Category Archives: Procurement Innovation

To Manage Innovation, Governments Must Fix Procurement … And Take Care Where AI is Concerned!

A recent article on Civil Service World noted two things that attracted my attention:

  1. To manage innovation, governments must fix procurement
  2. Too often, contracts in AI do not give governments powers to investigate algorithms or the data they are trained on. As a result, they risk taking the blame when things go wrong without the means to find out why.

Public Procurement is expensive. Very expensive. Given that it represents 12% of the annual GDP of an average developed economy, that is a huge amount of spend. Given that the overspend in most departments of most jurisdictions is likely as bad as in the private sector, which means, depending on the category, is likely in the 4% to 6% range at a minimum (based on the results high performing organizations see when implementing best-in-class processes and technology), that means a minimum of 1/2% of GDP is being wasted annually, but based on the fact that most public sector projects exceed initial budgets and timelines, we’d bet that the overspend is double that and at least 1% of the annual GDP. That’s a lot of waste — 770 Billion on the top 10 economies. Furthermore, that assumes that all of the spend is necessary and well planned. (There is likely considerably more savings with better demand planning, more operational efficiency, better project planning, etc. We’re just stating that the savings on committed spend alone is likely 10%.)

The article notes that despite the strategic importance of Procurement, it’s rarely seen as a priority and is more often treated as a standardized compliance function, rather than a tool for strategic investment and, in some cases, has become synonaomous with absurdity, due to an accumulation of rules so complex that even those administering them cannot interpret them creates the perverse incentive of doing the least risky thing to avoid individual liability. As a result, governments end up buying obsolete technologies that make them vulnerable, because innovation evolves so rapidly, and forces them to buy more. The cycle repeats, budgets balloon, and public capabilities diminish.

And, unfortunately, public procurement is a brick-and-mortar process, still more suited to bulk-buying precisely describable goods, accounting for them, and moving onto the next purchase. Innovation is different: you do not know today what is going to be possible tomorrow, even when you are the one inventing the tech. While governments work in one-off projects, innovation is made of ever-changing, always-fleeting products.

Furthermore, those in charge of procuring these technologies are not technologists. Public procurement is professionalized in only 38% of OECD countries, so even if officials had the incentive to experiment, they would not have the expertise.

To combat this, the authors of the article propose that Procurement systems should be like good software, fluid, flexible, and constantly evolving. However, as they note, this will take more than changing rules. As they note, it will take talent that are experts in what they are buying. It will take the treatment of Procurement as a strategic function, with clear lines for advancement for all personnel (as studies have shown that even a marginal improvement in skill can yield significant reductions in costs, times, and contracting complexity). Thirdly, they will need a federated data environment to make use of modern technology. (Especially if they want to use AI.)

This is just the start of what is necessary. There needs to be regular training. There needs to be specialization to different types of functions and purposes. There needs to be a rewrite of rules to focus on the right outcomes, not just a plethora of rules designed to prevent previously undesirable outcomes. There needs to be clear paths from buyer to public organization CPO to department head, not just paths of advancement within the Procurement function. There needs to be a focus on what’s best for the public being served, not best to minimize the risk to the buyer. And a willingness to accept that their may be a few mistakes made here and there as new buyers learn the ropes, while a willingness to weed out anyone that “makes a mistake” in order to give a contract to a supplier who is not the best fit (and do so in exchange for a kickback).

But most importantly, if they acquire AI technology, they also need to acquire the right to investigate the algorithms being used, the data it is trained on, the results of prior training, and the right to inspect any changes to the algorithms, data, and training. Otherwise, you can never trust any AI technology you might want to acquire.

Because governments need to apply the most appropriate AI-enhanced technology more than the private sector, but are the least likely to be able to use them properly.

Do You Have Continuous Cost Control?

If not, you should, because with tariffs rising, markets falling, inflation out of control, sales dropping (as entire markets are cut off with sanctions and trade wars), we’ve gone beyond the point where every dollar counts to the point where every penny counts on every purchase because those pennies add up as every 100 purchases is a dollar and every 100,000 purchases is $1,000 and when money is as tight as it is now, that is actually value (especially for an organization making millions of purchases a year).

And right now, organizations are wasting a lot of dollars through the entire purchasing process. From poor sourcing strategy and process, to poor sourcing and negotiation, through poor purchasing execution, and poorer logistics management, to poor invoice and payment management. Every step without good cost control adds cost to the process, at a time when you need to be taking cost out just to survive.

And we know organizations are losing across the board because the following is required to keep costs in control:

  • good processes at each step
  • (near) real time market intelligence at each step
  • good systems supporting each step
  • continuous monitoring at each stage

And we’ve never seen an organization, even a best-in-class organization, that has all of this for their Procurement department. In fact, it’s rare to find an organization that has more than half of this. It’s now at the point where your organization may not survive if it does not have:

  • well defined processes for
    • supplier discovery and management
    • sourcing
    • contract award and management
    • procurement, on-and-off contract
    • invoice management and accounts payable
    • logistics and warehousing
    • ongoing analysis
  • (near) real-time market intelligence at each step
    • current, financially stable, accessible suppliers
    • current commodity costs, average overhead costs by region, tariffs, etc.
    • current best practices, standard clauses, and insurable risks
    • market availability, quality, delivery times, remaining contractual commitments
    • current entity information, payment terms, standard processing times, community intelligence on supplier OTD
    • carrier availability, costs, surcharges, etc.
    • changes in spend trends and curves, etc.
  • good systems/modules supporting each step
    • supplier 360 module (not just SIM/SRM/SPM .. all supplier data and interactions)
    • sourcing (RFX) management
    • contract negotiation tracking, signing, and ongoing management
    • e-Procurement that supports ALL purchases through the system
    • I2P with automated invoice processing and workflows
      (85% should be touchless on implementation, 95%+ over time)
    • logistics booking and carrier monitoring
    • best in class spend and performance analysis that updates at least daily
      (and regularly re-runs best-in-class trend and outlier analysis and alerts you to unexpected changes)
  • … with built-in alerting when something unexpected happens or doesn’t happen on schedule / as expected

And you don’t. But you need this now more than ever. So, if you don’t have:

  • processes, define them; they can be basic to start; for example, classic 7-step sourcing is enough to start (even though there are some more refined 11 step processes)
  • market intelligence, get yourself some; in particular, supplier discovery as some of your suppliers will go out of business, be unreachable, or get too expensive in the days to come; cost modelling for major spend categories to understand true costs for better negotiations because even if it only shaves half a percentage point on average, that’s still 500K on a 1M category (and you can get some of these solutions for under 100K a year), and those hundreds of thousands quickly add up to millions; and major news/event monitoring to pinpoint emerging risks as fast as possible
  • modules supporting the entire S2P process, acquire them; note that most of these don’t need to be BiC; for example, all of the major suites will tout the tens or hundreds of millions their big customers have “saved” with their solution, but what they won’t tell you is that at least 90% of that savings simply resulted from the client implementing a good process supported by a tool with a decent workflow solution; in other words, you don’t need the multi-million dollar solution (to start), you’ll see the same benefit from a six figure suite that is better than average in the key modules that matter to you (especially since it will take you years to master the new processes it will support, meaning that for a big suite, it’s usually five years or more before you can see more value than just going with a basic solution given that the journey to Best in Class, as determined by Hackett in the mid moughts, is at least eight years)
  • continuous data modelling and analysis, start now; with your spend analysis and performance tool updated at least daily

you need to make a plan to incrementally acquire what you are missing, most critical need first, until you do. (Remember, don’t try a big bang implementation. No matter what the vendor or Big X will tell you, those always end in big booms.)

Stop Being Clueless. It’s Time for Revenge of the Nerds!

Last week we tried to further demystify the marketing madness for you by clarifying that spend orchestration is essentially Clueless for the popular kids.

This is really important because there is no difference between a “spend” orchestration and a plain old “regular” orchestration provider, and neither provides any value whatsoever if you don’t have any spend management (i.e. procurement) systems in place to actually process the spend. Otherwise, the best you get is intake to nowhere … which just provides your stakeholders yet another avenue to ask “where’s my stuff” and another reason to say “I thought this new system was supposed to make you more efficient” and get more impatient when their stuff doesn’t arrive any faster.

In other words, unless you have a hodge-podge of best-of-breed systems that cover most, if not all, of the source-to-pay process, that don’t interconnect, and the systems are old and don’t support multiple roles (or charge full license fees for each user, even a 99% read-only role, that access the users), there is no value in an orchestration, as we’ve said many times (including in our post on how Marketplace Madness is Coming.

What you need is not spend orchestration but spend defenestration — you need to throw any and all unnecessary spend out of the window, and that requires spend investigation, need verification, negotiation, observation, and payment verification. That requires spend analysis, demand forecasting and management, fact-based market insight, adherence to contracts and plans, proper procurement platforms, and proper payment validation platforms.

Moreover, it requires proper utilization of these platforms. And that requires Human Intelligence (HI!), skill, and deep (deep) Procurement knowledge. Geek skill and Procurement nerdiness. The nerdiness to use a best-in-class spend analysis and seek out the opportunity that a pre-packaged analytics routine will never find (because you’ve already stared at that report ten times and found nothing after the second time [wonder why?]). The nerdiness to examine the forecasts and use best-in-class forecasting techniques on real (and up-to-date) sales and market demand data. The nerdiness to pour through market cost data for materials, standard overhead costs, energy costs, water costs, differential costs for different production models, and cost models presented to you by third parties and the supplier to pinpoint the right the model, the right data to feed it with, and the true production cost at different volume levels — and then use this in a fact-based market data negotiation. Then, when you cut an agreement, the nerdiness to make sure it is encoded in the right systems and properly executed on as well as the nerdiness to follow the market over time and detect any inflections that would require you to change direction. And, finally, the nerdiness to make sure the platform is configured to properly m-way match every invoice, detect any attempts to fraudulently change the amount, terms, and payee, and only pay for goods and services received on the agreed upon schedule. In other words, if you want to truly succeed at Procurement, forget about the Clueless — It’s time for the Revenge of the Nerds!

Why Are There So Many Undifferentiated ProcureTech Startups That Still Don’t Solve My Problems? Part III

After all, with over 666 solution providers out there, I should be in solution utopia, right?

In Part I, we said there are three big big reasons for this, they are people-centric, and they all start with F!

  1. Founders
  2. Financiers
  3. Fashionistas

We also discussed Founders in Part I and Financiers in Part II. Today we will discuss the Fashionistas.

Now the doctor knows what you’re saying: “Wait, What“? What do Fashionistas have to do with ProcureTech? And the answer is, well, just about everything unfortunately.

You see, a fashionista is a designer of haute couture, and, today, haute couture is not restricted to clothes … it also breeds into tech, and while one might think it should be restricted to wearable tech, it isn’t. It’s any tech-du-jour that the fashionistas find cool. And, right now, they find FinTech cool. That’s why you see an over-focus on FinTech, of which ProcureTech is fast becoming the leading category, from (some of) the analyst firms and the influencers. Especially if that ProcureTech embraces the current haute couture hype of Gen-AI, whether or not the Gen-AI adds any value whatsoever. (After all, functionally, there is no difference between a $2K designer sundress and a $20 Walmart/Marks & Spencer sundress of the same size and thickness from a functional coverage/cooling perspective.)

Now the doctor knows that you’re probably saying: “so what, you don’t have to listen to them“. And that’s true. But the problem is, it’s mind boggling how many people do, especially at bigger companies. For example, if the ProcureTech player isn’t on a Gartner, Forrester, or IDC map, good luck even getting permission to invite the vendor for an RFI for a core system. We may have made it past the days of “you never got fired for IBM” but we still haven’t made it past the days of “you never got fired for buying the Gartner/Forrester/IDC” recommendation.

These big analyst firms, which feature the same big suites year after year after year with little to no change (because one of them will not include any vendor who is not a paying customer, another will go out of its way to redefine the inclusion criteria each update to what is absolutely minimal to allow for inclusion of all paying customers who want to be in the map [and, in the process, exclude as many non-customers as possible], and the third defines very restrictive criteria to keep the map size, and workload, down, and ends up with a client heavy map). A big company exec following these maps would think the space hasn’t changed in over a decade, even though the biggest change is that most of the companies in the map haven’t done any major innovation in a decade, and don’t appear to be focussed on it either (see the doctor‘s Sailing the Seven Seas Sans a Sextant? piece).

But this isn’t the extent of the problem these analyst firms pose. The real extent, as per our last piece where we noted that the financiers who over-invest and need to make their return pursue the increased pricing strategy (with no increase in underlying functionality or value) do so by ensuring that you are hit with a constant onslaught across all channels, making sure that their investment is hyped up by the big analyst firms and echoed by the Platinum/Diamond/Rhodium consulting and implementation partners. This means that the first thing these PE firms do is have their investment sign a six figure deal with one of these big analyst firms, pay that invoice promptly, make a vague promise to sign more in the future, and get the analyst firm to hype them up like mad. All of a sudden there’s a new Cool Vendor, a new Tech Sub-Category, or something where their investment gets hyped a lot even if it can’t yet make the major map (due to annual revenue, missing baseline functionality, etc.). They also ensure that their the lead influencer consultants at their Platinum+ Partners get these messages and reprints to echo and distribute.

And then, of course, there are the ever present influencers, who are often the biggest fashionistas of the space, with the large-ish followings who will have their newsletters sponsored by these firms, paid speaking engagements at upcoming customer events or conferences these firms sponsor, and other benefits in addition to first access to the firm’s messaging and content for redistribution. This will be especially true if the influencer doesn’t really know the ProcureTech landscape and how valuable a technology like Gen-AI really is to the product being promoted. This is because the less in-depth the influencer’s space and technology knowledge actually is, the greater the chance they will happily echo the firm’s marketing, meaningful or not, because, as one of the more astute readers commented on the doctor‘s Top 10 Ways to be a Procurement Influencer on LinkedIn!, they will happily self-censor their thoughts even without the marketers having to censor for them because they don’t want to cut the branch they sit on. (Or, for you Americans, they’ll happily parrot the message without question because they don’t want to bite the hand that feeds.)

And this is the third reason your ProcureTech solution doesn’t solve your problem, and that’s because the only solutions you hear about are the ones being over-marketed which may not even solve a basic problem for the majority of the customer base the advertising and marketing is (incorrectly) targeting.

In Conclusion

Any one of these F’s will result in a poor fitting solution for you, two of these F’s will result in a struggle to get a return that equals what you paid, and all three F’s will likely result in a disaster. And with over 666 companies, the sad reality is that it is a statistical guarantee there are way more companies that fall victim to all three Fs than you think, at least from your particular point of view.

Remember, even if a company has a good solution that works for the set of problems it was initially designed for (and received an unbiased write-up from an independent analyst), that still doesn’t mean it is right for you. As we have continuously pointed out in prior and forthcoming articles and LinkedIn Comments, YOU still need to make sure your problem aligns, the implementation option aligns, the integration with your systems is possible, the necessary data is available (or at least will be made available by IT), and that you have an independent project assurance expert who’s goal aligns with yours. Otherwise, you’re still falling for the fashionista’s fashion du jour, and failure is waiting around the corner.

Post Script

Please don’t interpret this series to imply that all founders or financiers are bad or that all influencers have evil in their hearts. There are some very good founders (who happily admit their shortcomings, seek out help, and step back at the right time). There are also some great PE firms that make it a point to avoid bidding wars and limit the multiple they pay to what they expect to make back without raising prices to unsustainable levels and then actually help the firm do better at selling. And some influencers honestly think the substance free content they push out is helpful. (It’s not, but they didn’t start to screw you over with bad recommendations, just to get famous and make their fortune off of being a famous influencer.)

However, as you have probably guessed by now, both sides of the coin exist. And the coin is definitely NOT weighted to come up heads anymore. It’s such a shame, shame shame.

Why Are There So Many Undifferentiated ProcureTech Startups That Still Don’t Solve My Problems? Part II

After all, with over 666 solution providers out there, I should be in solution utopia, right?

In Part I, we said there are three big big reasons for this, they are people-centric, and they all start with F!

  1. Founders
  2. Financiers
  3. Fashionistas

Then we went into detail as to why Founders are one of the three big reasons that the majority of ProcureTech firms don’t solve your problems. There were a host of reasons, but the major ones were lack of knowledge about the space, ego, and a reluctance to let either go.

However, founders are only the first part of the problem. The second part are the financiers. Right now, venture capital (VC) and private equity (PE) controls more of the space than they ever did, and while it could be a good thing, as there are many PE firms that know how to run a company responsibly and profitably for growth, some of them are only interested in a quick return (via growth and public exit or quick profit growth at any cost for a quick flip to a bigger PE firm), and most of them over invested in the firms they took a stake in during the last market frenzy. They often invested in valuations over 10X in bidding wars for companies that, frankly, weren’t all that differentiated from a dozen of their peers because they wanted into FinTech during COVID when everyone realized you had to be able to do business, and pay, online, and/or saw FinTech ProcureTech as the next big growth arena. While both are true, it’s almost impossible to grow a company more than 7X in their maximum investment time window, and that is ultimately one of the major reasons they are a major problem in the ProcureTech space right now.

The reality is that, even in SaaS (and B2B SaaS especially), you can’t responsibly sustain growth rates of more than 40% year-over-year. No SaaS is “flick-of-the-switch” no matter how much integration the provider claims to have out of the box, how easy they claim the initial data load will be, or how intuitive the User Interface is supposed to be.

Even the simplest module will likely take a few days to a few weeks to get integrated, populated, and configured, and then you will still have to provide training and support. And even if you have “one codebase”, you’re still not going to have “one instance”, and will have to roll those outdates out sequentially so that you can identify unexpected problems (due to unique configurations your developers didn’t expect) and fix them before you have a CrowdStrike scenario. Which means that for every X clients you add (where 1 < X < 10, typically, depending on how simple your implementation, integration, and support requirements really are), you’re going to have to add another FTE (in development, support, account management/client success, etc.), and guess what, training them and getting them up to speed not only takes precious resources, but takes time.

As a result, for most companies, the rate at which they can sustain growth and maintain the high customer service levels (which are critical for SaaS renewals, especially in tough economic times), is usually 30% to 50%, with most topping out around 40%. This says that, for a typical investment, after 3 years, if the company keeps prices steady, revenue will only be 2.75X, and after 5 years, 5.4X. For a top performer, we’re looking at 3.4X after 3 years and 7.6X after 5 years. Considering that there are very few PE funds that are happy to wait more than 5 years to make their investment back, it’s impossible for them to make more than a 7X return unless something changes in the equation.

There’s only four things that can change to affect the equation to the PE firm’s liking:

  1. more/enhanced offerings (more modules, deeper functionality) that increases the price
  2. (decreased) support levels (“do more with less”)
  3. increase sales as-fast-as-possible to get (as close) to 2X growth year-over-year
  4. increased pricing (charge more for the same functionality)

However, (a) requires more investment in development and product, and increases overhead, which decreases profit, and can take one to three years before you see a revenue increase. You can’t do (b) too fast, because as soon as support drops, customer satisfaction drops, and eventually customers get fed up, renewals drop, and revenue drops. So, you can really only do this in the year you plan to flip or go public. This means that most PE firms who over-invest will focus on (c) and/or (d).

Some PE firms will jack up the pre-sales and sales force to sell, sell, sell pursuing (c) and sometimes it will work. However, that will require their investments to quickly add support personnel for implementation, integration, and/or partner support, and if these new hires can’t be brought up to speed quick enough, we have the situation described in (b), which is undesirable. This just leaves (d) for the majority of PE firms that invest too much in their acquisitions.

Now, no one is going to suddenly pay twice as much as the last customer with no real increase in functionality or value, so for this to happen, they have to ramp up the hype, excitement, and marketing … to the max. And ensure that you are hit with a constant onslaught across all channels and that their investment is also hyped up by the big analyst firms and echoed by the Platinum/Diamond/Rhodium consulting and implementation partners. The goal: to make you think that it’s so much better than all its peers and worth that inflated price tag so you buy it and not a competitor’s product. When this marketing barrage works, it’s because you get an exaggerated view of the product, and believe it will solve a lot more of your problems, and return a lot more value, than it can actually be expected to. And this is another big reason why so many ProcureTechs don’t solve your problems.

However, it’s not the last reason!