Category Archives: Marketplaces

Low Cost Labour or Leveraged Labour — It’s Not the Same.

Organizations are always looking to cut costs to increase profits, and this goes double in tight economic times. An area that they are constantly looking at is labour, as it’s often the organization’s highest fixed cost. To reduce these costs, they try to move operations to low cost locales, low cost cities in low costs provinces and states for operations they need to keep in their home country, and they move as much labour as they can to low cost countries when they don’t have to stay at home, possibly through outsourcing.

In their minds, they are leveraging cost differentials, global opportunities, currency exchanges, and making smart investment decisions. (And, in their minds, they are doing a good deed by giving people work who might not otherwise get it, often by taking jobs away from people at home that should be doing them.) And herein lies the problem, they think they are saving money by leveraging low cost labour instead of leveraging labour for greater value. And, guess what, the labour that gives your organization more “value” is not the lowest price labour you can find, even for jobs that are traditionally seen as relatively unskilled, or low-skilled.

Let’s take the common example of a call center. Thanks to modern technology, and low cost VOIP, you can put it anywhere there are speakers in your language, often eliminating expensive landlines at the same time. When you move jobs from a $15 hour minimum wage location to an offshore location that costs you $3 an hour in comparison, that saves you 80% right? Maybe. Let us say the local resources you replaced were better educated, better trained, more familiar with your products, and resolve 80% of issues on a single call of 12 minutes or less, for an average issue resolution cost of $3. Let us say the new resources are not as well educated (average high school diploma, not college or university educated like your local resources), minimally trained (they are told how to politely answer a call, but no de-escalation training), and no familiarity with your products besides overview documents and issue resolution scripts. As a result, it will be likely that it takes them an average of three (3) calls of thirty (30) minutes each to fully resolve an issue. This means that the average cost for this “low-cost labour” to resolve an issue is $4.50. That’s 50% more than using a well-trained local resource to resolve the issue. That is not savings. Plus, some of those customers are not going to be happy that a 10 minute problem took 90 minutes of their time plus hold time plus time in between connecting to the rep. And a small percentage of those customers will switch to your competitor when it comes time for them to replace the product. That’s definitely NOT savings!

Let’s take garment production as our next example. This is a typical outsourcing industry that tries to find the lowest cost locales possible. When you go to the lowest cost locale, you end up paying significantly higher freight costs, possibly being stuck with inferior quality garments when the plant switches to lower quality fabrics, possibly ending up with garments with lower shelf life due to inferior stitching when they are manually made by lesser-skilled resources. In comparison, imagine you had a nearshore location that was low freight, used locally sourced high quality fabrics, and skilled workers who used a mix of automatic stitching machines and hand stitching, as required, for high quality production. If quality goes down, satisfaction goes down, and customers start to complain. Then brand reputation goes down and sales go down. Is that savings? Well, if the local production is $5 a garment and the outsourced production is $2 a garment, maybe. But what if the outsourced garment shop uses labour that is child labour under local laws (if not their local laws), the media gets hold of the story, it blows up, and there is a big brand backlash and sales drop 40%. Is it still savings? I’d argue not.

Let’s move upstream, to software development, which is happening more and more often due to many countries having good education systems and skilled workers who aren’t demanding the inflated IT salaries in the USA. Now, there are a lot of countries with highly educated talent who can code (like Poland, India, etc.) that are not the USA, Canada, the EU, the UK, and other countries where high tech has been traditionally clustered, and many of these, after currency conversions, have talent for 1/3 the cost or less. If they have about the same coding rate (in terms of lines of code per hour) as these first world countries, you can argue that it’s a saving. But it’s not just code lines per hour, it’s error free code lines per hour and, most importantly, it’s finishing the project on time, on budget, and to spec. Most IT projects fail and go well beyond budget and timelines and this is triply true in IT Software Development Outsourcing. (the doctor does not want to recount just how many projects he’s seen fail over the years, especially after advising companies not to outsource certain projects, which they did anyway.) Why? Because software development requires more than the ability to code, it requires understanding what the software has to do, who it has to do it for, how it has to do it, and why. If you don’t understand the domain you are developing for, the business who will be implementing the system, the culture of the user, and how they need to work — the system will be a failure even if it’s delivered mostly bug free. So while this is usually expected to be the largest area of cost savings, it’s usually the largest loss a company, especially one new to the game, ends up taking. (Outsourcing can succeed with the right, hybrid, model, but most companies have no clue what this is. Only a few figure it out.)

In other words, if you are trying to leverage low cost labour for cost savings, you’re usually looking in the wrong place. Especially if you are interested in maximizing return on investment, in whatever form that takes (lower total cost of ownership, higher sales, better brand image — which positively correlates with more profit). If you want to leverage labour or value, it’s the right labour, not the lowest cost labour. The labour that is the most productive, produces the highest quality product, gets it right the first time, and keeps your customers coming back. That’s true low-cost labour, because properly leveraged labour increases company profit, making labour costs low in comparison. Think about that the next time you try to replace talent with untrained troops.

Be Wary of Marketplace Solutions for Procurement

Spend Matters is running a series on Marketplaces (Part 1 and Part II) because, sadly, they are making a comeback. Why does the doctor say sadly? Because Marketplaces were designed by (specific) point-of-sale sellers to serve end buyers. They were never designed as full-fledged solutions for Procurement Professionals.

And to understand that, we have to step back and understand what a marketplace is. Traditionally, a marketplace has been a physical area where a number of individuals with goods to sell gather together to present those goods to whatever buyers happen to wander through. And these goods can range from food items and bobbles through clothing and accessories to high end electronics and even personal transportation devices or animals and, literally, everything in between. And payment can be cash, credit, promissory notes, or other goods in trade. And it has been like this for thousands of years. All over the world. Persistent, temporary (one day a week), and transient markets still exist in every county to this day (although my American friends like to call them swap-meets and flea markets, for reasons that perplex those of us with more British and French sensibilities).

Now think about translating this to the online world. You’d essentially be putting together an e-Bay where anyone can sell anything to anyone, but in addition to having to support payment in every online currency imaginable, you’d also have to support promissory notes or offline trading of merchandise, and, of course, implement mechanisms to track that. Does any marketplace support this? No. But this is not the real problem you need to be wary of Marketplaces as a Procurement professional.

The real reason is that they are NOT designed as Procurement solutions. A Procurement solution controls the universe of what’s available, at what price, to who, and when. This is essentially an integrated managed catalog solution. Now it’s true that modern Marketplaces are beginning to support this capability and allowing Procurement organizations who license an instance of the marketplace to restrict the catalogs, items, and have approval over the items and prices before they go into the catalog, but this isn’t really a marketplace, as sellers have limited control, no ability to negotiate, and no ability to provide better offers dynamically. So while it is more of a Procurement solution, it’s not really a marketplace.

Then there’s the issue that Procurement strives to use existing inventory and buy off of contracts, not from marketplace items, so you need a solution that will not allow a non-contract item to be bought when a contract one will do. Furthermore, you also need to buy non-catalog items and services and track those too, and will the marketplace do that?

And then you probably have the issue that you need to make different catalogs and items available in different locations if you are global, and restrict them to those specific solutions — so in addition to buying rules (no off contract items when there is an on-contract one and budget enforcement), you also need multiple view restrictions (or virtual marketplaces) in that single instance.

And then there’s the fact that you don’t typically pay item by item, you typically pay in bulk or monthly, as per a contract, or pay through another system. So you need more advanced accounting and payment tracking than will be found in a typical marketplace. And so on.

So, dear Procurement, be wary of a vendor that offers you a Marketplace solution for your maverick-spend or related Spend Management woes. Most of the solutions, which were really built for B2C, are not yet where you need them to be for B2B.

Important Things to Consider in a Merger and Acquisition

When doing a M&A, many companies over focus on the balance sheets, and the potential balance sheet that could result from the merger/acquisition. For example, if the company being acquired has a product that could be sold to a large percentage of the current customer base at a pretty penny, if the customer base of the company being merged with would be very likely to acquire the current company’s product, if the combined offering would appeal to a large new customer base, and if the merger could take a considerable amount off of overhead (through facility, asset, and resource rationalization), a merger or acquisition is often give a thumbs up even if the M&A could be toxic. How so? Let’s discuss.

Culture. As pointed out in last Friday’s post on how Fraggles and Doozers Require a Delicate Balance to Co-Exist, if the cultures are opposite and the relationship not delicately balanced then one, or both, sides of the relationship are going to suffer. Badly. And despite one’s belief to the contrary, you can’t always Dance Your Cares Away.

Process. How do the two companies accomplish their daily operations? How defined and rigid are their processes and how much do they overlap? If one company has a practice of just handing out “suggested” budgets and buying what they want and another has a minimum two level approval just to buy a stapler (crazy, eh)? Trying to instill a heavy process-driven no-maverick culture on what has essentially been a wild, wild west is no easy feat, and might take longer, and cost significantly more, than one expects. Considerably.

Data. The number crunching M&A advisors continually underestimate the difficulty of doing systems integration. It doesn’t matter if all of the systems have file export capability, APIs, or even interfaces to third party connective middleware — it’s difficult. Why? In the majority of organizations, data is dirty. Very dirty — full of spelling and classification errors (including SKU/categorization, document ID, timestamp, etc.), duplicates, holes (key fields missing), and so on. And in order to integrate, harmonize, and normalize (down to a minimum number of) systems, the data has to harmonized and normalized so that it can be matched one to one (on common suppliers, products, locations, etc.). This is a significant data cleaning effort, that, in large organizations, can often take months, or even years, due to the huge volumes of data that have built up. The Finance geeks will usually take the word of a high priced consulting firm that will promise their ability to do the project in X months for Y dollars, but then realize when they dig in deep it will at least 3 times as long. This is a huge cost and a considerable delay to expected efficiency gains.

Platform. If the M&A is between two software companies, the purpose is usually to acquire a (semi-)complementary software technology that, when integrated, will provide the combined customer base with a bigger, more valuable (and to the combined company, more profitable) offering — but that’s not always as easy as both parties might expect. Generally speaking, software companies that create software for a living believe “it’s all just code, and we’re good at code, so integration will be no problem”, but that’s not always the case. If the two products are on (completely) different stacks; if one product requires a deep knowledge of complex mathematics, modelling, or data science and the other is just implementing a simple business process without a lot of complicated logic; or if one product requires deep domain expertise (such as insurance pricing in a complex regulatory market, aircraft engine reliability testing, etc.) and the other requires nothing more than a knowledge of modern UI elements, that is definitely not the case. And if the acquiring company is the one whose developers have never coded anything that requires deep mathematics or domain knowledge and the acquired company’s code requires world-class expertise to build, this is generally not an integration that’s going to go smooth, if it happens at all.

In other words, a successful M&A is not all about the numbers — it’s about the synergy, which usually has nothing to do with the numbers at all (but which will typically push the numbers up as soon as the two companies truly become one).

Just What Is A Next Generation Supplier Network?

Just about every vendor with a supplier network these days that is doing any development at all is claiming to have a next generation supplier network, but just what is a next generation supplier network?

To answer this, we first need to define what was a first generation supplier network. But this is easier said then done.

According to the procurement dynamo, in his post on how marketplaces transformed into next generation supplier networks that was posted earlier this year, last generation supplier networks were marketplaces. And that’s more less accurate.

By definition, a marketplace is where suppliers can list their wares, buyers can search and review wares of interest, and contact the supplier to place an order. And that’s pretty much what first generation networks, which weren’t that much more powerful than craigslist or e-Bay, could do.

But that doesn’t a network make. Once these “marketplaces” began to allow buyers and sellers to transmit electronic documents, manage their offerings on a public and private basis (for current customers), and securely collaborate they became networks. And this is all many networks do.

So what is a next generation supplier network? According to the procurement dynamo, first and foremost a supplier network is a collaboration framework where both parties exchange business information in order to perform better together. And the doctor agrees. But any secure messaging portal fits this description, so we need to elaborate.

Secondly, a next generation supplier network is one that allows for seamless e-document exchange in EDI, XML, and other standard, accepted, and (government and regulatory body) approved e-format between buyer and supplier supply management systems. It must provide an open API for integration into these systems because if a buyer or supplier has to log in to send or receive a document, it’s first generation.

Thirdly, a next generation supplier network is one that allows suppliers to manage public and private catalogs, with multiple price tiers on the private side, to allow potential customers to find and browse their ways, and current customers to buy, buy, buy. Similarly, it allows buyers to announce tenders, define their typical needs, and be discovered by suppliers they might miss in their searches.

And fourthly, and this is the biggie, a next generation supplier network must support the development of custom apps that allow a supplier to access a supplier portal or capability on a buyer’s platform (to do VMI, for example) or a buyer to access a buyer portal or capability on the supplier’s (sales) platform to access shipment and status information or query factory stock levels. It must not only be the “glue” that allows people to connect, but processes and platforms to connect as well. We’re not really seeing much of this yet, but this will truly distinguish a next generation platform from a current generation one.

Cap Gemini IBX – Closing the Loop on Source to Pay

Cap Gemini is a one of the world’s largest multi-national consulting companies headquartered in Paris, France that focusses on management, outsourcing, and technology-based consulting and specializes in strategy, digital transformation, finance, marketing, IT strategy, solutions design, big data / analytics, and supply chain management consulting. Of course, we are primarily interested in the latter and, in particular, any technology underpinnings.

As part of their technology underpinnings, Cap Gemini has three primary offerings. Spend Analysis, powered by Spend Radar; Procurement Intelligence, powered by Microsoft’s Strategy Companion; and the IBX Business Network that implements their Source-to-Pay platform with e-Sourcing, e-Procurement, and supplier (portal) support. This is what we’re going to cover briefly in this post.

The solution is a seamlessly integrated Source to Pay Solution with a global supplier network, where suppliers can self-register, manage their customer interactions through a portal with a single integrated view, and even manage their invoices that originate outside of the IBX platform (which is a unique capability that will be discussed later on). If you consider the classic Sourcing and Procurement lifecycle, first diagramed by the doctor on SI back in the doctor wants to remind you it’s Sourcing and Procurement, a good S2P solution needs a lot of capability, especially if you want to capture low-volume purchases and spot-buys (and, in particular, catalog management needs to underlie the requisition through the approval process). The IBX platform contains, to some degree, almost everything indicated in this diagram (with the exception of true strategic sourcing decision optimization, which we know is currently limited to the six samurai) plus a lot of cool supplier network, catalog management, and spot-buy features, including a few that you will not find in any other (best-of-breed) platform on the planet.

In this post, we’re going to focus on spot-buy and the invoice management dashboard, as they are the most unique offerings in the platform. The new spot-buy functionality allows a requisitioner to create a requisition for anything they need, fill out as much information as possible (including expected pricing), suggest one or more suppliers on the network, and route it to Sourcing for identification of the proper products and/or services. A (senior) buyer in Sourcing will validate the request, choose the appropriate sourcing process (RFX, auction, third-party catalog offering), make a selection, and return it to the buyer for final acceptance and submission, at which time it will be routed to the appropriate approvers. Note that we say Sourcing, not a buyer, as it contains rule-based workflow management that allow it to be routed to the buyer with the proper authority with the smallest workload to minimize processing time.

The new invoice management dashboard, designed for the supplier, allows a supplier to sign in and see on one screen the status of every invoice sent to every customer on, and off, of the IBX network as well as drill in and get as much related information as there is for IBX platform invoices (including, but not limited to, conversations, buyer requested corrections, goods receipts, purchase orders, etc.). The system supports uploads from standard AP and ERP systems for suppliers to get this information in the system. Being able to log into one portal and service all their IBX customers through one login and one interface is great, but being able to manage all of their invoices, which is something that is always top of mind for a supplier, is even better still.

There’s a lot of other cool and powerful features in the IBX system, and they are covered in detail in the recent piece by the doctor and the prophet over on Spend Matters Pro (Part 1 of 2, membership required) which gives one of the most in-depth and balanced reviews of the system that you are going to find anywhere.