Since I’m not a professional economist, I don’t regularly comment on the economy. But if it wasn’t for the Bear Stearns reference, I would have thought this Mad TV Sesame Street parody video on the economy was just a few months old, not two and a half years old. (It premiered on May 17, 2008.)
What do you think?
As per this recent article in Digit Chanel Connect on “Moving Up the Supply Chain”, IDC India estimates the total Indian SCM solutions market will reach $132.6 Million in 2011. This might not sound like much, but, in relative terms, it’s the equivalent of a $1.6 Billion dollar market! (In 2009, the GDP of India was one twelfth of the GDP of the US.) And it’s still growing!
India’s Big 6 Consultancies are already making massive inroads into the global market. Many companies are making the SWITCH — Satyam, Wipro, Infosys, Tata Consultancy Services, Cognizant Technology Solutions, and HCL — and the current Big 6 Providers are being PACKED (PriceWaterhouseCoopers, Accenture, CapGemini, KPMG, Ernst & Young, and Deloitte & Touche) in. The major players might be SAP, Oracle, and Aspen today, but it won’t be long before the ABC Procure’s, Algorhythm’s, eBiz Global’s, Griha Software Technologies’, and Zycus‘s become the next major players in the Indian SCM space, and not much longer before those companies, and the next generation, make an even bigger impact on the global e-Sorucing and e-Procurement marketplace.
Furthermore, as Ravindra Sharma, General Manager of Ariba India, says: “With India poised for decent growth, many of the firms are proactively setting up [a] supply chain infrastructure which can help them grow rapidly and profitably. Many of these firms have global business aspirations and are benchmarking themselves with global organizations in various aspects including business processes, practices and technology“. As a result, deployment of SCM solutions is definitely increasing — and Indian companies are working hard to fill the surging demand now that Indian corporates have ‘tasted’ the efficiency of SCM solutions and now believe it to be a vital component of their business readiness plans.
In other words, while most of your technology options today will likely be US companies, or European offices with a strong US presence, it might not be long before many of the options on the table are Indian operations. But with the cloud and 24/7/365 service levels, will it really matter?
A recent blog post over on Procurement Excellence asked “why aren’t reverse auctions used more by procurement people”? According to the article, it’s usually because:
Fair enough. They do require confidence and if you’re really doing poorly, they’ll expose that. But these aren’t the only reasons, and, I’d bet, not even the most common reasons. What about:
Suppliers can be as scared of, or more scared, of an auction as a buyer. And for many reasons. They might be the incumbent with a history of overcharging. They might be a first-time invitee and have the perception it is only being run to drive down incumbent pricing. They might feel that it won’t capture the full value of their offering. And so on.
And these reasons only really apply to procurement people who probably haven’t run reverse auctions (or at least those who haven’t run a reverse auction successfully). There’s also:
For a reverse auction to be successful, a number of conditions have to be right. There have to be enough suppliers willing to participate who want the business. The current pricing has to be above market average. The buyer has to be willing to award to the bidder with the lowest (weighted) bid and the suppliers have to perceive that. Either the majority of the cost has to be landed cost or the true cost needs to be easily defined as a weighted multiple of a (supplier’s) bid. If these conditions aren’t met, not only could costs not decrease, but they could increase. For example, if there were only three suppliers, in collusion, in a supplier’s market where demand exceeded supply and the current market price exceeded the price the buyer was currently paying, costs might increase substantially!
Furthermore, a truly smart buyer knows that reverse auctions aren’t always the answer, especially for strategic materials, components, or services. Not only are there some things that you can’t auction, but there are some things you shouldn’t auction, especially if your spend is high enough where you have leverage with your preferred suppliers. If you do a spend analysis and find out you’re spending 50M with your preferred temp labor supplier, it’s pretty easy to get at least 10%, if not 20%, savings if you show them the numbers and threaten to take your business elsewhere. Who’s going to give up 30M to 40M worth of business in a down economy? And if you’re primarily contracting security guards, janitorial services, and seasonal warehouse packers, should there really be a salary bell curve? In these situations, someone making above the mean is not going to be more effective than someone making below the mean.
Finally, a good procurement pro knows that there are only two technologies in the tool-kit that consistently give double digit returns on average, regardless of the economy — and those tools are spend analysis (which can enable leveraged negotiations) and decision optimization. While it’s true that a reverse auction can generate double digit savings in the right situation, that situation is not nearly as common as some vendors will have you believe. And that’s why more procurement pros aren’t running reverse auctions. They’re not always the right choice.
Last June, I pointed you to an article in the McKinsey Quarterly on “the voice of experience” where not a single executive respondent ranked public equity better than private equity. This report, which surveyed 20 chairmen or CEOs from the UK who had served on both public and private equity boards, found that 75% of respondents firmly believed private equity boards had more value.
Then in December I pointed you to a piece in Supply Chain Digest on the intersection of Wall Street and Private Equity with the supply chain that printed that:
one large retailer had the opportunity recently to save an expected $50 million from a supply chain network redesign project, included shifting from a number of smaller distribution centers to larger ones. The project had a great ROI and the capital was available — but the company delayed the project just because of the potential for Wall Street to view the project as too risky operationally and financially.
And then a week or so ago I came across this piece on The Myth of Ariba on The Baseline Scenario by James Kwak who was reading Past Due that used Ariba, which at one point had a market capitalization of over 40 Billion on quarterly revenues of roughly 100 Million, for his case study of the internet bubble in Chapter 2.
According to Kwak, Goodman says that “there were obvious limitations to how much money Ariba could make selling its software. It was aiming its product at the big Fortune 500 companies” and asked “what happened when Ariba ran out of customers”? And that, during the boom, “the stock was the only thing that mattered. A valuable stock gave Ariba currency it could use to buy other companies”. Now, while Goodman’s book, as per Kwak’s summary, might blame the executives of technology companies like Ariba for consistently making unrealistic claims and projections, it’s important to note, as Kwak pointed out, that, back in 1999, industry and financial analysts were talking up the Business-to-Business e-commerce boom at a time when B2B e-Commerce didn’t really exist. And, in Ariba’s case, since, with the launch of the Ariba Network, it was as close as anyone else, big, and public, the analysts latched on like leeches. Then market expectations rose, and everyone started watching the stock price, because that’s what Wall Street told everyone the indicator of whether or not you were meeting expectations and being successful was.
And the end result was a massive market crash that wiped out, in Ariba’s case, over 97.5% of their peak market capitalization, led to a temporary revenue loss, and, most likely, stunted their growth for years. Why? All that focus on the stock price, and the marketing and public relations that went around it, shifted focus away from the true value of the offering, which was the platform itself and what it could do for your business, especially if taken to the next level. Imagine where the platform could have been today if all of the money that went into marketing, industry, analyst, and public relations, and all the money that went into patent filings and lawsuits to defend those patents — which could get tossed at any time with a proven claim of prior art or a decision to abandon software patents altogether (like they have done in Europe), had went into research and product development. I’m sure we’d be better off for it.
And if they had stayed private, and were run by a private equity firm interested in steady, profitable growth over the long term, we could be looking at a very different Ariba today. And that’s why private equity players can offer you a lot more value than a public offering. When you have the room to breathe beyond next quarter, real innovation happens.
An article this summer in Canadian Business by Jeff Sanford on the “Burden of Truth” referenced Bob Farell’s top ten market rules which have a a lot of bearing on supply management. Bob Farrell was the Chief Stock Market Analyst at Merrill Lynch for 25 years and knows a thing or two about the market.