Category Archives: Economics

Dangerous Procurement Predictions Part II

As per our first post, if you read my predictions post, you know SI hates predictions posts. It fully despises them because the vast majority of these posts are pure optimistic fantasy and help no one. Why are the posts like this? Because no one wants to hear the sobering reality off of the bat in the new year and the influencers care more about clicks than actually helping you.

But the predictions are not only bad, they’re dangerous. And to make sure you don’t fall for them and make bad decision based on them, we’re going to tackle some of the most dangerous predictions, which include predictions that look innocuous at first glance (like the last prediction on how a big legacy suite will go out of business) but hide the dangerous consequences of what will actually happen if a big suite finds itself in big trouble. Today we tackle the next four, and you can be sure this won’t be the last post in our series. Feeds are still being flooded with prediction posts, and I’m done ignoring the insanity.

4. The jobs market will be tough for the first half of the year, but will start to pick up in Q3 and Q4.

The job market is tied to the economy, and everyone predicts the job market will rebound when the economy picks up. But here’s the thing. Even when the economy picks back up, the job market never does quite as well as the last time. And the economy isn’t going to magically improve half-way through the year. This is the exact same thing we’ve been told the last two years, and it hasn’t happened.

First off, most of the first world economies around the world are flat, borderline recession, or in recession. Secondly, the only thing propping the US economy up right now is AI, and the money circles keeping it afloat as all the AI, Hardware, and Software companies keep moving the same money around investing in each other to keep each other afloat. If the bubble bursts, the US is in trouble, and the economy will quickly flush itself down the toilet. And the job market will go with it.

Considering only the big tech giants who have been hoarding cash for the last few years are in good shape, and everyone else is trying to conserve cash to survive not only the current market but a potential recession, the last thing they are going to do is hire unless absolutely necessary to fill a critical role as a result of a departure. Remember, they’ve spent the last two years using AI as an excuse to lay people off and are always looking for the next excuse to lay people off, not hire them!

Jobs will continue to be super scarce, and only the best will have a chance to land one.

5. We’re in the early stages of a broader pushback (against unnecessary upgrades or technology investments).

A few companies smartening up and saying no to forced big provider upgrades, eight (8) figure consultancy projects, and big Gen-AI investments is not pushback. There have always been a few leaders who have broken away from the pack, did the math, and made the right decisions, but the pack is still charging ahead on Gen-AI. Every big software shop except IBM (who hired a CEO who can actually do math) has invested heavily in Gen-AI, which still loses four dollars for every dollar of revenue, despite any hopes of a real return in the near future and a 94% failure rate.

Let’s face reality. I warned this space about The Vendor In Black nineteen years ago and how he always Comes Back sixteen years ago, no one took heed then, and no one is taking heed now. The business model of the enterprise software space, which has not changed for the two decades I’ve been covering it, is to solve the problem created by the old sh!t by selling the customers the new sh!t that comes with new problems so they can sell even newer sh!t in three years to fix those (and so on). Same old story. Only the vendor names change.

6. We Won’t Buy Things; We’ll Orchestrate Ecosystems.

This prediction likely came straight from the A.S.S.H.O.L.E. and anyone who repeats it should be ashamed of themselves. There are no AI Employees. Claims to the contrary are false and anyone making those demeaning and degrading claims is simply dehumanizing you. And, as we have clearly explained, you definitely don’t want agentic buying because it will happily spend your money not only on stuff you don’t need but stuff that doesn’t exist and, if you’re super unlikely, stuff that is highly illegal. You need wood, it will buy up all the Minecraft wood because it’s cheap and call your problem solved. And that’s if you’re lucky. If you’re not, it will fulfill your resin need with an illegal purchase of hash (the drug) on the dark web (which is labelled resin so the poster can claim they never advertised an illegal drug). And so on.

Plus, as we have already noted, most of today’s “orchestration” platforms in Source-to-Pay are really ORCestration platforms and can barely connect a handful of major Source-to-Pay offerings. They’re nothing close to what is needed to orchestrate ecosystems.

7. Boards will Zero in on Supply Chain Security and Supplier Risk shifts from quarterly PowerPoints to continuous “signalops”.

Just like they won’t invest more in cybersecurity, they won’t invest more in supply chain security until they lose a shipment in the tens of millions. After all, they’ve got supply chain insurance, why should they care? Especially since their current security measures have been sufficient up until now.

But here’s the thing. When the economy goes down, jobs go down. And then two things happen. People get desperate and turn to crime. And criminals, when their investments in drugs, alcohol, gambling, prostitution, and other quasi-legal through illegal activities start losing money because unemployed people run out of money to spend on their vices, these criminals get desperate too — and high value theft becomes more attractive. A temporarily unguarded truck here. A container there. An entire warehouse. And so on.

If it’s critical raw materials they can move (like rare earths), in-demand finished electronics they can sell (like iPhones, where a single container will contain at least 20M worth), military equipment or weapon (component)s that are now in demand globally, they’ll take bigger and bigger chances, especially if there are weaknesses in security. It’s not just cyber attacks that are going to increase, it’s physical attacks, supply chains aren’t ready, and companies won’t even stop preparing them until they lose tens of millions, don’t recover it all through insurance, and risk losing their insurance entirely. No one likes the math of risk prevention because, when it works, you don’t see the return. Even though it’s so much cheaper than insurance! And that’s why, in the majority of organizations, nothing will change.

Primary ProcureTech Concern: Economic Downturn & Deflation/Recession

There have been recessionary fears for the last two years. They are not going away, because most countries are teetering on the brink of a major recession if not a depression!

Why?

This is a significant concern because it contributes to the top risk of spend pressure because economic downturns always result in job loss and a drop in consumer spending as many consumers have to tighten the belt. And this, of course, contributes to the #1 joint risk of rising cost/spend pressure.

Impact Potential

The impact potential is dependent on how bad the downturn is, how long it lasts, and how global the downturn is. It can result in anything from a slight drop in sales (if you are in a mostly recession proof business and have one of the most affordable price points) to a massive drop in sales if you’re selling “luxury” goods to average consumers who, being unemployed, have to cut all luxury products from their purchasing.

Major Challenges/Risks

Prediction
When will the next downturn hit? How long will it last? How bad will it be. Right now the markets, and the US in particular, are defying all logic. Trade wars usually depress markets. Considerable over-inflation (which is the case in AI right now) typically leads to rapid depressions when the myth fails to become reality.

Detection
Detecting when it’s starting. When it’s not just a temporary blip, but when a downturn, whether a shorter one (of a few months) or a longer one (of a few years) is starting and when your organization should be adjusting its operations and strategy.

Planning
Just like you should have mitigation plans for significant risks, you should have mitigation plans for the downturn, which might involve shifting or changing product lines, pausing all expansion efforts, putting hiring on hold and planning for attrition (as people retire or contracts end), and even reducing operations with respect to production and/or support. It might also mean, for an international organization, shifting focus to different markets.

Final Words

The nature of today’s markets that allow rampant over investment without sufficient regulation ensures that recessions are inevitable. Your job is to predict them, and this is yet another reason you need a top economist.

Primary ProcureTech Concern: High Inflation Pressure

The two decades of low inflation we experienced in the noughts and tens are two decades we won’t experience again in our lifetimes. Thus, this is a significant concern.

Why?

More precisely, this is a significant concern for two reasons. The first reason is that if costs rise too much, the cost of acquiring the necessary materials and services to make the products and/or deliver the services you sell rise, as well as the cost of MRO and day-by-day operations. If you’re in a thin margin business, inflation pressure is thus a significant concern.

Moreover, this is also a significant concern because wages never keep up with inflation (because, if they did, we wouldn’t see so many port and logistics strikes every time cost of living skyrockets while wages remain flat or indexed against an outdated cost of living increase as of the last contract negotiation that occurred two to five years ago), and if the inflation leads to substantial cost of living increases, the relative share of consumer spending that will be spent on the organization’s products and services will drop, giving them less cash on hand to deal with their rising costs, increasing the spend pressures of their top joint risk.

Impact Potential

The impact is straightforward.

  1. If costs rise too much, not only does profitability fall significantly, but after a point, so does the sustainability of business operations. Cuts could hav to be made with devastating future conferences.
  2. If sales drop too much, critical revenue stops coming in, and the same problems arise.

Major Challenges/Risks

Inflation Projection
Predicting expected inflation over time based upon typical trends as well as from the impact of significant economic events that can cause rapid increases in inflation.

Impact Mitigation
Finding ways to mitigate the expected impact through alternate sources of supply, currency exchanges, operational efficiency improvements, investments, etc.

Final Words

This is a tough nut to crack, especially for Procurement. The organization needs to hire a top economist to help it predict and prepare for inflationary times.

The Tariff Tax Is Coming – And There Ain’t Much You Can Do About It!

Since you have been ignoring the home-shoring/near-shoring that a few of us experts tried to warn you about almost a decade before the first of the predictable tragedies happened (with articles appearing in the late 2000s on the dangers of outsourcing and the advantages of near-shoring — here are 3 SI articles from 2009, 2011, and 2013), you will now have to pay the tariff tax.

(Note that we are now on the fourth predictable tragedy. The first was the COVID pandemic, which the WHO and WEF were warning us about for a good decade [even though they didn’t know what the pandemic would be, they knew a pandemic was inevitable]. The second was geo-political conflicts and sanctions that cut off entire markets. The third was the double whammy of Panamanian droughts and Houthis in the Red Sea, cutting off the fast shipping lanes and forcing a return to routes around the Capes. Now we have tariffs, a predictable result of home-first economic policies that always return in times of tense geo-political climates … and especially in countries run by leaders who believe they have autocratic power, even if they aren’t supposed to.)

So now you will get hit by tariffs. No ands, ifs, or buts about it. And there is nothing you can do to prevent it. Why?

  1. Tariffs are going to be applied across the board. Thus, changing locations isn’t going to prevent them, just minimize them.
  2. In most countries, tariffs on products don’t change weekly. But sales can based on the perceived economic situation, so stocking up on inventory can increase inventory costs beyond expectations as well as logistics costs if you have to expedite shipping.
  3. Locations with cheaper tariffs without supporting supply chain networks will actually cost more, especially if the average competency of the workforce is lower than other locations.
  4. Proclamations are not actualizations. Actual tariffs could be more or less. You could switch from a location expected to see tariff increases to one that sees even more tariff increases.

If you want to protect from tariffs, which are likely only going to get worse as time goes on, there is only one option — re-shore as close as you can! You want to be as close to home as you can to not only protect against tariffs, but to minimize other costs and risks. Logistics risks, and costs, are less. Re-supply times are less. Risk response is faster. And new development and innovation is easier.

So even though costs will increase in the short-term — as you build/upgrade/refine factories and production lines, retrain workforces, build new supply lines, design new distribution chains, and so on. Especially when you re-shore to a location with higher energy or workforce costs. However, over time, the workforce will become more skilled and productive, automation will improve, and supply and distribution lines will optimize. Costs will go down, and they will be more stable than costs half a world away you have no control over.

The key is figuring out what you should re-shore and what you shouldn’t. You should only re-shore what you can do cost-competitively unless you are certain you would lose access to supply otherwise. While the end goal should be that you only outsource for what you can’t get near, or at, home, the reality is that you have to stay in business, and that means staying competitive. So, at least in the short-term, you have to pick-and-choose. So how do you do that?

What-if cost modelling, optimization, and predictive analytics. You need to accurately model the costs associated with pulling acquisition and production back over time. First production batch, 6 months, 1 year, 2 years, etc. Plot the costs over time and if the trend indicates the costs will match the outsourcing/offshoring costs within a few years, you go for it. These costs will require predicting all the component costs with predictive trend analytics, building detailed cost models, and optimizing them against all the different options. A lot of modelling, calculation, and what-if. But if you have the right advanced sourcing platform it can be done. (Although you will need to reach out to platform and modelling experts to figure out how.)

In the interim, for those of you panicking in the USA, just remember that some of the proposed tariffs is just posturing to force American allies to give into other US demands (more defence/border spending, less tariffs for US products). Others are promises to take revenge on countries that didn’t play nice or line certain pockets the last time the administration was in charge, unless those countries do exactly what is asked this time around. Thus, you don’t know exactly what will happen, all you know is that, since not everyone will meet the demands, more tariffs are coming. (And even if the worst don’t come now, who knows what the administration in four years will bring. Tariffs are coming!) That means you can’t select alternative locations ahead of time, or predict when to pre-buy. Moreover, you can only hold so much inventory, and can only get so much here so fast, so pre-buying wouldn’t help much anyway, if it helped at all.

The only sure fire way to minimize tariffs over time is to start re-shoring what you can relatively cost-effectively, as that will protect you no matter what, and even though it will take time, it will payoff in the long run. (And again, to be blunt, you should have started this fifteen years ago when Sourcing Innovation first started echoing the warnings of the inevitable disruptions that were going to come from too much off-shoring if a significant event happened, and now that we have had multiple — COVID, “special military operations” and sanctions, logistics challenges in Panama and the Red Sea, and now anti-trade policies in many countries — it’s time to act before even more disruptive events happen).

The USA is a Third World Country, Billionaires are NOT Benevolent, and That Needs to Be Fixed. (Bad Billionaires 3/3)

This is the promised follow up to Billionaires are not Benevolent, but they aren’t all Bad Either.

But how? As everyone is quick to point out when I say there are things that can be done, there are no easy answers. And there aren’t. Nothing worthwhile has ever been easy. Nothing worthwhile ever is easy. But if our ancestors refused to do anything until someone painted a rock red and drew a black circle on it and said, in the ancient proto-language of the day, magic rock, we would never have evolved to this point.

The US was in bad shape before, as a result of the robber barron railroad tycoons, the first great war, and the depression that followed, but it picked itself up by its bootstraps, introduced changes at the top, broke up the monopolies, allowed unions to raise worker’s prosperity, and by the ’70s had real prosperity that arguably surpassed any nation in the world at the time and, if those 10 years alone represented its economic history, it would stand side by side with many of the greatest recorded civilizations in the history books.

But then the Republicans, and their prosperous partisan proponents, came up with “trickle on” economics (which they renamed “trickle down” to fool you into accepting it) and, for anyone who is not upper middle class and above, their prosperity has gone downhill since Reagan took office in 1981. But history has shown this can be fixed, although we do have to be more careful this time because, if we do it wrong, the wealthy will just buy their own nation states, leave, and take 6% of the global GDP with them.

So what can we do? In short, we have to

  • recognize the realities,
  • create a multi-pronged solution that encourages the right kind of behaviour that truly floats all boats, and
  • get the greatest (game theoretic) minds (who know that all billionaires are plunderous pirates who don’t care if their brethren get beheaded) to buy in and ensure that all of the proposed changes, in combination, will realize the intended effects (by thinking things through in multi-step cause-and-effect chains to eliminate all the loopholes in a manner that reinforces desired behaviour).

Before we continue, it is important to point out this economic series, designed to get you thinking about what’s truly important for a thriving economy, came as a result of

… and the doctor‘s need to correct and/or inform and/or pull more information out of them. You can find quite a lot of interesting debate in the comments to the four articles above.

The US has high unemployment, high poverty (and record high child poverty for a developed country), over 650,000 homeless [USA Facts], poor levels of education (16th in science and 34th in math out of 81 OECD measured countries — critical for STEM) [Source: The Balance], and crumbling infrastructure because it does not have enough money to fund everything it needs to (especially given it’s high defence and foreign aid costs).

Why? Because it’s taxes keep falling (when you adjust for inflation and compute the average tax collected on a per capita basis). This is because of the large shift in wealth from the middle class (who earn well, but not enough to make the investments or play the monetary games required to take advantage of tax loopholes) to the truly wealthy (multi-millionaires and, most prominently, billionaires that pay themselves $1 a year, while making millions of dollars in stock gains tax free because it’s not taxed until realized and they don’t need to access it as banks happily give them low-interest loans that they live off of until they die, at which point just enough stock will be sold to pay off the loan while the rest of their estate transfers tax free to their children).

And since trickle-on economics don’t work, the US (and Canada and the UK) need the billionaires to pay their fair share. And the key here is fair. If you expect them to pay higher rates than the middle class, they’ll pack up and move on because why should they?

We also need to ensure the workers in the corporations they control are paid a fair wage (because the government can’t afford welfare, and honestly shouldn’t need it in a truly prosperous economy). In the 1970s, a hard working blue collar couple could have a good life with job security, housing security (house or condo), food security, affordable company sponsored healthcare, college security for their children (not Ivy league, but the local college or trade school), a vacation once a year and still save for retirement. As far as I am concerned, that is a basic requirement for a prosperous first world country. Now, in any given month, they have to choose whether they eat or pay the bills because if they don’t pay the rent, they’re on the street. The key here is fair, because of all people, billionaires are the last people who believe in handouts (unless it’s a massive tax write off and publicity op), and if you want more than a basic quality of life, you should work for it! And we need to make sure this is not too much of a drain on the corporations to pay this minimum wage (hint: it’s not for any decent size corporation; only small businesses would be impacted) or on the billionaires ultimate earning potential.

In addition, we need to make sure a Billionaire’s earning potential is not limited in any attempt we put forth to extract fair wages and fair taxes. Some countries think that the more you make, the higher rate you should pay — all that does is cause the wealthy to pick up and leave (why do you think Canada has so few Billionaries, if you live in Quebec you pay 25.75% on top of the 33% federal tax, for a total tax rate of 58.75%; in the countries in Europe with the best quality of life where almost all the basics are free or cheap (education, healthcare, transit [almost] free; rent and food way less), they accomplish that (with incredible infrastructure) with less than 50% tax. In the US, it’s 37% + 13.3% in California. A strict limit needs to be set, << 50%, because if more billionaire gains were taxed even at the average middle class rate, that would be more than enough!

We also need to limit their base compensation of multi-millionaire and Billionaire CEOs — money for nothing is supposed to be for rockstars and Beverly Hillbillies, not for billionaires who sit on their assess all day and do nothing. Especially considering, adjusted for inflation, we noted their compensation over the past 46 years has increased over 1,322% while the average Joe saw a mere 18% increase. There’s no way any job is worth that much (unless you perform spectacularly). It used to be, in Europe especially, a manager would make 2 to 3 times his underlings, and a CEO 2 to 3 times his C-Suite executives. So if there were 5 levels in a company, the CEO would make 10 to 15 times more the average worker. Which was fair. Now, corporations have become more global, jobs more demanding, and leadership more critical, so we should maybe double or triple that. But at the end of the day I don’t see how anyone could argue that a CEO should be paid a base salary that is more than 100 times what the lowest earning employee makes.

They also shouldn’t get bonuses for non-performance, and even if they do perform, bonuses should be limited to actual performance. Again, go back to our goal, use them to grow the economy for everyone, not just their bank accounts. Here we have to be careful how we define limits because they’ll take whatever negative short term behavior is required to maximize their earnings today.

Then there is the stock issue. If we force the majority of their compensation into stocks, then they are going to do whatever it takes to up the stock price, which usually includes making extremely shortsighted decisions.

Sounds like a tall order of requirements, and it is, and there is no one single solution. However, since the US recovered spectacularly the last time they took on the robber barons and busted up their monopolies, there’s no reason it can’t be done again. It just has to be done with care to ensure that that the desired effects are achieved.

Namely:

  • increased workforce prosperity (and more equitable pay)
  • increased tax reclamation for critical services and infrastructure
  • increased incentive for Billionaires to build truly prosperous businesses

As far as I am concerned, if great game theoretic political minds come together, convince the politicians to stop serving their own interests and start serving the interests of their constituents, it can be done starting with the following multi-pronged seven point framework. (And the final version of such framework would have to be all or nothing because partial approaches just create new tax loopholes and more unintended consequences.)

Increase the Federal Minimum Wage
to at least $12.25 an hour (i.e. the minimum wage of 1975 adjusted for inflation)
Decrease the Small Business Tax Rate
by 20% on average (70% minimum wage increase in a small business with minimal profits that dedicates at least 25% of revenue to payroll is a hit, so decrease the small business tax rate to support the big one time increase)
Limit CEO base pay to 100X the annual salary of the lowest paid employee whether directly or indirectly employed by their organization
if they outsource Janitorial services to an organization that pays the Janitor 12.25 an hour or 24.5K a year, then their salary is limited to 2.45M a year; if they want to earn more, they have to pay more, lifting everyone up
Limit CEO bonus pay to the greater of half their base salary or 2% of year over year REVENUE
when you base bonuses on Profit, they will cut headcount or quality to artificially inflate profit; so base it on year over year revenue increase using a rounded average profit percentage; since the average corporate profit is 7.5%, they should be limited to a fractional amount of 10% of revenue gain (i.e round up the 7.5% for easy math); we want them to keep profit in the enterprise to grow it, so their compensation should be limited to 20% of growth (which I think is still excessive, but I would leave it up to the board to decide how much to incentivize the CEO), which gives us a bonus limit of 2% of year over year revenue GAIN; so if they want a 10M bonus, then they need to increase revenue year over year by 500M (and if they do that, they’ve earned that 10M)
Preferential Capital Gains Tax Rate for their Stock in the ONE Business they are CXO for
While the 20% Trump capital gains tax rate, compared to highest middle class tax rate of up to 50% in some states, is contributing significantly to the tax deficit, they should be allowed to keep this rate for the one business they are actively running and/or contributing most of their time to (and if they want to pull a Musk or a Bezos, they get to pick ONE); this encourages them to grow it through the roof (as they will have the lowest tax rate in their stock growth in their long term stock growth in that business) while preventing them from having (multiple) monopolies; plus, they will have no need to tank the stocks in other businesses they have a hand in because they’ll have enough leverage in their current business to ignore them, plus
Biden’s Proposal to Restore the Capital Gains Tax to a meaningful level WITH Mandatory “Estate” Taxes
but no higher than the highest tax rate paid by the middle class; they’ll hate it, but the US needs the revenue, and they can still avoid a lot of the tax until they die, so they really shouldn’t care too much
[more specifically, since I agree with The Master of Cost that all income should only be taxed once, upon death, before the passing on of wealth through inheritance, all capital gains are declared and realized, and all amounts not yet taxed are taxed; so, if during their lifetime, they only realized 10% of their gains, the other 90% are realized and taxed, and then the money gets passed on … ]
Passive Income Taxing (including Mandatory “Estate” Tax)
the ultra rich pay zero (0) tax because they borrow against their paper assets, and then pay the interest from other loans against other paper assets, and just move debt around at rates way below the rates of return on their investments; as soon as any paper assets are used as leverage for capital, they have to be declared and taxed at the current value; no living free; now, if they want to keep taxes down, they’ll have to live frugally and keep the money in their companies, growing them and the prosperity of their employees and the economy in the process; they only have to pay taxes above the means at which they live until they die (as estate taxes will be mandatory on current value when the assets are passed on; this way the US will get a regular stream of critical revenue and their descendants will have to grow their holdings to grow their wealth, as the wealth will decrease by about a third on handover (but their descendants should be able to still quintuple it with smart management and elbow grease by the time it’s passed onto the next generation)

When you put all this together:

1. Workers have a higher quality of life (lifting many of them, and their children, out of [near] poverty) and more job security, especially if the CEO wants a bigger salary.

2. The USA gets more taxation revenue for critical programs and infrastructure.

3. Billionaire CEOs are incentivized to grow the business (as that’s the only way to significantly grow their net worth)

  • no more money for nothing (most CEOs won’t earn more than 3M base unless they pay their people more than minimum wage)
  • no more big bonuses for poor performance (revenue will have to increase or their bonus will be pocket change)
  • no short sighted measures (such as massive layoffs) that will negatively impact the stock price (as it’s now their biggest long term earnings vehicle as it will be taxed at half the rate as their other stocks and they will want to borrow against it as they will be taxed at double the rate to borrow against other stocks )

And, most importantly, we’re not limiting their earning potential. This is key because the minute you impose a limit in any organization (non-profit, profit, government, church, etc.), you lose your top performers. The whole goal is to put a framework in place that aligns their best interests of the billionaires with the best interest of the country and the people to the extent possible. (Remember, just because the billionaires say I Want It All, it doesn’t mean they deserve it all, and they certainly don’t deserve it now. The rest of us have to work for it, so they should have to work for it too!)

Now go forth and debate and turn this into a full-fledged solution!

And just remember, Nobody Said It Was Easy! But something has to be done because it’s Situation Critical and some of us are sick and tired of Crying Over You!