need.

When it comes to risk, there are risks in:

  • your company
  • your suppliers
  • their suppliers
  • third parties you interact with (which may not be [direct] suppliers of goods or services)
  • your carriers
  • your supply chain network (ports, warehouses, [cross]docks, etc.)

These risks can be with

  • your people
  • your board
  • your investors
  • your supplier’s people, board, or investors
  • the materials your suppliers use
  • the locale they operate in
  • the suppliers your suppliers use
  • the locale they operate in
  • the carriers
  • the ports your carriers use
  • the warehouses used for interim storage
  • and any other part of, or player in, the supply chain

And the types of risks are numerous. They include, but are far from limited to:

  • unskilled/uncertified people
  • sanctioned/prohibited individuals and entity
  • restricted / banned materials
  • use of underage / forced / slave labour
  • geo-politics
  • economics / currency fluctuations
  • natural disasters
  • labour unrest / strikes
  • fraud / theft
  • the internet
  • and so on

And you need a very extensive application to identify, analyze, monitor, mitigate, and manage these risks. In fact, you may even need a suite of these applications, especially when you consider that most applications consider risks from the viewpoint of:

  • the company (especially those that offer GRC applications)
  • the supplier / third party (SRM/SUM+ / TPRM)
  • supply chain visibility
  • … w/or in-transport visibility
  • w/or multi-tier (manufacturing chain) visibility
  • cyber monitoring

And such an application will need entity/function specific capabilities as well as generic capabilities. The generic capabilities might include, but not be limited to:

  • data feed/stream integration
  • metric definition
  • trend analysis
  • user defined reports
  • data / trend monitoring
  • (mitigation) plan creation
  • plan management

Risk is broad, and the solution footprint needs to be broad as well. In the next few articles we will tackle some of the major application areas we noted above.

Source-to-Pay+ Part 1: The Beginning.

Once upon a time
not so long ago …

SI ran The 39 Steps … err … The 39 Clues … err … The 39 Part Series to Help You Figure Out Where to Start with Source-to-Pay and helped you understand what each of the six core technologies in Source-to-Pay do, how to evaluate them, and the order of implementation necessary to maximize short-term results (which is the only thing the CFO cutting the check for the systems cares about). Not that it should be hard, given that, as the doctor explained, if your organization is a mid market, the answer to Per Year, How Much Should You Outlay for Source to Pay? 120K! (because Yes Mid-Markets, 120K is More Than Enough for Source-to-Pay!). That’s cheap, and if you can’t get a 10X ROI on that, the doctor would be surprised. (Yes, you’ll need some integrations and some services, and that will double or triple the price and you may only see a 5X or 7X ROI, but still.)

But the reality is, especially in today’s turbulent times (where me and my wine is not enough), even full Source-to-Pay is not enough. Risks abound, and even if your Supplier Management Platform has an Uncertainty (Risk) module, there’s more than supplier risk to worry about. There’s third party, supply chain, logistics, geographic, natural disaster, and many other risks that Supplier Risk Management, which we prefer to call Supplier Uncertainty Management (due to the lack of depth, action management, support for mitigation planning, etc. we prefer NOT to call these Risk modules), applications in Source-to-Pay typically don’t address.

Then we have Corporate Social Responsibility (CSR), Environmental & Social Governance (ESG), and Carbon / Scope 1,2,3. Today, a non-responsible company that buys from suppliers who are particularly environmentally unfriendly, don’t treat their workers well, or, even worse, use forced or slave labour is the one that gets the consumer backlash, and possibly the civil AND criminal liability (with certain jurisdictions introducing laws making the last company down the chain responsible). A company that just hoards profit and doesn’t make an effort to give back is frowned upon. And a company that stays on dirty power when there is an alternative, wastefully uses fresh water, or unnecessarily consumes non-recyclable resources in its day to day operations is just being dumb. Moreover, when you consider that Carbon Tracking is Important — But a Calculator or a Credit is Not A Solution! but What You’re Really Concerned About is YOUR e-Liability, that it’s not just about tracking, but reducing where possible, and that there are real baselines given that it’s impossible to mine, process, produce, ship, or consume without emitting carbon, it’s not easy to figure out what you need.

When you are buying direct, you have to consider the supply chain as well as the implications of a change in the supply base. The ink on the contract is when the fun truly begins. The product has to arrive on time, on budget, damage free, at the right location. This requires logistics coordination, and if the contract will change the supply base configuration, this is something that should be considered up front. So logistics/network analysis is creeping into Sourcing.

Then there is the issue of T&E — what happens when it’s put on the card, because its too small to bother with a Procurement effort (it never is, although it’s not always worth the time of a Procurement Pro, and that’s why you need an appropriate T&E/Tail Spend system to make sure the end buyer gets it right) or someone is trying to bury something that they know is not truly needed, off contract, or shouldn’t be expensed.

Plus, at the end of the day, you have to pay … and most Source-to-Pay end at the OK-to-Pay. What do you do when it’s time to pay?

And so it goes.

As such, it’s time to start another multi-part series to help you, dear reader, understand the extended Procurement landscape and what you should be looking for in such systems. We’re not going to attempt to tell you what to implement first, as that will depend upon what your biggest need is, which will usually depend on what the biggest risks are to the organization at the current time — unidentified spend, risk of supply, breaks in the supply network, forthcoming legislation, global payments, and so on. We’re just going to take an area and explore it, for as many articles as it takes. More to come. Much More.

Low Cost Labour or Leveraged Labour — It’s Not the Same.

Organizations are always looking to cut costs to increase profits, and this goes double in tight economic times. An area that they are constantly looking at is labour, as it’s often the organization’s highest fixed cost. To reduce these costs, they try to move operations to low cost locales, low cost cities in low costs provinces and states for operations they need to keep in their home country, and they move as much labour as they can to low cost countries when they don’t have to stay at home, possibly through outsourcing.

In their minds, they are leveraging cost differentials, global opportunities, currency exchanges, and making smart investment decisions. (And, in their minds, they are doing a good deed by giving people work who might not otherwise get it, often by taking jobs away from people at home that should be doing them.) And herein lies the problem, they think they are saving money by leveraging low cost labour instead of leveraging labour for greater value. And, guess what, the labour that gives your organization more “value” is not the lowest price labour you can find, even for jobs that are traditionally seen as relatively unskilled, or low-skilled.

Let’s take the common example of a call center. Thanks to modern technology, and low cost VOIP, you can put it anywhere there are speakers in your language, often eliminating expensive landlines at the same time. When you move jobs from a $15 hour minimum wage location to an offshore location that costs you $3 an hour in comparison, that saves you 80% right? Maybe. Let us say the local resources you replaced were better educated, better trained, more familiar with your products, and resolve 80% of issues on a single call of 12 minutes or less, for an average issue resolution cost of $3. Let us say the new resources are not as well educated (average high school diploma, not college or university educated like your local resources), minimally trained (they are told how to politely answer a call, but no de-escalation training), and no familiarity with your products besides overview documents and issue resolution scripts. As a result, it will be likely that it takes them an average of three (3) calls of thirty (30) minutes each to fully resolve an issue. This means that the average cost for this “low-cost labour” to resolve an issue is $4.50. That’s 50% more than using a well-trained local resource to resolve the issue. That is not savings. Plus, some of those customers are not going to be happy that a 10 minute problem took 90 minutes of their time plus hold time plus time in between connecting to the rep. And a small percentage of those customers will switch to your competitor when it comes time for them to replace the product. That’s definitely NOT savings!

Let’s take garment production as our next example. This is a typical outsourcing industry that tries to find the lowest cost locales possible. When you go to the lowest cost locale, you end up paying significantly higher freight costs, possibly being stuck with inferior quality garments when the plant switches to lower quality fabrics, possibly ending up with garments with lower shelf life due to inferior stitching when they are manually made by lesser-skilled resources. In comparison, imagine you had a nearshore location that was low freight, used locally sourced high quality fabrics, and skilled workers who used a mix of automatic stitching machines and hand stitching, as required, for high quality production. If quality goes down, satisfaction goes down, and customers start to complain. Then brand reputation goes down and sales go down. Is that savings? Well, if the local production is $5 a garment and the outsourced production is $2 a garment, maybe. But what if the outsourced garment shop uses labour that is child labour under local laws (if not their local laws), the media gets hold of the story, it blows up, and there is a big brand backlash and sales drop 40%. Is it still savings? I’d argue not.

Let’s move upstream, to software development, which is happening more and more often due to many countries having good education systems and skilled workers who aren’t demanding the inflated IT salaries in the USA. Now, there are a lot of countries with highly educated talent who can code (like Poland, India, etc.) that are not the USA, Canada, the EU, the UK, and other countries where high tech has been traditionally clustered, and many of these, after currency conversions, have talent for 1/3 the cost or less. If they have about the same coding rate (in terms of lines of code per hour) as these first world countries, you can argue that it’s a saving. But it’s not just code lines per hour, it’s error free code lines per hour and, most importantly, it’s finishing the project on time, on budget, and to spec. Most IT projects fail and go well beyond budget and timelines and this is triply true in IT Software Development Outsourcing. (the doctor does not want to recount just how many projects he’s seen fail over the years, especially after advising companies not to outsource certain projects, which they did anyway.) Why? Because software development requires more than the ability to code, it requires understanding what the software has to do, who it has to do it for, how it has to do it, and why. If you don’t understand the domain you are developing for, the business who will be implementing the system, the culture of the user, and how they need to work — the system will be a failure even if it’s delivered mostly bug free. So while this is usually expected to be the largest area of cost savings, it’s usually the largest loss a company, especially one new to the game, ends up taking. (Outsourcing can succeed with the right, hybrid, model, but most companies have no clue what this is. Only a few figure it out.)

In other words, if you are trying to leverage low cost labour for cost savings, you’re usually looking in the wrong place. Especially if you are interested in maximizing return on investment, in whatever form that takes (lower total cost of ownership, higher sales, better brand image — which positively correlates with more profit). If you want to leverage labour or value, it’s the right labour, not the lowest cost labour. The labour that is the most productive, produces the highest quality product, gets it right the first time, and keeps your customers coming back. That’s true low-cost labour, because properly leveraged labour increases company profit, making labour costs low in comparison. Think about that the next time you try to replace talent with untrained troops.

Ardent Partners Steps Up Its Game — But Will the CPOs Rise Up?

Unless you’ve been under a rock for the past ten days you will have noticed that Ardent Partners — a research firm that has traditionally focussed on Contract Management, Accounts Payables/Invoice Management/e-Payables, Contingent Workforce, and CPO Advisory — stepped up their game when they hired Magnus Bergfors as VP of Research. Magnus, a former Gartner and Spend Matters analyst, possesses deep expertise on the Source-to-Contract side of the S2P equation, especially around Strategic Sourcing, Supplier Management, and the front-end of e-Procurement. With the addition of Magnus, Ardent Partners can now truly cover the Source-to-Pay spectrum.

Even though they only have three (3) senior analysts, at the very least, given the slew of departures over the past few years from the top firms, Ardent Partners can now attempt to go head-to-head with these firms in confidence and possibly be more valuable to their clients than those firms. While the doctor doesn’t expect that they will be able to introduce a new market map (or even want to try given the technology dominance of the Spend Matters map), as every up-and-coming market firm is want to do these days, he does expect that, given the vast network of CPOs they have built up, Magnus will be able to draw out some fairly interesting insights from that group. Likely deep insight into the typical technology landscape, average Procurement department proficiency, key concerns of today’s CPOs, and so on.

But the question is, how will Ardent Partners make use of that knowledge, how will their clients, and what will Magnus do to disrupt the space in his new role? the doctor will be watching.  In the mean time, the doctor suggests keeping an eye on Magnificent Magnus Mondays for some hints into what might be coming.

Finance and Procurement Need to Collaborate, but Sometimes the Relationship Needs to go Beyond the Financial Viewpoint

A recent article over on Financial Executives on Why Finance and Procurement Need to Collaborate For Success made some very good points …

The article in question, which noted that how companies approach expense management will become a top priority with the economy heading into uncertain times summarized an interview with Matthew Smith, CFO & CoFounder of finetune, a full service expense management firm focussed on select complex categories (such as uniform rental, waste & recycling, pest control, energy & utilities, and security) for large clients. In addition to the baseline assessment, sourcing, implementation, and ongoing management (which many BuyDesk operations will do), they also do regular auditing, which is key to ensuring you get what you pay for because, as Matthew said, where the rubber meets the road in expense management is what happens after the contract is signed.

Matthew believes that expense management does need to be its own thing and that there has to be a coordinating element between the affected functions, which always includes Procurement (which is responsible for placing the order and managing the contract) and Finance (for paying the bill) and then the department(s) that are using the goods or services being procured. Especially since the vendors will give up a lot in the negotiations, and then do their best to get it all back through change orders and off contract-purchases of items not covered under the contract. In addition, analytics is becoming critical, but most organizations have bad data. However, without the necessary expertise, the data won’t be clean and the right calculations can’t be done. Procurement can identify the good data and Finance can identify the key analysis that needs to be done. (Not ChatGPT, which is hallucinating and getting all those bad answers and producing false information. Matthew’s words, but the doctor couldn’t agree more.) Furthermore, without a good understanding of the entire situation from multiple sides, you don’t know when incentive are good or bad.

Expense management is a key area where Finance and Procurement needs to collaborate because it takes both departments to prevent overspend, and the article was a really great deep dive in this respect, but it’s not the only area. Working capital management is also key. Managing expenses is a great start, but the goal should be improved working capital management. If both departments work together, and with other organizational departments, to appropriately predict demand and utilization, and optimize payment terms, then the organization can do accurate cash-flow forecasting and working capital can be optimized. And that can truly only happen when both departments collaborate.