Category Archives: Best Practices

… Don’t Forget the Contract, Part II

As pointed out in yesterday’s post, Contract Lifecycle Management (CLM) — which includes contract creation, management, analytics, and renewal — is becoming big and will likely get bigger still as organizations rely more and more on contracts to control price and mitigate risks. But, as we also pointed out yesterday, a contract lifecycle management system is not only useless without contracts to manage, but is also useless without good contracts to manage.

Poorly created contracts that don’t define anything more than a bulk price and a term don’t ensure defensible pricing, loss management, or risk control. To be more exact, they don’t even ensure that absence of a typo or careful insertion of a single word by a litigious lawyer that could negate and entire contract and make it totally useless.

So where do you start?

Define the need

What do you really need? (And what are the core requirements?) When? Where? How do you need it delivered? Who is responsible for the production, delivery, support, and return? Why does it need to be this way? What are the risks and how will they be mitigated? Split?

Create a Statement of Work

Clearly specify what is required, when, by who, in what quantity, how it is to be packaged, stored, delivered, supported, maintained, and recovered. Specify delivery dates for products if known or delivery timeframes if exact dates are not known but response or replenishment times are needed. If the contract revolves around the construction of a particular deliverable (system, machine, building, etc.) specify key milestones and acceptance criteria. If it revolves around ongoing services, specify delivery timeframes and required service levels. Specify as much detail as is known and where specifics can’t be specified up front, specify how the details will be worked out later and agreed to, as well as the procedure that will be followed in case of disagreement or conflict.

Make sure Milestones are Clearly Specified
… with Deliverables and Acceptance Criteria

Go so far as to explicitly number the milestones and make sure they are easy to index, track, and assign to buyers, supplier managers, and other organizational individuals who are affected by the contract. It should be easy for the CLM to auto-index these milestones and even auto-assign the milestones (and monitoring management responsibilities) to the most logical individuals in the organization (who can reassign if necessary).

Make sure the deliverables are clearly annotated, that precisely what they entail is defined, that the acceptance criteria that will be used are spelled out in sufficient detail to allow work products to be rejected if they are not up to requirements, and who has final determination of whether those criteria are met. Also, if there is a dispute, the process that will be used for resolution must be indicated.

Define the Payment Schedule
… and Tie it to the Milestones

Don’t just specify how much will be paid, but when it will be paid, and what the dependencies are on the milestones and deliverables. Also specify if there are any penalties for late or unsatisfactory delivery, precisely how they are calculated, and when the remaining payment(s) will be made. Also clearly specify how disputes will be filed, handled, and resolved and whether any payments will be made during the dispute, and in what amounts.

Define any SLAs and Warranties the Supplier Must Adhere to

Do so up front and in plain English. It’s critical that the supplier understand exactly what is being expected, how it will be measured, what guarantees the supplier is making, and what it will cost them if they are not adhered to. If the products are rejected, do they have to deliver replacements? Are they penalized? Is the contract terminated?

Then, and only then, start thinking about writing the contract. But don’t write it yet!

It’s Easy to Get Lost in CLM — But Don’t Forget the Contract! Part I

Contract Lifecycle Management — which includes contract creation, management, analytics, and renewal — is becoming big and will likely get bigger still as organizations rely more and more on contracts to control price and mitigate risks. And since no one can ever find a paper contract once it’s been sent to filing, the ability for anyone anywhere at anytime to access a relevant contract, compare deliverables and prices to negotiated deliverables and prices, track (evergreen) renewals, and determine which party is responsible for a loss is almost priceless.

That being said, a contract lifecycle management system is not only useless without contracts to manage, but is also useless without good contracts to manage. Poorly created contracts that don’t define anything more than a bulk price and a term don’t ensure defensible pricing, loss management, or risk control. Nor do they ensure termination, as evergreen status could be implied if orders are still made after termination and pricing is still honoured. Nor do they even imply that the supplier even has the right insurance or certifications to even produce or ship the products the supplier is selling to you.

In order to control risk, mitigate loss, and realize the expected benefits, a good contract is critical. This not only requires good negotiation, but good contract drafting that covers all of the necessary T’s and C’s, including those you never hope to need. All of them. And, more importantly, that spells out all of the requirements of both parties in terminology that cannot be easily misinterpreted or twisted by leeching litigious lawyers who will bleed both parties dry in legal fees before an agreement or decision is reached.

So how do you get a good contract? Well, as the legendary Dick Locke once wrote in our classic post on Blogging on International Contracting, not only should your contracts be in plain English, but they should be written with a high reading ease score (40 or more in Microsoft Word) and a grade level requirement of 11 or less. Especially since the contract is not likely to be in the supplier’s native language if the contract is with an international supplier.

After all, as Mr. Locke so keenly pointed out in a follow up piece on Simplified Contracts, Part 3, if you let a litigious lawyer write a contract from a supplier with a slimy sales team, he could easily insert just one word in a twenty page contract with an average sentence length of 73 words and paragraph length of half a page that negates the entire contract, and you’d never know.

So how do you write a good contract? We’ll explore that in this series.

The UX One Should Expect from Best-in-Class Spend Analysis … Part IV

As per our last post, in this series we are diving into spend analysis. Deep into spend analysis. So deep that we’re taking a vertical torpedo to the bottom of the abyss. And if you think this series has been insightful so far, wait until we take you to the bottom. By the end of it, there will be more than a handful of vendors shaking and quaking in their boots when they realize just how far they have to go if they want to deliver on each and every promise of next generation opportunity identification they’ve been selling you on for years.

We’re giving you this series so that you can use it to make sure they deliver. Because, as we have repeatedly pointed out, you only have two technologies at your disposal to achieve year-over-year savings of 10% or more. Optimization (covered in our last four-part series, see Part I, Part II, Part III, and Part IV), which can capture the value, and spend analytics, which can identify the value.

But, as we will keep repeating, it has to be true spend analytics that goes well beyond the standard Top N report templates to allow a user to cube, slice, dice, and re-cube quickly and efficiently in meaningful ways and then visualize that data in a manner that allows the potential opportunities, or lack thereof, to be almost instantly identified.

But, as per our last two posts, this requires truly extreme usability. Since not everyone has an advanced computer science or quantitative analysis degree, not everyone can use the first generation tools. This means that, in organizations without highly trained analysts, the first generation tools would sit on the shelf, unused. And that is not how value is found.

However, creating the right UX is not easy. That’s why it takes a five part series just to outline the core requirements (and when we say core, we mean core — there are a lot more requirements to master to deliver the whole enchilada). But it’s needed because we are in a time where there seems to be a near universal playbook for spend analysis solution providers when it comes to positioning the capability they deliver and when many vendors sound interchangeable when, in fact, they are not.

In each part of the series to date (What To Expect from Best-in-Class Spend Analysis Technology and User Design Part I, Part II, and Part III), over on Spend Matters Pro [membership required], the doctor and the prophet have explored three to four key requirements of a best-in-class spend analytics system that are essential for a good user experience. Here on SI, we’ve covered three of these to whet your appetite for the knowledge that is being kept from you.

In The UX One Should Expect from Best-in-Class Spend Analysis … Part I we discussed the need for real, true, dynamic dashboards. Unlike the first generation dashboards that were dangerous, dysfunctional, and sometimes even deadly to the business, true next generation dynamic dashboards are actually useful and even beneficial. Their ability to provide quick entry points through integrated drill down to key, potentially problematic, data sets can make sharing and exploring data faster, and the customization capabilities that allow buyers to continually eliminate those green lights that lull one into a false sense of security is one of the keys to true analytics success.

In The UX One Should Expect from Best-in-Class Spend Analysis, Part II, we pointed out that one cube will NEVER be enough. NEVER, NEVER, NEVER! And that’s why procurement users need the ability to create as many cubes as necessary, on the fly, in real time. This is required to test any and every hypothesis until the user gets to the one that yields the value generation gold mine. Unless every hypothesis can be tested, it is likely that the best opportunity will never be identified. If we knew where the biggest opportunity was, we’d source it. But the best opportunities are, by definition, hidden, and we don’t know where. Success required cubes, cubes, and more cubes with views, views, and more views. But this is just the foundation.

Then, in The UX One Should Expect from Best-in-Class Spend Analysis, Part III, we indicated that success requires appropriately classified and categorized data. But good data categorization is not always easy, especially for the average user. That’s why the third key requirement is real-time idiot-proof data categorization, which, while a mouthful, is a lot easier to say than it is done. (For details, check out the articles.)

But, as you’ve probably guessed by now, more is required. Much more. In “What To Expect from Best-in-Class Spend Analysis Technology and User Design” (Part IV) over on Spend Matters Pro [membership required], the doctor and the prophet dive deep into a couple of additional key requirements for a best-in-class spend analytics solution. And, like the previous requirements, these are intensive. Quite intensive.

The one we are focussing on today is support for descriptive, predictive, and predictive analytics. First generation solutions stopped at descriptive. They simply reported on what happened in the past, and stopped there. And usually the description of the past was so far behind that the reports were not always that useful. So next generation moved onto predictive, and computed trends, taking into account historical sales data and current market data to describe opportunities so that, even if the data was a bit outdated, at least the analyst had a good idea of direction.

And as platforms got faster, and more powerful, and more real-time, the predictive power got better, and more useful. And organizations realized more value … but not nearly what they should realize. Because it’s not always enough to know that there may be an opportunity, to realize that opportunity, one needs an idea on how to capture it. And if one’s not a category or market expert, one can be completely lost. But if the system supports prescriptive analytics, then the analyst has an idea where to start. And that is key to a great user experience.

But is that everything the system needs for a great user experience. Nope. And we’ll continue our overview in the next, and final, part of this initial series. (We’ve written the first few chapters, but believe us when we say the book has not been written yet.)

Do You Have Too Many Suppliers?

Maybe. But maybe you should also be asking Do You Have Too Few? Many organizations assume that just because they have 20K, 30K, 50K, or even 100K suppliers that they have too many. And while that’s probably the case, the question is much more complicated that. First of all, just because a supplier is in your system, that does not mean that the supplier is still being used. Secondly, if you have 100 locations and always use local providers for janitorial, security, (bike) messenger, floral, etc. then you could have 1,000 providers for small services that cannot be consolidated due to business rules or just lack of suppliers. As a result, sheer number of suppliers alone does not mean there is a problem — at least not a serious one.

Secondly, for some categories you want multiple suppliers. If the product is critical, if one supplier cannot (always) meet all the needs, if even minor disruptions in supply could be costly, and so on, you need multiple suppliers. Sometimes more than the minimum number. Risk Management might believe two suppliers is enough, but if one goes out of business, how long will it take to find a second, and start receiving viable products and services. If you have a third supplier, even providing minimal amounts of the products or services, it’s a lot easier to shift demand to that supplier in an emergency. So sometimes extra suppliers are good.

Plus, the ultimate goal of (category) sourcing is to receive the best value — typically defined as the lowest cost award that meets the organizational need. Sometimes the best value will come from assigning all of the award to a single supplier, other times it will require splitting the award between six suppliers — depending on product costs, shipping costs, import/export tariffs, and so on. So, supplier count alone is not a good metric.

As you can see, if you want a truly optimized award across a category, sometimes the organization will have too few suppliers. The right number of suppliers is the number that the organization ends up with after every category is optimally allocated across both the strategic spend and the tail spend. While it will usually be less than the number of (active) suppliers in the supplier database (as most organizations that do not do sourcing across all categories will end up buying from more suppliers then they need to), it won’t always be significantly less. You can’t always cut your supply base in half just because you think you have twice as many suppliers as you need. You properly source each category, and when all is said and done, the suppliers you have selected represent the proper pool size. Any remaining suppliers that aren’t absolutely essential for a non-sourced product or service get cut and then you have a properly sized supply base as it was properly designed. 10K vs 20K vs 50K is irrelevant. Only so much value comes from consolidation alone. Remember that.

And that’s why, in his response to Sydney’s questions on “What’s the Cost of Having a Long Supply Tail, and How Do You Determine the ‘Right’ Supply Base”, the doctor noted that the size of the supply base is totally irrelevant. The right size is the size that gives you the most value for every category you source. That will vary by company and there is no fixed size, or even formula, to compute it.

And, as the doctor noted on Twitter, your only concern should not be how long the tail is, but how many rats are in the supply chain. Those are the only parties you should be in a rush to stomp out.

The UX One Should Expect from Best-In-Class Optimization … Part IV

In our last post on The UX One Should Expect from Best-in-Class Optimization (Part III) we continued our foray into the world of optimization and how the requirements for a good user experience go far beyond the requirements for e-RFX and even best-in-class e-Auction platforms. (We will remind you that you can review the basic requirements for e-RFX and e-Auction in our four part series on Best-in-Class e-Sourcing and Best-in-Class e-Auctions, Part I, Part II, Part III, and Part IV.)

As per the previous entry in this series, the doctor cannot emphasize enough just how important sourcing optimization is, and is about to become, for any organization that wants to continue to not only find savings but identify crucial value. This is because, as stated in our last post, in many global jurisdictions, and in North America and the UK (where many global organizations are headquartered) in particular, savings are about to go up in smoke due to inflation, protectionist policies, insufficient supply of raw materials, and forthcoming breakdowns in trade agreements.

There’s no other solution that can not only identify year-over-year savings of 10% or more but also an award scenario that will allow the organization to realize that savings of 10% or more if the award scenario is adhered to. It’s getting hard to understand how organizations, getting more budget-stressed by the year, can continue to hold out from adopting the only solution that can help them.

Buyers have to put aside their fear of the maths and go out and get a solution ASAP. But not just any solution claiming to be a true strategic sourcing decision optimization platform, or even any true strategic sourcing decision optimization platform, will do. It has to be one that provides the right user experience.

So what is the right user experience? One that satisfies about a dozen different key usability requirements, of which we’ve already discussed three — true, powerful, cost modelling; guided sourcing by the way of system-assisted “what-if” support; and identification of the constraints, or sets of, that are preventing a solution when the model is over-constrained and a solution is needed.

But this, as you can guess, is not enough. It’s only a fraction of the key requirements that need to be satisfied in order to provide the necessary user experience that will drive each and every buyer to find the value that only a true best-in-class optimization solution can be used to find.

Another key requirement, but by far not the last, is analytics-driven comparison reporting. You see, one thing that is critical in the identification and allocation of the proper award is, as the co-authors of this series identify in “The UX One Should Expect from Best-In-Class Optimization Part IV” over on Spend Matters Pro [membership required], effective visualization.

Why is effective visualization so critical? Consider that a power buyer’s job is to try and find the perfect scenario with the almost perfect award that maximally satisfies the constraints and the desires of all the stakeholders. This could require the comparison of dozens of alternatives that have about the same costs and about the same overall total constraint violation, but have the potential to dissatisfy each group in significantly different ways. Without an effective analytics and visualization component that can help a user visualize the mathematically minimal but not objectively minimal differences in the minds of the stakeholders, a user could spend days or weeks trying to decide on the right award variation among dozens of spreadsheets when a good visualization solution can eliminate the less desirable candidates in minutes. It’s another key requirement of a good, modern, user experience in sourcing optimization.

But, as you can guess, this is still not all a platform needs to do. For a deeper dive on this, and other requirements, check out the doctor and the prophet‘s final instalment in our optimization UX series, “The UX One Should Expect from Best-In-Class Optimization Part IV”, over on Spend Matters Pro [membership required] and stay tuned for our upcoming deep-dive series on the required UX for spend analysis as this will not only help you select an optimization solution with a good visualization solution but an analytics solution with a good visualization component as well.