Category Archives: Cost Reduction

There Are No Hard Choices in Software Spending, Just Hard Heads

A recent Industry Week article on “hard choices for software spending”, quotes John Lovelock of Gartner who says that, if you’re an organization, either you’re viewing IT as a way of making money, saving money or increasing your profitability; or you’re viewing it as an expense to be trimmed. The implication, both of the analyst and the author, is that you fall into two camps, the spenders or the savers, and you have to make a hard choice as to what camp you fall in.

Well, I disagree. There are no hard choices when it comes to software spending, only hard heads. Like Procurement, properly approached and managed, IT investments always increases profits (by lowering costs and/or increasing revenue) — especially in the supply chain. Pick an area. Any area. The right systems will always increase efficiency, transparency, and productivity. And if they impact spending, they will help to contain costs and optimize spending, resulting in savings the first time they are used. And anyone who can’t see beyond the up-front costs to the long term savings has a hard head, especially after all of the successful case studies that have been published by the analysts, research firms, and publications over the last ten years.

Unfortunately, it looks like it’s going to be a while before IT spending reaches the level it should be at and companies replace their antiquated systems and/or acquire systems that they should have had years ago, as Gartner is only projecting total worldwide IT spend in the manufacturing sector to grow by 2.6% this year. That means that while one third of CIOs may go forward with software and hardware upgrades that were deferred due to the recession, as per a study conducted by Robert Half Technology earlier this year, it will likely be a while before the other two thirds of CIOs do the same.

As a result, manufacturers will continue to struggle with increasing complexity, global competition, rapidly changing business environments, and volatile raw material prices for no good reason. And the pressure to reduce costs, improve productivity, and deliver greater customer satisfaction while continue unabated. All because they have a hard head.

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There’s No Such Thing As Savings!

I’ve said it before and I’ll say it again: There’s No Such Thing As Savings. And I’m glad to say that I’m finally not the only one screaming it. As per this recent editorial in the CPO Agenda on “an escape from the tyranny of savings”, the problem with savings — whereby procurement is executed properly and there is early engagement, demand challenge, functional specifications, and diligent supply-market analysis — is that there are none. The more preparation that is done, the narrower is the range of offers from candidate-suppliers. The more radical the procurement solution, the less it fits a standard unit-price-difference calculation.

In other words, when a procurement department is well run, it will generate less of the head-turning savings that CPOs are obsessed with. So there is actually a perverse incentive not to change at all, and to manage spend badly. Because, as I’ve said many times before, savings is just money you shouldn’t have spent in the first place. That’s why “savings” quickly disappear after a company runs all its top spend categories through an open reverse auction for the first time. Once a company is getting market price, there are no more “savings” on the unit price. The only “savings” left are in efficiencies, and once an optimization is run to optimize the network, there are no “savings” left in the buy. The only option left is to go back and reengineer the product to reduce production and/or raw material costs. Then when that’s done there are no “savings” left. Success is then measured by controlling costs and preventing the inevitable rise to previous levels of excess that always happens when a category is put on the back burner and unmonitored. (That’s why “saving” consultancies can come back and revisit a spend category every three to five years and find “savings” when, in reality, there shouldn’t be any if they did the job right the first time and the category was properly monitored at contract renewal time.)

I understand that a Procurement Department still has to track and report its progress against a standard performance metric, but it definitely shouldn’t be savings. In the past I have recommended “cost avoidance” as a possible metric, but the CPO agenda article offers another recommendation which, if properly implemented, might be better. The author suggests using a “Procurement Control Index” which is to be developed by applying the following five criteria against each relevant procurement category:

  1. Is there a policy that describes how staff approach suppliers, what their financial authorities are, and what kinds of goods and services they may buy?
  2. Is there a procurement strategy document that is developed and agreed jointly with the ultimate budget-owner?
  3. Is there compliance with policy and strategy?
  4. Are current contracts and delivery performance actively monitored and managed?
  5. Are there improvement targets for assessing compliance, delivery performance and user satisfaction?

If the appropriate measurements are defined with respect to each question, for example:

  • % of categories with policies
  • % of categories with strategies
  • % of categories where policies are followed
  • % of contracts that are actively monitored
  • % of categories where improvement was seen

and these measurements are combined into a single perfect procurement metric through straight-forward multiplication, then a good measurement of overall procurement performance would be whether or not the PCI increased over time.

Of course, if this is too much, you could always start with Charles’ cost indices over on the Purchasing Certification Blog, but I’d hope the ultimate goal is a more comprehensive metric that applies organization wide.

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For an Alternative to the Ariba Supplier Network, Don’t Overlook Ketera

Ever since Ariba decided to hike their already hefty fees, there’s been a lot of chatter about the Ariba Supplier Network on and off the blogs, including a great piece on An American Editor, reprinted here on SI, on the harbinger of getting paid.

Since that time, SpendMatters has been covering multiple Ariba Supplier Network Alternatives, including Hubwoo, Basware, and OB10, but has not made a peep about Ariba’s smaller competitor further down the valley. Now, Ketera may not be as big or loud as Basware, Hubwoo, or OB10, but they have a fairly solid offering and one advantage the other guys don’t have — a very low price point, which is critical for the SME market who can’t afford $20,000 a year just for the privilege of transacting online, which is not even close to new technology anymore.

The Ketera Network is a lot bigger than one might think. While they haven’t reached a Trillion dollars in transactions yet, 50 Billion is nothing to scoff at and with over 100,000 buyers and over 1 Million suppliers, it has reached a respectable size and is still growing.

And, most importantly, it’s very cost effective. It’s essentially free to try, as a seller can list for free using their Amazon-like model and pay 3.5% of the sale, and as soon as the seller closes in on $7,000 in sales, the seller can upgrade to the premiere membership which, at $25/month or $250/year, costs the seller less than pennies on the dollar, and quickly becomes a much more affordable alternative than the ASN at the $16,130 mark. For example, even though (to the best of my knowledge) Ariba limits the transaction fees they charge a seller to $20,000 a year, a seller has to do 1.29 Million in business before the cost drops below 15.5 basis points.

The following table should help an organization evaluating their options put the networks in perspective:

Network Ketera Network (KN) Ariba Supplier Network (ASN)
Service Level Sponsored (Private Buyer Catalogs) Public Listing (Amazon-Like Model) Premiere Membership Standard
Service Cost Free 3.5% of Sales 250/year 0.155% of Sales, up to $20,000
Good When only selling via private catalogs to KN buyers doing less than $7,143 of public sales doing more than $7,143 of public sales doing (considerably) more than 1.29M of sales per year with Ariba buyers

And the following table should help an organization understand the relative costs of the KN Premiere Membership vs. the Standard Ariba Supplier Network Membership:

 

Cost Per Dollar of Sale
Sales Volume KN ASN Winner
10,000 0.02500000 0.01550000 ASN
16,130 0.01549907 0.01550000 KN
100,000 0.00250000 0.01550000 KN
1,000,000 0.00025000 0.01550000 KN
1,300,000 0.00019231 0.01538462 KN
10,000,000 0.00002500 0.00200000 KN
100,000,000 0.00000250 0.00020000 KN
1,000,000,000 0.00000025 0.00002000 KN

 

The Ketera Network may not be right for everyone, but it’s something every SME should definitely investigate.

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If the Supplier Walks Away Whistling …

… simply put, you didn’t do a very good job. While the supplier should be walking away from the table with a hint of a smile on their face, as you want a positive relationship, if they’re whistling a jaunty tune and dancing to it, you got suckered. And these days, it’s happening all too often.

As per this recent post on the SCM blogs by James Baehr of Greybeard Advisors on how last minute bids and contract extensions can limit leverage, contracts are being benignly neglected. Procurement professionals are too busy issuing quick bids and placing orders based solely on price. As a result, the decision criteria is generally limited to price and Procurement finds itself with little, if any, room to negotiate for a better whatever. Furthermore, many buyers have taken to simply extending existing contracts, sometimes two or three times. This leaves money on the table and compromises leverage since the organization generally becomes more dependent on the supplier from whom they are no longer getting the best price. It’s not long before Procurement is stepping over dollar bills to pick-up pennies and the supper is walking away from the table with a jaunt in his step, whistling a happy tune …