Category Archives: Market Intelligence

A Mere Eighty Nine Years Ago Today …

The Tariff Act of 1930, known as the Smoot-Hawley or Hawley-Smoot Tariff, was signed into law and implemented protectionist trade policies that raised tariffs on over 20,000 imported goods to the highest levels since 1828 (when the US relied very heavily on tariffs for public funding purposes).

Why is this act so significant? Most economists agree that this act and the following retaliatory tariffs by America’s trading partners were MAJOR factors that resulted in the reduction of American exports and imports by more than half during the GREAT DEPRESSION.

And let us point out that it wasn’t called the GREAT DEPRESSION as a marketing gimmick. It was called the GREAT DEPRESSION because it was one of the greatest declines of the global economy in all of recorded history! In a mere three years, the worldwide GDP fell by an estimated 15%. That’s FIFTEEN times the decline of GDP during the Great Recession of 2008-2009.

In most countries, this depression lasted until the late 1930’s — a whole decade — and in some countries it lasted all the way until the beginning of World War II! In other words, it was 15 times as bad as the Great Recession (which is a marketing gimmick as this was just a blip when all was said and done) and lasted 15 times as long!

And while it officially stated on Black Tuesday (on October 29, 2009), the Tariff Act of 1930 only served to exacerbate a bad situation, and turned what might have only been a truly great recession into a great depression.

So, my American Readers, tell me what you think is going to happen if you decide to keep your current trade-war happy President in charge for another term (assuming the world survives his first term)? [The worst thing is that his father had to live through the Great Depression and should have not only understood how bad protectionism can backfire but passed that message on as a successful businessman.)

In Spite of Ourselves: Procurement’s Curious Contradictory Behavior


Today’s guest post is by Anthony Mignogna, a Director at Source One, a Corcentric Company. He provides clients with expert, end-to-end support for their procurement software investments. Leveraging years of experience working with mid-market to the Fortune 1000 companies, he empowers procurement organizations to identify opportunities to better leverage technology, assess the software landscape, select best-fit solutions, and implement them to meet their business objectives.

“Numbers never lie.” It’s a popular saying that’s also far from true. In fact, numbers are often most interesting when they call the truth into question.

You can observe a few good examples of this phenomenon in Deloitte’s most recent CPO survey. Rather than painting a clear picture of Procurement’s path forward, the survey results suggest a function that’s uncertain of how it should proceed. CPOs, it seems, are eager to use the survey (and its numbers) as a way of lying to themselves. This is particularly true where talent and technology are concerned.

Though a majority of respondents suggest these are areas of concern, a shocking few report they’ve acted on these opportunities. Let’s take a closer look.

Talent

If you’ve attended a Supply Management conference this decade, you’ve attended a handful of sessions on the ‘talent gap.’ As more and more organizations invest in managing the cost side of their balance sheet, demand for procurement talent is far outpacing the available candidates. This is complicated further by the evolving set of skills and experiences we expect Procurement professionals to leverage. Based on the survey, roughly half of CPOs don’t believe they have the right talent in-house or the resources necessary to find it:

  • 51% of procurement leaders believe their current teams do not have sufficient levels of skills and capabilities to deliver on their procurement strategy.
  • 47% of procurement leaders found it more difficult to attract talent in the last 12 months

Alone, those numbers aren’t especially surprising. What’s interesting is the way they fly in the face of logic CPOs love to employ. Procurement often stands firmly on the buy side of the make vs. buy discussion, but that goes out the window where investing in talent is concerned. Procurement seems totally unwilling to take its own advice:

  • Levels of procurement outsourcing have dropped to 10%, the lowest level in over 5 years.

If you don’t have the talent to support your organization’s goals, and you can’t find that talent externally, outsourcing to organizations capable of scaling and focusing resources seems like an obvious path forward. It’s debatable why organizations it’s still an unpopular path. Are the nearly 50% of organizations that struggle with talent simply failing to consider all of their options, or are CPOs too focused on tactical, day-to-day operations to even consider pursuing more strategic initiatives.

Technology

If one topic trumps talent, it’s technology. Conference agendas, blogs, podcasts, and whitepapers are loaded with questions and suggestions around the incoming digital revolution. The conversation is inescapable. From eSourcing to AI and everything in between, technology is on the top of minds and tips of tongues for Procurement. Identified as a solution to inefficiency, poor visibility, low ROI, and perhaps even the talent gap, software looks like a magic bullet. Deloitte’s survey results support this. They indicate that CPOs are betting big on the promise of new solutions:

  • Two-thirds to three-quarters of organizations surveyed are leveraging digital technologies along the source-to-pay continuum to some extent.
  • The rate of digital technology adoption among organizations is highest in the P2P process, followed by sourcing and tactical buying.

Again, this is not especially surprising, particularly when you consider that most of the pain points cited in the survey are closely related to technology. Two statistics, however, jumped out. Like the talent findings cited above, they suggest the numbers don’t tell the full story:

  • Only 3% of Procurement leaders believe their staff possess all the skills required to maximize use of digital capabilities.
  • Only 6% of Procurement leaders believe their digital strategy will help them fully deliver on their objectives.

Suffice it to say, there is no amount of statistical error tolerance that can make 3% and 6% look like a significant chunk of the survey’s respondents. Juxtaposed against Procurement’s enthusiasm for new technologies, these statistics are especially alarming.

Again, the paradox could point to one of a few issues. Maybe it’s just a symptom of the talent and skills shortage. On the other hand, it might simply point to flaws in the way Procurement views technology. Expecting an antidote to cure all of their ills, they’re finding something less exciting. It appears that CPOs are good at speculating about technology and even good enough at purchasing. When it comes to building the necessary ecosystem to build a compelling business case and support implementation, however, they fall flat and realize disappointing results.

The survey results suggests that 9 in 10 CPOs are opting for the status quo – and they know it. It might be time to break the trend and give outsourcing some thought once again. Maybe then our actions will match our ‘priorities’ and the numbers will start to tell the truth.

Thanks, Anthony.

AI Will Make Your Talent More Efficient and Effective!

… but, as per our post last week, AI won’t solve your talent problem, so let’s get that out of the way right now!

AI, regardless of whether it’s being sold as assisted intelligence, augmented intelligence, or amplified intelligence, is valuable It’s powerful, and in some domains, essential to the modern day enterprise. In fact, without it, some enterprises won’t survive because the efficiency improvements and related cost reductions it can bring are so significant that competitors who invest will be able to reduce prices and leave their breathren in the dust.

And while it won’t ever replace a workforce, as it will not only allow that workforce to be 2, 3, or 10 times as effective, it will allow you to control the size of your workforce and associated costs where it can be properly applied, leaving more money to hire workers in areas of the business where AI can’t be employed and you are understaffed and/or not operating at full efficiency.

A great example we’re all familiar with is automated invoice matching and processing. A lot of vendors have automated 3-way match and kick out an invoice for manual review when something is off. This allows the department to focus on the 10% to 15% of invoices that have errors instead of spot checking 10% to 15% of invoices they have time to manually review, allowing all errors to be caught and dealt with if the manpower is efficient (and all invoice-based overspend to be prevented, which prevents costly recovery efforts down the road).

But the reality is that only 10% of these invoices have errors that need to be manually addressed. In many cases its missing PO numbers, missing bill to or ship to addresses, unrecognized line items due to OCR errors, etc. which can easily be corrected by an assisted intelligence system which can search the PO database and find out that there’s only one PO for that supplier which is for the same item (quantity, and price) shipped, one address in the vendor master, or a 95% fuzzy match due to a simple OCR error of reading an “O” as a “0” or dropping a character. Why should a human waste time on that? Good AI can handle this, and handle bouncing back an invoice to a vendor when a price is wrong (and allow the vendor to correct or open a dispute), when there are no associated shipping notices or receipts (and tell the vendor the invoice is rejected until such time as one or the other are received), etc. At the end, all the procurement professional or AP clerk is left with are invoices where there are no corresponding contracts, POs, or work orders; invoices from unknown suppliers; invoices with unapproved payment terms (or unknown accounts), and other situations that need to be manually handled. About 1% to 1.5% of invoices, on average for a large organization. For an organization with 1M invoices a year, this is 1,000 – and can be fully dealt with by 2-3 staff members, in comparison to an average organization which would have 20 who couldn’t properly review 20% of the invoices.

There are similar situations where AI can greatly speed up Sourcing Events. For example, new supplier discovery efforts often take 40 to 60 hours of manpower, and a supplier discovery platform like Tealbook can sometimes reduce that to as little as 4 hours and achieve the same result.

There are other examples in sourcing and procurement, but the point is proper AI technology is worth its weight in gold. (But relying on AI to entirely replace part of your workforce will yield an investment less valuable than lumps of coal, which at least you can burn for heat when your business goes bankrupt due to one bad decision on the part of an AI without a complete world-view or real intelligence to process it.)

Your Tail Spend Should be Vanishingly Small …

Not the 30% to 40% of spend that it probably is (as this is the amount of tail spend in the average organization)!

The reason it’s so large is that, in most companies, there is strategically sourced spend and tail spend when, in fact, there should be (at least) three categories of spend: strategic, managed, and tail — and, if the managed spend is large enough, you can break out a 4th category of tactically procured spend. Each of these categories is defined as follows:

Strategically Sourced
This is the spend that is high volume, high dollar, or strategic to your organization. While there will usually be a dollar minimum relative to your total spend (i.e. 5M to 50M depending on organizational size), if the part is critical to production of a primary product or service, if it can only be sourced from one supplier (hopefully split across multiple locations), and if its absence would bring an entire multi-million production line to a halt, then it would be include, even if it was only 1M annual spend).

More generally speaking, a product or service fits in this category if the return expected from a strategic sourcing exercise (which costs manpower and technology) will be considerable relative to the cost. (I.E. an ROI of 3X to 5X.)

Managed
This is where you put the categories or buckets of spend that are not quite big enough to undergo a strategic sourcing event (as the expected return is low relative to the effort of a manual strategic sourcing event) but where not managing the spend leads to a considerable loss when you look at an average of 15% or more overspend in tail spend.

For example, in a big multi-national, 1M is not large when there are 100M categories, but 15% overspend on 1M is 150K, that’s enough to pay the salary and overhead of another junior buyer.

This is where you do mini-events and/or take steps to make sure Procurement is efficient and cost-effective throughout the category.

Good examples are

  • low-value non-electronic office supplies and MOR, where you can integrate the punch-outs of two or three leading, generally cost-efficient vendors, into a federated search catalog which forces the organizational buyers to procure the lowest cost item in stock that meets the requirement without supervisor oversight (and keeps costs close to market, vs. 15% above)
  • recurring tech-support services, where you can integrate master rate cards from local vendors and just have the users select a vendor with an approved rate card to perform the service (and push all spend through the system)
  • one-time event spend, where you bundle up as much of the spend as possible and push out a standardized RFI to an event organization firm who makes money by aggregating event-related spend across their clients, negotiating sizeable discounts from venues and services providers, and passing those savings on to their clients in exchange for management fees … while you won’t see the full 20% they negotiate once you deduct the management fee, you might still see 10% of it, and that’s savings to you

Tactically Procured
If a category of spend is large enough that an auction or (multi-round) RFI will save money, but not so large that the savings are enough to waste a buyer’s time on a strategic sourcing event or tactical procurement event, then you can push that spend to a platform with modern automation and assisted intelligence that can automate the RFI or auction for standardized goods and services.

If the goods and services are market standard, or you have fully defined specifications that have been vetted and manufactured multiple times without issue, if you have a set of pre-approved suppliers, if you have price history and market data, why not just automate the entire process with bounds and checks?

New providers like Keelvar, Levadata, and Xeeva are realizing this and this is a great way to manage what was tail spend and keep costs down.

True Tail
These are true small, one-off, purchases that can’t be combined into a managed (or tactically procured) category and are truly not big enough to waste the valuable time of even a junior buyer on.

This should be less than 10% of your spend at most, and, in reality, with the low-cost, low-effort of automated tactical procurement in newer platforms, as well as the guided buying features of modern federated catalog platforms, should be less than 5% of your spend. A modern organization should not be overspending by more than 0.5% of its total spend (which is an acceptable margin of spend error), not the 4.5% to 6% or more it is typically overspending on the tail when 30% to 40% of the organizational spend is unmanaged.

Don’t Forget The Big Four Questions to Ask During Any Mega-Acquisition

Four years ago, during the last big M&A Frenzy, SI published a post on The First Four Questions to Ask During Any Mega-Acquisition, that is still just as relevant today as it was four years ago.

And while it was direct, it’s a good idea to be direct because sometimes you need to let the vendor know you’re not in the mood for any shenanigans and if they bought your former vendor for the sole purpose of playing such shenanigans with you, you’re ready to walk (and execute that change of control agreement in your contract tomorrow).

1. How will you screw us over on price?

As we said before, every acquisition brings with it the promise of economy of scale and lower price, but it typically takes years to understand and take advantage of platform overlap, redefine responsibilities and organizational boundaries, and identify staff re-assignments. And since, in the interim, change management experts, process consultants, and other resources need to be brought on board, overhead goes up and costs go up accordingly.

Or, the mega vendor bought your vendor just to retire its solution and migrate your vendor’s client base to its more expensive solution. Even if the solution is superior, it’s not necessarily superior for you and you don’t necessarily want it or the higher price tag.

2. How will we get screwed over on quality of service?

As we said before, the biggest fish in the combined company gets the best resources. And even if your current organization was a big fish in the old company, that does not mean your company will be a big fish in the merged company. Your company might just be a medium sized fish that gets the “B” Team, if it is lucky.

The fact of the matter is your current support team could be re-assigned or let go, the new team might not know anything about your solution, and without the current team your service levels might not be met. And make sure to point out the service levels the new vendor is committed to during the conversation so both parties can be on the same page about expectations from day one.

3. How will we get screwed out of innovation?

As per our last post, will the merged company continue to develop the platform your company is dependent on or will you remain locked in to a multi-year deal as the technology platform you bought withers and dies?

If the company is not going to support the platform, make sure that they are aware of the “full data export in standardized format” clause you included in the contract (and that you expect it to be honoured when the time comes) and that you expect full integration support so you can augment what you have where your platform is lacking.

4. What new and interesting ways will we get screwed in the future?

What additional layers of complexity and confusion will the new, combined, legal team try to weasel into the contract renewal and how will that bite your organization in its backside down the road?

Longer contractual terms? Non-disparagement clauses? No ability to discuss platform shortcomings when trying to find a best-of-breed solution to plug the holes. No ability to buy a non-vendor module when the vendor has one. And so on.

Not every mega-vendor is out to screw you, but make sure from day one that they’re not and that you are on the same page.

And yes, this is confrontational.  But sometimes you have to stand up for yourself.