Category Archives: Market Intelligence

Why You Should Not Build Your Own e-Sourcing System, Part I

In a recent post titled “thinking of building your own e-sourcing system please don’t” over on Spend Matters UK, Mr. Smith (who went to Washington, as per Buy, Buy, Buy, Once Bitten Twice Shy) asks you to please, please, please not build your own e-Sourcing system because, apparently, a few public sector organizations have this crazy idea that they can build their own and that it can compete with best-of-breed solutions on the market today.

Wow! Today’s best of breed systems have been built on fifteen-plus (15+) internet years of development, implementation, integration, and customer support experience by seasoned professionals who have had numerous bouts with weariness and wisdom. (And since we all know that internet years are measured in cat years, that’s really ninety-plus years of experience.) How could any average organization, especially in the public sector which is typically behind in technology and running on the B-Team (since unionized pay scales typically mean that they can’t afford the A-Team that commands private sector pay scales) really think they can come up with anything close?

In addition to Mr. Smith’s arguments that, especially in the public sector, you are:

  • going to waste OUR money building it,
  • waste exorbitant amounts of money keeping the system up to date and compliant with ever-shifting legislation, and
  • only feed those dangerous delusions (until the Smug reaches critical mass and puts us at risk of a disaster of epic proportions),

there are dozens of reasons NOT to build your own e-Sourcing system, or to even think that there is the slightest of chance you could build your own.

In addition to the standard reasons of:

  • Lack of Sourcing Domain Experience
  • Lack of Software Design Skills
  • Lack of A-Team Software Development Talent

in Sourcing, you also have to deal with the traditional software challenges of:

  • Big Data
  • Real-Time Requirements in a Distributed System
  • Variable Workflows

as well as a host of challenges in each of the main, traditional, areas of:

  • Spend Analysis
  • e-Negotiation (RFX & e-Auction)
  • Decision Optimization

which, to make it abundantly clear that no public and private organization should even remotely consider building their own e-Sourcing system, will be discussed in detail in the next three posts. Unless your core business is a software development and delivery organization specializing in Sourcing or Source-to-Pay, when it comes to building a modern e-Sourcing system to meet the needs of the organization and identify savings and value, just don’t do it. Put those Nike’s back in the closet and break out those Carolinas.

Correlations are Good, Causations are Better, but Models are Best!

the maverick recently penned a great post on “Spurious Correlations, 150% Cost Savings and How to Justify Your Next Procurement Project” on Spend Matters that expounded upon the classic problem of second rate analysts, who didn’t read the classic post where the Brain gives Pinky a lesson in Statistics, using correlation to infer causation. If you listen to these analysts, you’ll find yourself in the same situation Roy Anderson was in when he was former MetLife CPO. Namely, the situation where if I added up all the promised savings from vendors and Aberdeen Reports, I’d be saving over 100% and suppliers would be paying me money! Not very likely, is it, but definitely the conclusion you’d draw if you stacked enough Aberdeen reports end to end!

After all, with enough data, you can find all sorts of near perfect correlations between (almost) completely unrelated data sets. For example, Pierre points out that if you go to tylervigen.com and check out the spurious correlations on the site, you’ll find out that there’s a near perfect correlation between

  • the number of people who drown after falling out of a fishing boat and the marriage rate in Kentucky (r=0.95),
  • the total number of computer science doctorates awarded in the US and the total revenue generated by arcades (r=0.99), and
  • the annual number of automotive suicides and the number of Japanese passenger cars sold in the US (r=0.94).

And while you might believe that computer science doctoral candidates spend all their free time in arcades, do you believe that buyers of Japanese passenger cars buy them to commit suicide or that somehow the marriage rate in Kentucky has something to do with the number of people who drown after falling out of a fishing boat? (I hope not!)

As Pierre notes, it’s important to have a good ROI model that really looks at the “R” and the “I” realistically. A model that uses ranges that allows you, as an analyst, to play around with assumptions and adjust the results based upon modifications to the assumptions. Procurement might want to be aggressive, but management might want to be conservative. Procurement might assume an abundance of supply, but Engineering, knowing that only a couple of suppliers are qualified to produce the refined raw materials needed, might want to assume a lack of supply based on the fact that these refined raw materials are becoming increasingly sought after. And so on.

Without a detailed model that captures all the cost components and the assumptions they are based on, Procurement can’t be realistic in its projections or its project requests. Analyst reports with benchmark data are a great starting point to identify where to look for savings, but the savings still have to be validated before a proposal is put forward.

Procurement is Doomed! Entombed! Marooned!

Apparently the recent Procurement Pub Debate, summarized in a recent post from Mr. Smith on “procurement pub debate arguments from the doomed side”, ended up with a win for the pro side. But the harsh reality, is that Procurement, at least as we know it, is doomed, ready to be entombed, and marooned on a desert Island. The pro side can be as blindly optimistic as they want to be, but it doesn’t change Procurement’s future.

As the supporters of the doomed side note, with modern web platforms:

  • it’s easy to buy what you want, when you want, for the price you want,
  • up-to-date market information lets you know how the price compares to other offerings on the market, and
  • peer reviews and opinion crowd sourcing lets you know how likely it is to fit your needs.

In other words, from an average employee’s point of view, who needs Procurement?

Furthermore,

  • inflation is back, so Procurement is not going to be able to negotiate significant cost reductions, or do much better than a market auction across a sufficient supply base,
  • risk is increasing, and organizations’ think it’s more important to focus on Risk Management in the Supply Base than Procurement, and
  • the market is becoming more digitized by the day and the organization would rather focus on expanding sales through the largest sales channel out there than worry about cost control as they see increased revenue as the quickest path to greater profit in a time of inflation.

So, despite the continued need of an average organization to insure that the organization can continue to acquire the supply necessary to meet customer demand, Procurement is increasingly being seen to be of secondary importance in an average organization and this trend is only going to continue. As it stands now, Procurement has peaked well below the level it should have reached. There is no future for Procurement. Unless, of course, it evolves. How? Stay tuned!

M&A: Is What’s Good for the Shepherd, Good for the Flock? Part II

In Part I, we noted that the prophet has a different take than the doctor on the recent M&A (merger and acquisition) frenzy that is again gripping the Procurement space and, contrary to the doctor‘s opinion, the prophet believes that, at least in the long term, it brings more clarity than confusion. We then summarized the cons that the doctor sees with the M&A frenzy and the pros that the prophet sees. The points that the prophet made were all valid points and they definitely presented opportunities for the firms in question, but is what’s good for the shepherd good for the flock?

While it’s obvious that any of the advantages brought up by the prophet bring great value to the new organization, do they bring great value to the customer as well? (Let’s face it, while the doctor loves innovative and customer-focussed vendors, he loves innovative and customer-focussed solutions even more.) The Supply Management space will only advance if the organizations doing Supply Management can advance. And to advance, they need the right (transitional) processes, the right technology platforms, and the right talented people to run the function. Does a merger necessarily improve the processes, the platforms, or the people? Let’s take the advantages proffered up by the prophet one by one.

  • Differentiation by way of a broader solution offering
    If you were relying on the vendor for its great sourcing platform, and the merger was between a platform provider and a services provider that allows the new organization to offer a full (outsourced) sourcing solution, how much does this help you if your organization was a leader in sourcing process and capability and doesn’t need any of the new service offerings? Or let’s say a sourcing provider and P2P provider merged but your organization already has a superior P2P platform implemented and integrated with the sourcing platform. Does the merger help you?
  • New Points of Entry
    While it’s great for the newly merged company that they have more opportunities to secure more customers, except for the fact that this may lead to increased financial stability for the provider (which will make your risk management department happy), that doesn’t do anything for you as a customer. The only thing that you care about is whether there are new products, functions, or services that make your operations better.
  • Lower-Cost foot in the door
    With the exception that this lowers the provider’s overhead in the long term and the provider is willing to reinvest this savings in innovation that results in free platform / product upgrades, this doesn’t do anything for you as a customer.
  • Stealth-Transformation
    While this is great from the perspective of an acquiring company that can use the acquiree’s personnel and capabilities to transform itself into a big league competitor under the radar, what does this do for the end customer? Maybe nothing!
  • A Better Executive Team
    If the executive team understands your needs and support requirements better and actively works to improve their service offerings for you, this could be a good thing, but not every new thang will be right for your organization.
  • New Products / Solutions
    If the new products / solutions complement the products / solutions that your organization is using and can be utilized by your organization to increase organization capability and maturity, this will be a good thing, but the new products / solutions might be focussed on a completely different type of customer base and leave you hanging high and dry.

In other words, while all of these benefits are arguably good for the shepherd, there is no guarantee that any of them are good for the existing flock. And even if some of these benefits are good for some of the herd, there’s no guarantee that they will be good for each individual sheep. So, again, the doctor must ask, from a customer perspective, M&A: Confusion or Clarity?

M&A: Is What’s Good for the Shepherd, Good for the Flock? Part I

As the doctor expected, the prophet has a different take on the recent M&A (merger and acquisition) frenzy that is again gripping the Procurement space and, contrary to the doctor‘s opinion, the prophet believes that, at least in the long term, it brings more clarity than confusion. Furthermore, in his posts over on Spend Matters, the prophet makes some great arguments as to why M&A is a good thing, at least from the vendor perspective.

But is what’s good for the shepherd good for the flock?

Let’s look at the cons that the doctor highlighted in his original post that asked if M&A was confusion or clarity.

  • Many acquisitions end up being overvalued
    As the prophet neatly summarized, the doctor has noted that some transactions often remain “in the red” even a couple of years after the transaction has been made. Maybe the value was there, but if it’s not captured, and the private investors and/or VCs start demanding realization, who’s going to pay?
  • Many acquisitions end up significantly overlapping in functionality / offering
    Does a customer need two RFX platforms? Two invoice management platforms? Two reporting engines? Nope! In order to streamline costs and operations, one of these platforms has to be axed, and a large portion of the customer base migrated. If the functions don’t map one to one, who loses?
  • Many acquisitions run on completely different platforms & stacks
    This makes integration a nightmare. Either a lot of work, and money, will need to be invested to make an integrated platform work or one platform will have to be selected as the core go-forward platform, critical functionality developed on it, and a migration strategy, and module, developed for the customer base that will need to be migrated. In the short term, costs will go up (and not down, which is what should happen if there is synergy).

Now let’s look at the pros that the prophet highlighted in his pieces on “A Critical Take on M&A in Procurement Technology” and “M&As in Procurement Technology Work” on Spend Matters.

  • Differentiation by way of a broader solution offering
    than the companies could offer on their own, which creates
  • New Points of Entry
    into the market than a point-based solution can provide with a
  • Lower-Cost foot in the door
    since, even if the technology headcount can not be synergized, at least the salesforce can be (and sell more per unit). In addition, the combined company can effect a
  • Stealth-Transformation
    that allows the combined organization to offer more than each could on its own, because 1+1=3, and all of a sudden the new organization can graduate from the minors to the big leagues, with the support of
  • A Better Executive Team
    that is formed by bubbling up the cream of the crop for each position in a manner that allows each executive (who often had to wear multiple hats in the individual smaller organizations) to focus in on their key strengths which will help the company identify
  • New Products / Solutions
    that could be developed and brought to market by the combined organization that neither organization could consider on its own.

And these are all real opportunities that can be realized by the firms in question in a merger or acquisition that truly has the right synergy, but is what’s good for the shepherd good for the flock? Stay tuned for Part II!