Category Archives: Best Practices

Ten Best Practices for (Software) Vendors, Part 1

In a recent article, we gave you Five Best Practices for Buyers, which built off of our articles on five easy mistakes source to pay tech buyers can avoid and even a critical sixth mistake most tech buyers make in source to pay (who need to realize that No Tech Should Be Forever).

But it’s not only the buyers who need help. You vendors do too, even if you won’t (publicly) admit it.

(We’ll just say this. If you didn’t need any help, a lot of you would be doing better than you are. the doctor has seen, and sees almost weekly, vendors with great tech who never get beyond the 1M to 5M mark because they didn’t understand either what the market needed or how to sell the great product they have, vendors with great service get lost in the marketing noise made by bigger peers, and vendors with inferior tech but better focus get ahead quickly with the right messaging and a partial solution but then stall out when new competitors with better solutions hit the market, and so on. Each of these vendors have, or at least had, the potential to be bigger and better if they just understood where they were weak, focussed on the right issues, extended the platform appropriately, and, if necessary, obtained the appropriate help.)

Just like you need a great mix of talent, transition, and technology to build a great company, you need a great mix of problem targeting, customer focus, solution capability, process fit, and affordability to build up your market share. But we’re getting ahead of ourselves here. Let’s step back and go through the best practices you need to get the right orientation.

#1 Identify the Market Sector You Are Competing In
… and the Niche Your Solution is Targeting

As an analyst and due diligence professional the doctor doesn’t want to tell you how many times he heard the company was started because “product XYZ didn’t solve problem BIGGIE we were having“, and neither did it’s main competitors that we identified in a Google search, when it was often the case the product they were expecting to solve problem BIGGIE was never designed or intended to solve that problem. For example, during COVID, online collaboration and payment portals became the craze, and many I2P/AP/Payment solutions came into the limelight. Looking into these closely, it didn’t take long for some us to find out that many of these were started because bill.com or Quickbooks or another e-billing (management) platform didn’t solve the invoicing or accounts payable problems they were having. They searched for bill management, invoice management, etc. and found cheap online small business solutions, and didn’t research a single, true, accounts payable (AP) or invoice to pay (I2P) solution among the dozens out there and then wondered why they didn’t stand out in the AP/I2P/e-Payment market when they tried to sell their platform, raise money, or get acquired by Private Equity or a bigger company (at a high multiple).

What’s important to understand here is that you need to understand the broader space you are playing in, the terminology that is typically used, the standard solution categories that are out there, and the baseline capabilities that are expected/present in the majority of solutions in each solution category/niche. Talk with peers, use your local professional organizations, use free analyst firm and independent authority resources, and get the terminology down. For example, purchasing, procurement, and sourcing have well accepted meanings in the analyst world, with detailed outlines of what those categories should contain and associated vendor lists, but if you don’t understand that, you might not realize that your definition of these terms is completely different than the majority of the space, leading you to research the wrong vendors and believe certain capabilities aren’t out there when actually solutions with those capabilities are actually quite common. For example, let’s say your old company used “purchasing” for tactical catalog buying and “procurement” for strategic buying, and you researched procurement vendors when starting your company to create a new solution for strategic buying. Since you didn’t research strategic sourcing vendors, you might come to the conclusion that most of the existing RFP options were shallow and your idea to inject more analytics and basic optimization inline is industry changing and enough for an MVP, only to find out 18 months later you have a dozen competitors who are two years ahead of you and you can’t break into the larger mid-market because all your potential customers can find 3 to 5 more mature vendors for their short-list (and many buyers, who are risk averse, think start-ups are risky and will avoid them if there are other options, especially when that’s the mandate from IT or the C-Suite).

#2 Do Your Market Research

Once you understand the market you are playing in, the top players in that market as well as the up-and-comers, and those that play in the niche where your solution best fits, do competitive research and understand what the subset of vendors you will be competing against offer. What core capabilities do they provide? What do they do well? What do they do poorly? And, most importantly, what pain points are they not hitting, or not hitting in a way that works for the markets you are going after?

Then acquire the right customer-oriented market research in the market sector and niche that you are targeting. Specifically, market-research that focusses on the problems the customers want the solutions to solve and the capabilities they are looking for. Augment this with the competitor and customer research you’ve already done to identify whether or not your hypothesis that the “problem” you identified when you started the company is

  1. a real problem experienced across a large number of customers in one-or-more industries and
  2. not solved, or not solved in a good way, by the majority of solutions out there.

If the answer is “no”, even if you have a good solution, you don’t have a very marketable solution, no matter how great your technology is. A marketable solution is one needed by the market that is sufficiently differentiated in a way that allows you to easily sell it to grow your business, and, if necessary, attract then investment needed to help you expand the product functionality, the target market, and the business overall. Do NOT skip this step, or you will waste a lot of time and money (which will typically be in the man years and millions of dollars) to learn something you could have learned for well under 100K.

#3 Define Your Target Industries

While many problems / solution needs are common across industries in general, when you get down into the specifics, the processes and solution capabilities can often be quite different across industries. Think sourcing. If you are sourcing finished goods, any indirect sourcing solution does the trick. If you are sourcing raw materials and parts for manufacturing, then you need a direct sourcing solution that supports bills of materials and deep product and material specifications.

For just about any solution category you can define in Source to Pay, you will find that the needs across different subsets of industries will be different enough that you will not be able to build a one-size fits all solution. So focus in early, so you can build something suitable and attractive to that industry subset. Remember that many industries are so big that you can build a decently sized company just focussing on one core industry at first (and if you get it right, much more than the 1M to 5M range where most startups get stuck).

Come back tomorrow for Part 2 where we will continue our deep dive into ten best practices.

That’s Right, You Do NOT need AI for Automation!

In our last article, we stated that our space was full of Overpriced “AI” you don’t need in source-to-pay, and one of our three examples was “Sourcing Automation” in Sourcing. To be clear, we’re not saying you don’t need automation — the whole point of software has always been efficiency through automation — we’re saying you don’t need “AI” automation.

The reason we’re doubling down into this topic is that we know there are a number of vendors pushing AI Automation and while automation is very good, AI is just not needed. But we know you’re going to get pushback if you echo the doctor‘s viewpoint here, so we’re going to double down into the details and explain why no AI is needed for great automation.

In our last post, we noted that, at its simplest, it’s the ability to auto-source a (set of) product(s) or service(s) once the need has been identified or the request approved. It’s useful, but you don’t need AI to accomplish this, just good-old rule-based (workflow) automation. After all, it’s just

  1. instantiating a new RFP (which can be done if you have a template tied to the product/service types)
  2. distributing it to known, approved suppliers (which is easily done if you have supplier management that tracks approval status and associated products/services)
  3. collecting the bids (automated submission management through a portal or provided spreadsheet for upload)
  4. selecting the lowest bids and marking it as an approved award (simple analytics)
  5. assembling the contracts (with templates, it’s just sucking in the supplier details, product details, and bids using tag-based search and replace)
  6. push it into the e-Signature portal (via the API)
  7. alert the buyer when the contract is ready for signature (via alerting)

1 You just need templates, and good providers have had those for a long time. And “AI” is not going to invent one you can trust.*1 It’s not too hard to tag your (provider’s) existing templates to all of the products and services you buy, and you only have to do it once.

2 When you onboard a supplier, you should tag it as approved, associate it with the products and services it is approved for, look up its risk and environmental scores, and track its performance over time. If it’s performance drops, it can automatically be suspended from consideration for new projects using old-fashioned business rules that will prevent it from being included in events it shouldn’t be. Thus, approved supplier management isn’t that hard to do and simple saved searches find all the suppliers that should be automatically invited to an event.

3 RFP and e-Auction software has been around for 25 years, so don’t let anyone ever tell you that you need AI.

4 If you’re trying to administer an award subject to constraints or goals, that’s good old fashioned strategic sourcing decision optimization. That’s not AI. MILP using classic tableau and interior point algorithms works just fine in predefined scenarios that suck in the organizational constraints … that leading SSDO (Strategic Sourcing Decision Optimization) providers were building over two decades ago.

5 Contract templates should be prescribed by Legal Counsel, not by software flipping random bits using layered statistical algorithms in combinations no one truly understands. The vendor will provide you with templates, but you should be the one reviewing them to make sure they are too your liking. This includes the standard clauses and variation by geography, industry, or risk you want to address.

6 Software integration happened for decades before AI.

7 Alerts have been standard software capability for decades, no AI needed.

If the right data is captured, and the right rules are written, standard workflow-driven software systems can be fully automated without any AI. The only thing preventing them from going from one step to the next is the human verification checkbox being completed. You can turn that off and they will work just fine. So, again, don’t be fooled that you need AI for Sourcing Automation, because you don’t. And with rules-based systems, you’re guaranteed you won’t get the odd, unpredictable result, every 10th sourcing project (because AI is only statistically effective, which means, eventually, it will always fail).

*1 Sure “Generative AI” can generate one. But there’s no guarantee it won’t be hot garbage.

How Many Employees Should You Have in Procurement

Those of you who have been around for awhile will know that AQPC, Hackett, and, going way back AMR, and Aberdeen, among others, have been benchmarking and telling us for years how many employees your Procurement Organization should have based on organizational revenue.

Furthermore, those of you who have been paying attention will know that they’ve been telling you for years that the better you are, the less employees you should have.

And you probably believe them. But, THEY ARE WRONG!

Why?

All of these employee count recommendations were based on two fundamental assumptions.

1) You can automate your way to baseline, as every improvement in automation will allow you to shed employees.

2) Baseline is sufficient to maximize Procurement value.

The first assumption is true. As you automate the thunking, more and more tactical processing that requires no actual thinking is offloaded entirely onto the machines, and those resources are no longer needed for those tasks. At this point, you can redeploy them, or you can follow the crowd and reduce the headcount (while remembering that the true wisdom of crowds is that none of us is as dumb as all of us). (We’re not saying that you shouldn’t let the employees go. It all comes down to whether or not they have the skills to be redeployed in a value generating role. But more on that later. We are saying that you should think twice before reducing the headcount target. More on this later.)

The second assumption is false. Baseline is considered to be enough for an average organization to source the top 80% of their spend over the average contract window and sufficiently manage the critical suppliers.

But simply having enough headcount to do baseline sourcing events and manage a few suppliers is not necessarily enough to guarantee value. And that’s what it comes down to. Value.

If the buyers barely have enough time to setup and run the events, but don’t have any time to discover or qualify new suppliers, negotiate beyond initial bids, or work with existing suppliers to identify additional opportunities for cost saving (such as minor design/spec changes) or value creation (such as new value added services), then are they really providing any value (beyond simply adopting a bleeding edge sourcing platform that can automate an entire sourcing event and reducing headcount even further)? No, they aren’t.

Now that inflation is back with a vengeance, in any managed category, savings is out the window. The absolute best case scenario is you keep costs flat, but most of the time the best you will be able to do is reign in increases less than the market average increase (and less than your peers). So if you want, or need, savings, you need to redefine the category, the product, the service, the delivery, the network, etc. That takes a lot of expertise, creativity, focus, and time from true Sourcing professionals … focus and time they won’t have if they have to launch a new sourcing event every week because you are measuring Procurement success based on how low the headcount can go and not how much value Procurement can generate.

Similarly, if all buyers have time to do on the supplier management side is deal with critical issues and the fires that arise because of them, you’ll never get real value out of the relationship, never build the relationship to the point where you co-innovate and jointly take cost out of the supply chain, become a true customer of choice (and not a fake one based on standard contract rhetoric which only guarantees they won’t screw you in pricing more than any other customer), and never discover capabilities in your supply base that you never new existed (… capabilities that may allow you to offer new products and services with a greater profit margin).

Plus, if you’re only tackling the top 70% to 80% of spend and the top 10% to 20% of suppliers, what opportunities for significant spend reduction, or at least control, are you missing. There’s often more overlooked opportunity in the tail than the middle categories. And you’ll never know the true extent of the potential in your supply base if you only ever talk to 1 in 10 suppliers.

The right amount of headcount is the number of professionals that add value and an ROI 3X to 5X their fully burdened FTE cost. the doctor would hazard a guess that the right number is probably 2X what AQPC, Hackett, and others would have you believe. Look to these reports to understand what percentage of tactical headcount can be redeployed with the right automation, not for the right number of strategic headcount to retain. (Based on the current numbers, you should be able to redeploy 80% of your tactical head-count as you go from the bottom to best in class, but you only start redeploying headcount out of Procurement when adding more strategic resources doesn’t increase value at a 3X to 5X ROI.)

Overpriced “AI” You Don’t Need in Source-to-Pay (S2P)

Everyone and their dog is trying to sell you an “AI” solution. Most of which, as we continually lament is “Automated Idiocy” at best (and “Applied Indirection” at worst, see our article on the April Fools joke vendors are playing on you year round that relaunched SI full time). Some vendors, for select capabilities, actually have the first stage of AI, Assisted Intelligence and a few, for very select capabilities, actually have the second stage of AI, “Augmented Intelligence”, but, and this is what they won’t tell you, especially if you’re a mid-market (MM), you probably don’t need it.

In fact, if you don’t yet have complete S2P, we’d wager that you absolutely don’t need it and likely won’t get an ROI from it, at least not with respect to the price tag they try to charge. (Just like spending more than 120K a year on S2P as a MM generally decreases your Return On Investment [ROI].)

While what is and is not effective and valuable can be situation dependent (just like certain high-priced capabilities can be highly valuable in 10M+ categories but detrimental in 1M categories), there are some capabilities that are almost never valuable, and in this post we will give you some examples, and the reasons therefore, so that you will be able to both analyze whether or not a solution actually has AI AND whether that AI will provide any value.

While there are dozens of capabilities being marketed as AI (which, if implemented using advanced techniques could fall under Level 1 AI), we’ll pick one from three (3) areas as our goal is exposition and not an all-inclusive treatise (that’s a novella, not an article).

Sourcing: Sourcing Automation

What is this? At its simplest, it’s the ability to auto-source a (set of) product(s) or service(s) once the need has been identified or the request approved. It’s useful, but you don’t need AI to accomplish this, just good-old rule-based (workflow) automation. After all, it’s just

  • instantiating a new RFP (which can be done if you have a template tied to the product/service types)
  • distributing it to known, approved suppliers (which is easily done if you have supplier management that tracks approval status and associated products/services)
  • collecting the bids (automated submission management through a portal or provided spreadsheet for upload)
  • selecting the lowest bids and marking it as an approved award (simple analytics)
  • assembling the contracts (with templates, it’s just sucking in the supplier details, product details, and bids using tag-based search and replace)
  • push it into the e-Signature portal (via the API)
  • alert the buyer when the contract is ready for signature (via alerting)

And while very useful for non-strategic and/or low-value categories, no AI is needed. Now, the vendor will counter with multi-round, but guess what, you just implement ceiling, best X, or mandatory response rules before allowing a supplier to progress to the next round and close round one and open round 2 on pre-set dates.

Low bid prediction? i.e. when should the RFX be ended? Guess what, if the platform has anonymized community intelligence, integrates with market data feeds, or supports should-cost modelling (and knows industry average margins), it’s pretty easy to calculate what the low-bid should be (and any bidder that bids lower has likely made an unsustainable bid that should be ignored), and end bidding when you hit that. No AI needed for any of this.

Contract Management: Contract Generation

The ability to auto-assemble a contract is cool, but leading platforms have had it for almost 15 years. How?

  1. A contract template for the category that specifies the clauses that are required, the data that needs to be included, and the meta-data that is needed to assemble the contract correctly.
  2. Default clause templates for each clause, with variants for each geography or industry of interest

That’s it. Then, the system just uses rules to select the template and the clauses and fill in the required supplier, product, and price data from the RFP.

Invoice-to-Pay: Automated Invoice Parsing

Yes, it’s great if you can reduce the number of invoices you need to review from an average of 15% with issues to 1.5%, but let’s face it, you can reduce it to 5% or less with just a little bit of automation, no AI needed.

Almost all invoices are coming in electronic these days, and suppliers that invoice regularly and want to be paid fast will use EDI, XML, or PO-flip through the portal, which means the invoices will come in electronic in an easily parseble format. Missing data / errors will be easily detectable in address, PO field, line items, amounts, etc. when there is an empty field or a mis-match between expected and received data (based on the PO, etc.), etc. and the invoice can be flipped back with notifications of issues for the supplier to correct. Most of the time it will be an honest mistake or oversight and the supplier will happily make the correction to get paid.

The remaining problems will fall into two categories.
1) Those few suppliers that don’t have a solution and have to send PDFs (or images) through e-mail, but those aren’t the suppliers doing massive business (as we’re talking about one time suppliers or consultants for the most part)
2) Those suppliers who don’t accept the requested corrections and have a dispute that needs manual intervention.

With respect to these two categories.
1) An “AI” parsing solution with 80% accuracy is just going to create more manual work, since you will have to correct all the errors anyway (which will be just as much work as entering the data in the first place). (And if the invoice automatically flows through, then it flows through with errors, and that touchless system leads to overspend. Better to touch an extra 3% of invoices and get it right than trust AI that, instead of saving you money, overpays suppliers or sends money to non-existent fraudulent suppliers.)
2) No AI will resolve a dispute. In fact, it will just annoy the h3ck out of the supplier representative and make the dispute worse.

So don’t fall for “AI” in the sales-pitch, even if it isn’t automated idiocy. The vast majority of it you don’t need as good rules-based workflow, configuration, and human ingenuity in the solution still gets the job done (and as the vendors get smarter, the software gets better, and that manually driven best-of-breed software optimized for the process doesn’t make company ending mistakes).

Yes Mid-Markets, 120K is More Than Enough for Source-to-Pay!

the doctor is sure that by now you have certain (mega-)suite vendors whispering in your ear that you really need their full 1 Million+ (annual subscription) S2P solution to maximize efficiency and savings (and that the doctor was crazy*0 when he told you that you should be able to get a sufficient Source-to-Pay solution for 120K a year), which, while possibly true stated that way, you don’t need to spend nearly that much to maximize your ROI.

But how do you maximize ROI without necessarily maximizing savings and/or efficiency? Simple! The same way you optimize profit by optimizing COGS vs. increasing volume. Just like every $1 of savings goes straight to the bottom line vs only $0.10 of revenue, every dollar you don’t spend on a technology solution goes straight to the bottom line vs. only squeezing out an extra 1% on savings.*1

But the best way to see this is to, gasp, do some math! Let’s take three mid-markets at 250M, 500M, and 750M. We’ll use industry averages for COGS (with 33% salaries & contractors; 2% utilities; 5% rental; and 20% amortization/depreciation) and assume 40% external spend. Depending on the industry, external costs can go to 50% or more, but not much in the Mid-Market (MM). We’ll assume an average 5% savings potential and 80% spend addressability over 3 years (as some existing contracts will be long term and not addressable in the short term, and some tail spend will just be too small / one time to ever bother with). We’ll assume that a base solution can achieve 80% of that savings potential, or 4% over three years (if there is sufficient manpower to address all the relevant categories [semi]-strategically).

 

Size 250M 500M 750M
Addressability (80% of 40%) 80M 160M 240M
Savings Potential @ 4% 3.2M 6.4M 9.6M
3 Year Cost 360K 360K 360K
ROI 8.8 17.6 26.4
Savings Potential @ 5% 4M 8M 12M
3 Year Cost 3M 3M 3M
ROI 1.4 2.7 4.0

 

Now, what type of ROI would you like to see if you are a 250M MM? A 1.4X ROI or a 8.8X ROI? the doctor knows what type of ROI he’d like to see! Also, if the mega-suite provider cuts the price in half, it only doubles the ROI to 3.2X. Barely acceptable, and you need the manpower to identify the full savings potential and everything to go perfectly to realize it. (What’s the probability that this will hold true continuously for three [3] years? Zero Percent. 0%)

Unless you have a (very) large category over 10M (where the savings potential on that category is 500K), the reality is that the 80% solution you will get by an average across-the-board solution / self-assembled platform-powered BoB suite will provide you an ROI that far outshines what the oversized, overpriced solutions will do for you as a mid-sized business. (Those suites are only needed for 1B+ enterprises where there are 50M to 100M+ categories where an extra 1% makes a huge difference.)

the doctor loves sourcing optimization, but it typically won’t find that much savings beyond what you can find with good spend analysis on RFP data in a category < 5M. (It might take a few hours of spend analysis, but you will get 80% of the savings with intelligence. If the vendor includes an affordable optimization module (2K/month; likely with model size caps), then you should use it on every category, if just to get a baseline, as you will get a good ROI from the module with continuous use, but if they want 10K/month and you are a 250M business, you likely won’t get enough of a return, especially since most of your categories aren’t that large or complex. Note that if you are a 1B+ multi-national enterprise, the story is the exact opposite. You absolutely need it and in your well managed categories, you won’t identify enough savings without it.)

For most categories, all you need to do in sourcing is 3-5 bids, side by side unit cost and total landed cost (TLC) comparisons, supplier award selection with RFP (spend) analysis, contract cutting to capture the price, configured POs in the eProcurement system to capture the contracted price, and line-item match on the invoice to the PO to make sure you’re paying what you should be. This is two-decade old tech now, but more than sufficient, when properly implemented and enforced, to capture 80% of the “savings” (or cost avoidance) in a category. Procurement savings come more from the proper implementation of a process than from technology that enables that process. What technology does is make it easy to do the process efficiently and effectively because it can guide you through the process, prevent you from missing steps or making mistakes, provide you the insight you need to make the best decisions, and even train you on best practices you aren’t familiar with. And allow you to repeat the process many more times on many more categories in a much shorter timeframe than if you were trying to do it all by hand.

Plus, the technology will allow you to do more with less, so you can minimize the need to expand the Procurement team as the company grows. Remember, good people cost $$$. In fact, a fully burdened high-end resource will cost as much as you pay for the tech, if you are paying the right price. This means that the tech will not only provide you an ROI on measurable cost reductions, but a measurable cost avoidance as you grow as you will not need to add as many people to a Procurement department that will become more efficient over time (as more and more tactical tasks get automated, freeing up the team to focus on value-add tasks). (Remember, tech never replaces the people you need, it just makes them many times more efficient so that you only need one or two high performing individuals for a function vs ten for one that is poorly managed; allowing you to add those ten resources elsewhere to produce more product or grow the business further. However, remember that Procurement does more than one function, so you may still need those 10 people for contract management, supplier development, additional strategic sourcing events, etc. but you won’t need them processing paperwork.)

So don’t overpay for S2P tech. You absolutely need S2P tech, but overpriced tech won’t get you the ROI!

*0 they may be right, I may be crazy … but it just may be a lunatic you’re looking for …

*1 An extra savings of 10% on a maximum savings of 10% leads to a maximum additional savings of 1% overall on a single category. In inflationary times, which we are now back to, you’ll never find more than 10% slack in the TCO of any category. In fact, you’ll do good to find 5%, which means going from average capability to advanced capability will only shave an extra 0.5% off of the total category spend on average.

Don’t think that these inflationary times are going away anytime soon. Supply chains are at their shakiest thanks to both the pandemic and the repercussions thereof, the rapid increase in climate change which has led to a rapid increase in natural disasters, the increased geopolitical destabilization around the globe, and the rebelling workforce, many of whom have gone from living barely above the actual poverty line (relative to where they live) to below it. Now add that to the flat and recessionary economic conditions in most major GDP players, and we won’t be seeing good times ahead for quite a while.