Category Archives: Guest Author

Is UNSPSC Really the Best Route? 3 Reasons … ‘Against’


Today’s guest post is from Brian Seipel, Spend Analysis lead at Source One Management Services focused on helping corporations gain a clear view of their spend data to derive actionable budget optimization strategies.

In Part I, we discussed three reasons for the standardized taxonomy of UNSPSC. But it’s not always all sunshine and roses. Today we will discuss three reasons against.


The Downsides of a Standardizes Taxonomy

Recall I mentioned that standard taxonomies are a great start. However, we will want to move beyond the confines of these models to compensate for a few critical problems you’re likely to face.

  • Alignment to organizational needs and strategic sourcing goals may be lacking
  • Structural rigidity may not align with organizational profile
  • Contain a good degree of built-in granularity (yes, this is both a strength and a weakness)

All three problems above come down to a lack of proper fit – both in terms of organizational usage and an action-oriented focus.

First, let’s return to our overarching goal: to make sense of spend and identify areas of focus for future savings initiatives. Looking at UNSPSC through this lens, you may find that it difficult to source strictly according to this taxonomy. I’ll give an easy example – when organizations bring in commercial printers for promotional materials, they tend to also buy branded tchotchkes from these same vendors. It makes sense; both items are planned for and purchased at the same time to be used at the same events. Suppliers often work in both of these spaces for this reason, but you wouldn’t know it following UNSPSC strictly. We’re in two separate areas of the code. As a harder example, think about your trusted, value-added IT vendor. This supplier may provide hardware and software across a range of departments, integration and engineering support, and handle your maintenance contract after installation. Draft up a list of products and services, and pull a UNSPSC code to cover all aspects of this supplier relationship – go ahead, I’ll wait. If I had to guess, you likely quit halfway through writing up a pretty long list.

Second, these are rigid structures are inherently one-size-fits-most in nature. UNSPSC can be great for some industries, but may not align well to others. I mention earlier that UNSPSC did tend to get detailed in a number of areas and, if you’re primary focus leans toward the machinery or MRO side of procurement, you may never need to venture beyond UNSPSC. However, any company with a more specialty focus may not get the coverage they need. The purchase of specialty chemicals may have a head start by using UNSPSC as a baseline, but the taxonomy won’t have the granularity to truly understand purchases as-is. One way to solve this issue is to blend additional supplementary detail where needed to make up the difference.

I will close this section with a word of caution. Twice now I’ve talked about the power of granularity, either already found in UNSPSC or added as a supplement afterwards. As such, it may seem odd that I’m considering categorical granularity as both a strength and a weakness – which case ends up being true for you will largely depend on what you’re doing with this level of detail. If you can use this granularity for better isolating and targeting savings opportunities, then throw this under the strength column. However, “paralysis by analysis” is a very real threat to a timely spend analysis project. Consider office supply purchases. One could easily adopt a taxonomy to drill down to a very granular level, separating black ink, felt tip pens from blue ink, ball points – but, would you ever really want to? Always ask yourself, “is more granularity truly necessary to get at the heart of this spend? Will this place of lesser detail hinder this project?” If you don’t need more detail, don’t invest the time. In this case, both pens would be purchased by the same internal groups and from the same suppliers. Spending time classifying to this level, or holding meetings on the best way to characterize paperclip groupings, is a waste.

Never Forget your Ultimate Purpose

It can be tempting to opt for a standard taxonomy, as is offered by UNSPSC. The value they provide is especially obvious early in the process when faced with dirty data, particularly if this is your organization’s first foray into spend analysis.

This temptation, however, will always be short-sighted. It is critical to wrangle spend and develop a clear picture of where your organization’s cash is going, true, but doing so without a clear path forward (one that leads to cost savings) is only going to stagnate strategic sourcing initiatives, leading to lost opportunity costs.

Always stay focused on answering this key question, “what is my best path forward to identifying savings opportunities?” and develop a taxonomy that will lead you there. Starting with UNSPSC can be a great foundation, but always consider where the taxonomy falls short for achieving your goals, and fold in more customized categories of spend where appropriate.

Thanks, Brian!

Is UNSPSC Really the Best Route? 3 Reasons ‘For’ …


Today’s guest post is from Brian Seipel, Spend Analysis lead at Source One Management Services focused on helping corporations gain a clear view of their spend data to derive actionable budget optimization strategies.

A common question many organizations have when delving into a spend analysis project is, “which classification taxonomy should I be using?” There are plenty of options on the generic end of the spectrum, UNSPSC being a popular choice. These standards certainly have their advantages, but choosing whether to use one of these standards or something entirely different is ultimately a matter of what will work best for the task at hand.

So, the real question is – What is your primary goal, and which taxonomy will best help you reach it?


Defining Goals

Before we begin, it is important to define what, exactly, our goals are for our spend analysis project. In this case, the spend analysis will be directly supporting the identification of strategic sourcing projects.
Certainly, we want to view our organization-wide supplier base and spend profiles using a commonly understood model so all stakeholders, departments, and C-suite executives are on the same page. One problem many organizations face is that different departments or offices speak different languages when it comes to defining supplier relationships. Add a merger or acquisition to the mix, and chaos can easily ensue.

But this isn’t our end goal – this is just a single, albeit crucial, step in the process. Our true end goal is to provide the ammunition needed to best identify opportunities for cost saving initiatives. No taxonomy, no matter how thoughtful or detailed, can be considered valuable if it can’t help promote change. As such, we should select a taxonomy based on two key parameters:

  1. The taxonomy must be universally applicable to all company spend.
  2. The taxonomy must aid in developing actionable information for future cost saving initiatives.


The Benefits of a Standardized Taxonomy

First, let’s discuss the key reasons to choose a standard model, such as UNSPSC. There are a few great aspects to these model that make them a good starting place for your taxonomy development:

  • Standards are pre-developed and ready-to-use
  • Contain a *good* degree of built-in granularity
  • Wide availability of data enrichment options exist

Right off the bat, one of the largest draws of using a standard taxonomy is that the structure is already in place, ready-to-use. UNSPSC has you covered for any spend your organization is likely to see, from office supplies (commodity code “4412″) to graphic design (“8214″) and beyond. Additionally, there is already a level of granularity at your fingertips: The telecommunications media services includes 10 immediate sublevels with greater detail, from local and long distance service, to mobile communications, and more.

You’ll note my asterisks here; while this granularity is great in many cases, it isn’t always up-to-task across the purchasing spectrum – more on that later. In any case, if you’ve been tasked with the herculean job of collecting, cleansing, and ordering a vast set of spend data covering your entire organization, being able to pick up and implement a taxonomy immediately is one less task on your plate to worry about.

What’s more, this hierarchy is both well-known and heavily utilized. There are plenty of organizations you can turn to that, for a fee, can append your spend data with appropriate categorizations. The appeal here is obvious – one of the more time intensive elements of performing a spend analysis is either developing and validating a rules-based system for categorization or slogging through the process manually.

Jump in feet first, hit the ground running … Pick your action-packed metaphor; a standard taxonomy gets your project started faster – and that’s huge.

But is it all sunshine and roses? Stay tuned for Part II!

Enhancing MRO Supplier Value through Contract Service Levels

Today’s guest post is from Jennifer Engel, a Senior Supply Chain Project Analyst at Source One Management Services, responsible for executing strategic sourcing and process improvement initiatives.

Despite the convenience of boilerplate language and pre-approved templates to expedite execution, contracting is never a one-size-fits-all process within any silo of a business. Contracts for professional services tend to require a focus on performance expectations, and rarely have a need for protection against pricing volatility, lead time requirements, and fuel costs. Diametrically, contracts for the tactical purchase of goods focus not on service levels, but on maintaining pricing, ensuring product availability, and outlining delivery terms.

A trait often unique to the Maintenance, Repair, and Operation (MRO) space within a business is that many suppliers are providing a combination of both goods and services that support overall operations. As a result, contracts within this space are difficult to mold to a single template, and constructing agreements without taking into account the business needs to cover each area can be detrimental to the overall relationship goals. When undergoing contracting with a new or existing supplier, there are a few key principals to keep in mind that will benefit both parties as well as drive best value in pricing and service levels.

#1) Fully assess the risks associated with the goods and services separately

When negotiating terms, it is important to prioritize the areas that could most drastically impact the business should a change occur. If the pricing of a good is tied to a volatile commodity index or may be subject to interruptions due to raw material availability, protecting exposure to these factors should be at the forefront of the agreement. If the service associated is more critical than the actual good, for example a specific sanitation chemical being less critical than the completion of the actual sanitization process, then the level of service needed to ensure the business can continue to operate at or above standards should take priority. This primarily holds true to categories for which product substitutes are widely available, however the end result of the service is critical to business continuity.

#2) Adjust the terms of the agreement to form a mutually beneficial relationship that does not expose either party to significant risk.

Explicit service levels and pricing escalators and de-escalators inherently protect the business from any supplier shortcomings or market changes. As long as commodity increases are tied to a verifiable index, are accommodated by a manufacturer’s letter and advanced notice, and de-escalate at an equal rate should pricing decrease, the supplier is protected from becoming insolvent and the customer is protected from realizing an increase not driven by market conditions. For goods not driven by an identifiable index, pricing increases should be capped at a reasonable rate and subject to review and mutual agreement of the involved parties.

#3) Leverage rigorous service levels as another tool to drive negotiations and ultimately satisfy both parties.

As long as supplier expectations are detailed, measurable, and tied to a condition of termination with cause, there is less business risk to include contract language that may be viewed as more favorable to a supplier than the customer. A common point of disagreement in most MRO contracts is term length. Businesses are hesitant to engage in two or more year agreements with fear of dissatisfaction in a supplier’s performance. From a supplier standpoint, these lengthier terms allow them to invest more heavily in a specific customer without risk of being replaced in the near term. As a result, suppliers are often more likely to give more favorable pricing and terms under these extended agreements. Another point of leverage that incentivizes suppliers to offer more competitive terms is exclusivity clauses or volume commitments. Both can be high risk for a business to include, however are easily protected under strict service levels and quality expectations outlined in the agreement.

When putting together such agreements, stakeholder involvement should go beyond the legal department and relationship owner (department manager and/or procurement). End users, and those more closely aligned with the day to day operations should be consulted to outline critical functions of the supplier and bring to light any historical or future potential issues that will impact the integrity of the relationship or daily operations. Contracting should be viewed as opportunity to maintain and strengthen the relationship from both parties, and not seen as a necessary evil of back and forth on general language until legal departments reach consensus. Dedicating the extra resources necessary to construct a detailed and forward thinking agreement will prove beneficial in the long term, as company standards will be maintained without sacrificing cost competitiveness.

Thanks, Jennifer.

Are You An Idiot? Stupid? Dumb? Oh, and Happy New Year to You Too …

Today’s guest post is from Dalip Raheja, President and CEO of The Mpower Group, and is reprinted with permission (as it originally appeared on The Mpower Group Blog. (Dalip provides us guests posts as well.)

Obviously that’s a rhetorical question and not one that I’m asking but it was in an article that stated:  ”Any idiot should be able to work out that publicly-quoted advertising holding companies (whose margins are public knowledge) have to make their money somewhere…..” (Stephen Foster) and I’m pretty sure that the idiots he was referring to are the procurement departments of various advertising agency’s  clients.  What the author is referring to is the practice of extremely low priced contracts from the agencies but who then get compensated from the media owners (where ads are bought) in the form of rebates.  Think of it as the rebate that car dealers get from auto companies thus muddying up the price you actually pay for your car.

Almost all the major advertising holding companies and reportedly a few others are under investigation by the Department of Justice for taking rebates (kickbacks?).  Stephen points out that this is a result of overzealous procurement departments squeezing the last penny out of contracts thus forcing the agencies to make up margins through rebates.  Another article goes on to say, ”Procurement has triumphed in commoditizing marketing, and its tentacles are deepest in media. Blind e-auctions and a general policy of letting agencies know the cheapest bid will win have stripped out nearly all the visible profit from media.”  Not only has this led to the rebate conundrum but also in agencies directing business to sister companies within the family and also led to the recent scandal of getting third parties to submit high bids so that in-house production units would end up winning the business (also under investigation and resulted in jail time in 2002).

For those that have followed this blog and our work over the years, this should sound a bit familiar – all the way from “Strategic Sourcing is Dead” to the more recent “Back to the Future – Strategic Sourcing is Dead – or It Should Be… ”.  We have long argued that the over-the-top focus on lowest price by procurement was actually destroying value and this would be a perfect illustration of that.  While procurement drives results that deliver to their own metrics, the marketing department suffers as they are not getting the service levels they need and are still paying higher prices – except on a different set of invoices.  Here are some additional comments from different authors: “If brands continue to turn everything into price, if they continue to screw cost so tightly ….then they would be stupid not to realize there will be mission (scope) creep.”  “If brands can’t see how reducing everything to cost at first saps the big agencies….. then they are dumber than anyone could have ever thought.”  Seems like everyone wants to call us idiots, stupid and dumb!!!

Google recently announced a formal “rebate” program where they are paying the agencies for placing ads with them accompanied by this gem, “If you hit certain thresholds and depending on the market, a check is paid back to the agency, which the agency should theoretically pass back to the client,” said a Google source with detailed knowledge of the program. “The agency will then divvy it up by client. P&G gets X and Visa gets Y.”  So procurement feels great that they negotiated a great contract with their agency but are willing to pay more for the actual ads and let marketing then fight to get some share of the rebate from the agency!!  Only in Strategic Sourcing does that make sense .  It’s almost similar to buying lots of things in a store because they are on sale and you can document huge savings – even though you don’t need half the stuff you bought?

The good news is that more and more of the conversation at various conferences is starting to get away from cost and much more into value(TCO=Value Destruction??). Unfortunately, the relentless focus on price/cost is not losing a lot of steam with procurement in most companies.  In the above example, it has changed the way the entire industry operates and is in fact lessening the options and competition for procurement by forcing a lot of independent agencies out of business – all brought upon by strategic sourcing practices.  Perhaps those calling us idiots, dumb and stupid may have a valid point?  I leave that up to you to decide.

Thanks, Dalip!

IT and Functional Departments – Finding the Middle Ground


Today’s guest post is from Torey Guingrich, a Project Manager at Source One Management Services, who focuses on helping global companies drive greater value from their Procurement expenditures.

One of the challenges Procurement can face when working within the typical IT category is working on IT-related services that are used to support functional areas. Think of the marketing group or supply chain function; there are a number of different systems or software products that support those departments, but how clear is ownership of the solution between IT and the business group or function that the solution supports?

The answer to that question can vary across companies, across industries, and even across those within IT and the department utilizing the solution. Given this ambiguity, it is critical for Procurement to ensure representation from both and IT and the functional group for sourcing efforts that involve products and services that are not “purely IT”.

Does Procurement really need to be involved?

For many organizations, IT groups tend to work in a vacuum or keep their sourcing efforts separate from Procurement. While there are nuances that Procurement professionals need to be aware of and navigate within IT, there is clear value that Procurement brings to the table, especially when other functional departments are involved. Those in Procurement should be comfortable working with different areas with differing needs and finding a cohesive path forward. Procurement also brings market information (suppliers, price points, service levels) that IT may not be as focused on, but that could be critical to the overall solution. IT groups can at times limit themselves to certain suppliers for system or software solutions, but there may be alternate suppliers that easily integrate, or provide enough value to justify the effort required for working with disparate suppliers or systems. Procurement can bring that perspective forward and champion the needs of the business to balance the costs associated with IT change.

How do I know if something is “purely” IT or not?

When we look at organizations today, there tends to be a number of software and hardware suppliers that are categorized in spend data as “IT,” but fulfill a more functional or business need. When looking at spend and suppliers considered as IT, be sure to think through your organization’s end users and how the program or solution is being used by different groups. Marketing, HR, supply chain/logistics, and finance are all key functional areas that likely use some form of software to support their processes and should have a principal role in selection, whereas supplier selection for hosting or PCs and related consumables may be made more centrally within the IT area.

How do I get IT and functional departments to work together and come to a consensus?

When working with multiple stakeholder groups, no matter the departments involved, it is important to establish roles and responsibilities from the onset of the initiative. A key to working with these two groups is to consider what is most important to each group. Likely the functionality, ease of use, and flexibility of the solution will be top of mind for the functional department, whereas IT may be more focused on integration and hosting requirements, continuity with the company’s overall technology strategy, and licensing/purchasing models. Beyond IT and the functional area, discuss what other stakeholders may be affected or if other IT systems (and those who administer them) would be impacted downstream in the process. Focus the two (or more) groups on the goals for sourcing and what criteria is going to drive supplier selection – this will help to ensure that any critical issues or “deal-breakers” are identified and don’t come up later in the process. Each group will likely have their own set of requirements and criteria that need to be aligned and prioritized to ensure they are not in direct contrast with each other. Ask each group to look at their requirements and define the priority of each (e.g. rank as nice-to, prefer-to, or must-have) to ensure the core solution encompasses all must-have requirements.

Who ultimately makes the decision?

This is likely going to depend very heavily on your organization’s priority of functional and IT requirements. Ideally, Procurement can help bring these two groups together and drive to a decision point that all, including Procurement, can agree on. When the solution is business critical or the department relies heavily on the given product/service on a day to day basis, the business function is likely to be the lead in terms of making a decision, but IT will in any case need to validate that the solution will work from an infrastructure and support position.
While most may think of Procurement as a cost-reduction engine, we are uniquely positioned to enable relationships among different groups within the organization. Especially when working with software and hardware systems to meet business needs, it is critical to bring in IT stakeholders at the onset of the process to enable a more efficient and effective sourcing process that balances the needs of IT with the needs (and wants) of different functional areas.

Thanks, Torey!