Category Archives: Best Practices

Informed Decision-Making …

… comes from a long tradition of guessing and then blaming others for inadequate results.
Scott Adams

And this summarizes how most decisions are made in most companies, especially in the C-Suite. Why? Because, historically, organizations didn’t have much in the way of good data, most data that was available (by the time it was assembled, analyzed, and reported on) was outdated, and most decisions made on the data were iffy if the organization was in a fast-moving business.

So, as a result, the best executives learned that they had to learn to “read the tea leaves”, listen to third parties, ignore them, then go with whatever their gut was telling them … especially if their gut was right more than wrong (and that’s how they got to their position). (And then if something didn’t work out, they blamed the underlings that gave them the analysis that supported their gut feeling.*)

But in today’s fast moving hyperconnected world where, for every unsatisfied customer, there are three more companies waiting to jump in and satisfy that customer, there’s no time for slip-ups from bad, gut-feel, decisions. There’s no room for guessing.

And, with so many software applications today that can process more data than an organization needs to (as it’s not about how big a data set you can get, but how big a data set makes sense) in real time, every organization should be making decisions based upon good, extensive, data and likely possibilities. No data set is ever complete, no trend or data-based prediction is ever perfect, but when there are so many systems that can bat 950 when most of the best seat-of-the-pant executive decision makers struggle to bat 500, why isn’t the average organization using one of these systems for all decisions?

For starters, every organization should have a good spend analytics system that is capable of working on all spend, and numeric spend-related data, that can also compute trend lines. The organization should know what products are taking off, which are nearing the end of their life-cycle, and which are flat. And it should also be able to analyze market data to see how raw material cost and availability is trending.

But it needs to do more than just analyze organizational spend data, buying trends, and commodity markets. It also needs to analyze market trends in various product lines, including those it does not (yet) produce, and predict how good a new or altered product might sell based upon sales of similar product lines. So not only does it need a spend analytic solution, but it needs a predictive analytic solution as well. Every regular reader knows that the doctor does not believe in AI and that decisions should not be handed over blindly to a system, but that the suggestions of a good system with a good track record, properly configured, should be carefully evaluated, much more so than the gut-feel of a random executive. This is where analytics efforts are focussed, not down blind alleys. Especially when the batting average of these systems is almost double. They’ll miss occasionally, but a good analysis will reveal that (and why, which allow the system to be improved), and, most importantly, analytic effort will be focussed where it makes sense to focus, not on random areas to support random hypothesis with no foundation in reality (which is where a lot of effort is focussed in guess-work run organizations).

* The really successful executives always asked for multiple analysis until they had data that supported their decision, just in case.

It’s Not What You Pay a Man …

… but what he costs you that counts.
Will Rogers

Will Rogers was born in a time when many businesses were vertically integrated, controlling everything from the extraction of the raw material from the mine to the final delivery of the end product to the consumer, and they succeeded or failed on the caliber of man they hired.

But if he were alive today, I bet he’d be saying:

It’s not what you pay a vendor, but what the vendor costs you that counts.

All vendors of software and services cost you — and they typically cost much more than the license fee or consulting hour they bill you by. We’ll start with a services provider. Besides the myriad of expenses they will bill you for (that will be just within tolerance), there will also be the costs of supervising the resources, evaluating the deliverables, participating in regular review meetings, monitoring the relationship, and so on — and all of these will take up time which will eat up a huge opportunity cost.

But this is nothing compared to what a software/platform vendor will cost you.

A vendor touting the virtues of on-premise software will not only charge you an installation fee, a license fee, and an (on-site) maintenance fee, but will also charge you regular (emergency) upgrade fees, change fees, and so on. But there will also be the costs of the supporting software they need (databases, middleware, etc.), the hardware they need to run on, the training to use and support the software, and so on. If the vendor is ASP, these costs will all be rolled up and hidden in a monthly service fee that will also include the personnel costs to manage the instance and a portion of the overhead cost of the facility. And if the vendor is SaaS, there will still be a single fee, but since the facility is multi-tenant, it will be less.

But regardless of the platform, there will still be other costs — for instance, most of today’s sourcing and procurement platforms don’t deliver value unless the pre-requisites are met. For some platforms, this means connectivity to other systems. For others, this means good data … and lots of it. Data that typically resides in a myriad of other systems, in various forms of incompleteness and correctness, that needs to be centralized, corrected, completed, and enriched — an effort that can cost thousands of man-hours and hundreds of thousands of dollars for some organizations. And if the system is relatively worthless until most of that data is loaded (for example, spend analysis), then the organization will have to spend many times the system cost to get any source of value.

The same goes for systems that require templates and libraries to be useful — like contract management systems. If the authoring feature doesn’t simplify matters until a few hundred templates and a few thousand clauses are created, indexed, and cross-indexed, countless hours from paralegals and legals will be needed to make it useful.

In other words, when it comes to vendors, it’s not what you pay, it’s what they cost. And if the return doesn’t outweigh the cost by at least a factor of 3, think twice.

The First Rule of Any Technology …

… used in a business is that automation applied to an efficient operation will magnify the efficiency. The second is that automation applied to an inefficient operation will magnify the inefficiency.

Bill Gates

So many companies forget this in their rush to implement new S2C / P2P / S2P systems after finally getting budget approval. If you just automate what you have, you’ll simply amplify your mess and your problems.

Take sourcing. If, all of a sudden, a buyer can go from 50 mini-RFX events to 250 mini-RFX events, this is not always a good thing. What if the buyer is always using the suppliers she favours, who recommend custom SKUs for every project? In this situation, all that will happen is the buyer will proliferate SKUs throughout the system, often adding SKUs for products that were already supplied by another supplier (that the stockroom clerk ordered from), that was not invited to the RFQ as it was not one of the buyer’s favoured suppliers.

And while this theoretically increases Spend Under Management (SUM) as it gets the spend in the system, this just increases Spend Under Record (SUR) as, instead of properly managing the spend — which in this case would have resulted in SKU standardization instead of proliferation and category-based supplier rationalization based on a collective stakeholder scorecard and not just buyer preference — all the buyer did was add more chaos to the spend.

As another example, take invoice processing. As the purchasing wizard regularly laments over on Purchasing Insight, many organizations still think invoice automation is OCR and automatic field extraction based on keywords or relative location in the document. This in a time when most suppliers have EDI or the ability to send some form of standard XML, and when just about every decent e-Procurement or Source to Pay platform allows smaller suppliers without these abilities to “PO-flip” to an invoice. Some platforms even allow virtual printer drives to be distributed (for Windows and Mac) that will allow a supplier to “print” an invoice from their AR software straight to the e-Procurement platform — there are so many options that don’t require erroneous OCR, why would anyone in their right mind* even consider it.

Before automating anything, be sure to do a formal process review, identify any areas that are inefficient, and any areas that could be improved by technology. Then identify what the processes should look like. Only then do you automate. And be sure to measure whether or not the automation is delivering the planned results. This means that you should have, and be reading, throughput/efficiency metrics before the conversion, and throughput/efficiency metrics after the conversion. And the metrics should improve in the right direction. If they don’t, stop and figure out why. Automation should help, not hinder.

* We know, we know. Many MBAs aren’t always in their “right mind”. 😉

Is Bad Procurement Responsible for the Proliferation of Snake Oil?

Once upon a time in China, medicine was based on ingredients found in nature. One such ingredient was snake oil (from a water snake) that was used to treat joint pain (which we now call arthritis and bursitis) because it gave relief when rubbed on the skin at a painful site. This is because real snake oil contained a lot of omega-e fatty acids which not only reduce pain but also reduce inflammation. While not necessarily a powerful medicine, it is a medicine nonetheless.

When the Chinese worked on the first transcontinental railroad (in the US), they introduced this medicine to fellow workers (which included native and working class Americans) who had never had such a medicine. They were, naturally, impressed by it … as were salesmen looking to make a quick buck with this “miraculous pain cure” which, at a time when western medicine was relatively weak, was desired by the population at large. So, long before the creation of the FDA (1906) when anyone could sell anything they wanted, these salesmen created fake snake oils (which often didn’t contain any oils from snakes) that they hawked as “cure-alls”. These roaming charletans, who often paid assistants (who would travel separately, act sick and injured, take the cure-all, and immediately exclaim cure), did well, until people who bought the tonics realized they din’t work. But by then they were on to the next town.

However, people did travel and eventually realized that all these salesmen and untrained / unlicensed doctors were, as we still say today, quacks (which is short for the Dutch quacksalver who would use home remedies to “cure” everything, whether there was any real basis for the cure or not), and gave a name to these cheaters and the product they sold. Because the first cure-all tonics were called “snake-oil”, any medicine with a ridiculous claim was “snake oil” and any peddler of such a ware was a “snake-oil salesmen”. However, these salesmen and products are not restricted to the consumer world, and soon those claiming to have the ultimate solution to all of a business’ process, sales, or cash management problems, etc. were deemed snake oil salesmen, selling processes or products that didn’t work. And we still have these salesmen today, often pitching great investment opportunities (especially in high tech, which we call silicon snake oil) that don’t really exist.

But to make matters worse, we don’t just have snake oil salesmen to deal with, we have snakes in our business (which the snake-oil salesmen claim they can deal with, but we’ll get back to that). What kind of snakes? KPI snakes. As the procurement dynamo explains over on procurement.world, most enterprises are chock-full of Cobra KPIs.

Why Cobra KPIs? Blame the British for that and their folly of offering a bounty for every dead snake the locals brought them in 19th-century Delhi. If you were an enterprising, but struggling, vaishya, and you received rupees for every dead snake, and the British were handing over rupees by the snake, you’re going to want to get your hands on as many snakes as possible. What’s the easiest way to do that? Breed them in droves, and kill them in droves.

As the British discovered, Cobra KPIs are those that eventually rise up, strike, and inject you full of poisonous venom. All the British got for their efforts were drained coffers and more live snakes then they wanted (when the merchants released them all on the streets when the bounty was cancelled). And if your organization has Cobra KPIs, all it will get for its efforts is loss — lost time, lost money, and lost opportunity.

Organizations, including Procurement organizations, are chock-full of these Cobra KPIs. Like FTE per dollar of spend, supplier count per category/region, p-card spend per total spend, sourced spend over total spend, etc. (Why? It’s not how much is spent on Procurement resources, it’s the value they generate. It’s not how many suppliers, it’s the right number of suppliers, which varies by product, region, and numerous other factors. It’s not how the bills are paid, it’s whether or not the bills are for the right stuff. And sometimes it’s best to renegotiate with incumbents and seek out value-add innovation versus unrealizable or unsustainable year-over-year cost reductions.)

But even worse, because organizations are sometimes too obsessed with KPIs, they overload themselves with overly intensive tracking, scorecarding, and reporting initiatives that take time away from value-generating sourcing activities. And then they decided they need a solution to automate this or reduce the stress. So they go to market. And who responds? Snake-oil consultants who offer their next generation tracking, scorecarding, and reporting platforms that, for a “very reasonable” one-time set-up fee (in the tens or hundreds of thousands, depending on how big the organization is and what they think they can get), and an ongoing “expensable” license and maintenance fee that just fits under the P-card limit on a monthly basis, the organization will be provided with an automated system that will do all the data collection, normalization, integration, scorecard generation, trending, and reporting the organization needs. And if needs change, changes can be made for a “modest” daily consulting fee (of only a few thousand a day). It’s the KPI cure-all! And it’s snake oil. Snake oil that the organization proliferates by defining too many KPIs, which always contain too many wrong KPIs, that entail too much work that needs to be automated.

In other words, don’t define KPIs needlessly. And don’t define any until you not only understand what the goal of the KPI is, but how the KPI will help the organization achieve that goal. (With reference to our examples above, it’s ROI per FTE above a threshold, it’s a supplier range for each product-region pairing determined by way of stakeholder collaboration and analysis, p-card spend under management above a threshold, and spend under management — where spend under management is any spend where a conscientious decision was made to tackle the spend that way after an analysis. Now, the ROI calculation will have to carefully thought out and reviewed regularly, the supplier ranges revisited regularly, and the threshold reviewed to make sure it doesn’t trigger a red light on emergency spend, but at least these metrics are designed with a value focus in mind.)

(And if you’re not careful, you might end up with real snakes! Just ask the airline industry, that, just two days ago, made Samuel L. Jackson’s nightmare of motherf*ckin’ snakes on the motherf*ckin’ plane a reality for some passengers of the Air Mexico Torreon-Mexico City flight! [One Source!] If you have too many useless KPIs, as Douglas Adams tried to warn us years ago [as you can wait forever for lemon-soaked paper napkins and never get enough], the attendants will be too busy running through time-wasting checklists rather than making sure that only authorized, paying, passengers are in the cabin!)

 

SRM Case Studies Speak for Themselves

On Friday, we noted that State of Flux just released their eighth annual SRM survey, entitled “Digital SRM: Supplier Relationships in the New Technology Landscape”, and with it the surprising revelation that while leaders are taking steps forward, Procurement organizations as a whole might be stagnant or taking steps back! This, of course, is not a good thing because the best sourcing event in the world is useless if the plan (encapsulated in the contract) isn’t followed through and the expected savings or value never materializes. SRM is the key to realizing sourcing success, and too many companies overlook that (and wonder why 30% to 40% of identified savings never materialize).

We’ve written many posts over the years not only on the importance of SRM but how to implement it and support it with technology, so this time, instead of doing another multi-part series (which can be found in the archives), we’ll just skip to some of the case studies covered in the report and hope that maybe they are enough to convince you to get your SRM act in gear and go forward!

Telstra, a big name in Australian telecoms that is relatively unknown outside of Australia, implemented a SRM program that not only put more structure, process, and value around SRM but repositioned the perception of Procurement from a function that is only focussed on cost saving to one that works with suppliers and stakeholders toward the realization of business goals. As a result of this change in mind set, and more collaboration between different departments and suppliers, Telstra has met 10% of savings targets through increased revenues, showing that SRM can do more than save money, it can increase sales and revenues by finding ways to create new value that end customers will pay (more) for.

But that’s a small win compared to Ladbrokes who saved £18 M by taking the gamble out of SRM. Since beginning their SRM transformation in 2014, they hit a 3-year savings target of £ 18M a full year ahead of schedule, demonstrating the true savings potential of a well defined and well executed SRM project, which is huge in an industry where the majority of indirect spend has to go to a very small supplier base and where competitive bidding has little effect.

And the value of SRM has not been lost on the giants. For example, if Mars were a public company, it would be a Fortune 100 company as it regularly sells in excess of $ 33 Billion a year in food products (as it manufacturers more than just the iconic Mars bar). Even though it is a top procurement organization (that employs many leading supply management technologies and processes), it has recognized that SRM can help it get even bigger and better still, and that is part of the ambitious plan it has for SRM. While its initial SRM program is still in rollout, it’s starting to see a lot of enthusiasm from stakeholders and suppliers alike, which is a hard momentum to build in an organization of 77,000 employees with a dedicated commercial team of 1,200 individuals! Whereas most organizations might have a few dozen people on the commercial side, and maybe a few hundred, and can thus build enthusiasm for new initiatives and roll them out quickly, getting a thousand people on board is no easy feat. But the potential of SRM is such that even an entire organization can get behind an initiative that can cut costs, increase value, and even encourage innovation in the supply base.

In other words, there’s a lot of gold in them thar SRM hills, and any organization that doesn’t mine for it is leaving a lot of money and value on the table. To find out how much money and what kind of value might be left on the table, check out “Digital SRM: Supplier Relationships in the New Technology Landscape”. It’s worth your time.