Category Archives: Risk Management

A Great Guide to Outsourcing Risk Management, Part II

Yesterday we discussed the starting point of your outsourcing project and how you go about selecting service providers to issue RFPs to. Today we will discuss proposal evaluation and remind you to check out the full series on outsourcing risk management by Alsbridge, as printed by SourcingMag.com, that this series is partially based on.

So How Do You Evaluate The Proposals?

Before you start, you should have an evaluation plan and a weighting scheme that weights each proposal that meets your minimum requirements on a comparable scale that addresses, at a minimum, solution completeness, solution cost, provider experience, proposal complexity, leadership capability, deal importance, and how. Then, if there is a clear winner, you start negotiations with the pack leader. If two, or three, solutions, are close, you can request additional information in a follow-up RFP, provided you specified in your original RFP that a follow-up round will be held if the organization feels that it does not have enough information to make a final selection. So what are you looking for?

  • Solution Completeness
    To what extent does the solution being proposed meat your requirements?
  • Solution Cost
    How does the cost stack up compared to the other proposals relative to the completeness of the solution being proposed? Be wary of proposals with an extremely low price tag that seem too good to be true — they usually are.
  • Provider Experience
    How much experience does the provider have delivering solutions of the completeness and complexity they are proposing?
  • Proposal Complexity
    Is the organization able to offer the complete solution on its own, or will it need to partner with one or more external organizations? Be wary of proposals that require a team of external participants to deliver … since the communication and coordination challenges increase exponentially with each additional participant.
  • Leadership Capability
    Has the provider led the previous projects of similar complexity, or merely been an understudy? You’re looking for a provider who will take ownership of the processes and systems you’re outsourcing … if you have to guide them every step of the way, you might as well just keep the processes in house!
  • Deal Importance
    How big is this opportunity to the provider and, conversely, how important will you be to them as their customer? If this deal would double their size and represent half of their income, you’ll be pretty damn important. However, if you’d represent less than 1% of their income, you’d be pretty far down on their priority list and the vendor might not be that responsive when problems arose that needed immediate resolution. However, be wary of being too important … if they have to tie up all available resources just to get started, what extra support will be available down the road?
  • How?
    When reviewing every statement of action, be sure to look for How?. If the answer isn’t in the proposal, you might have a problem. For example, if they are proposing that they will open a new support facility just for you near your location, you want to know how they are going to do this in the timeframe allowed. It takes time to hire and train people, and even though the big three can ship servers within a week, it takes time to set them up, and telecom circuits alone can take over 60 days to order and install.

Once you’ve selected you’re preferred provider, you can move on to the contract, which is the subject of the next post in this series.

A Great Guide to Outsourcing Risk Management, Part I

Not that long ago, SourcingMag.com published a great six part series, authored by Alsbridge on “managing risk in outsourcing” that covered a best-practice approach to reducing your outsourcing risk that is a must-read for anyone considering outsourcing as part of their procurement function, even if (and especially if) it is just the tactical part. Although the article, and the series, focusses primarily on the aspects of IT outsourcing, the reality is that tactical improvements primarily originate from automation and better systems, so you really need to understand the IT trade-offs before you can make an educated and informed decision.

It’s also important to remember that the reality is that even though there is little to be saved on tactical process automation or improvement relative to what can be saved from a well executed strategic sourcing event on a high-dollar category, the reality is that a botched automation of your tactical procurement processes, especially as part of an outsourcing project, can cost you dearly as your team will have to spend all their time fixing the mess … and the opportunity cost of doing such is phenomenal. Moreover, if your systems are not aligned, you’ll never capture all of the savings that your expert sourcerors negotiate. (There’s a reason that most companies capture less than 50% of negotiated cost savings … and that reason is inadequate systems and poor monitoring.) Thus, before you outsource any aspect of your procurement operation, which you should consider doing if an outsourcing provider can offer you better technologies and processes at a lower cost of operation, it’s important that you understand what you are going to outsource, how you’re going to get a return on your investment, and how you’re going to manage the outsourcing project to make sure the savings materialize. In other words, before you embark on a procurement outsourcing project, you need a good strategy.

Where Do You Start?

Start by identifying all of the potential failure points in your plan, determining the probability of failure and the associated cost if a failure occurs, and then develop risk mitigating plans for those risks that have more than a slight chance of occurrence or a high recovery cost. Then you can move on to your search for a service provider partner.

So How Do You Select The Right Service Provider?

Do some research, starting with the industry leading blogs (like Sourcing Innovation) and the free resource sites (like the SI Resource Site) available to you to identify potential providers. Then embark upon an RFX project to help you identify the provider who can meet your needs at the best price point.

Make sure the RFP completely spells out what you want to outsource; the processes you want followed; the people, process, and system interactions you desire; the change management processes that you follow; the frequency with which you inspect system updates and innovation; current process cycle times; and the cycle-time and cost reductions you are expecting; the service levels you require; and the degree of year-over-year improvements that are expected from your service provider. It’s important that the RFP spells out everything the vendor needs to know, otherwise, they won’t be able to put their best foot forward and will have difficulty being successful. It’s not up to them to fret the details, it’s up to you. Penalty clause or not, it’s still your mess to clean up if your vendors don’t get paid the right amount on time or, even worse, they all get overpaid by 10% and you have to fight for refunds and it’s still your liability if financial statements are wrong because the provider screwed up. If you can prove complete ignorance and best-effort to insure financial statement accuracy, you might escape jail, but that will be of little consolation if the resulting fines bankrupt your company and you’re out on your ass without a job. The simple fact of the matter is that the more detail you can provide in your RFP, the better a potential partner can determine whether or not they can provide the solution you need and how much it will likely cost to do so. And if you don’t know how to put together a good RFP, you can always Get Help from an expert. Once the RFPs are in, you start with the evaluation, which is the subject of Part II of our series.

Dead Company II: If You’re Hoarding Cash …

Like my fellow bloggers, I talk to a lot of companies in the run of a week, and many more in the run of a month, and one thing I’ve been hearing too much of lately is “we’ve cut back on X” — where X is marketing, development, or outside consulting — “because we have to conserve cash to get through the current crisis” — where the crisis is the current recession, downturn, etc. And it saddens me because the truth of the situation is thus: If You’re Hoarding Cash, You’re Not Going To Last … you’re just prolonging a slow, agonizing death!

As I’ve reminded you many times before, great companies are born in recessions … especially in Spend Management! This is a spend management company’s best time to shine … and the time you are most likely to get the undivided attention of senior management who dismissed you as unnecessary when times were good and the stream of cash was overflowing. Plus, it’s an opportunistic perfect storm like none you’ve ever seen: companies are desperate for savings, prices have nose-dived in many commodity markets which had been climbing steadily for years, and many types of spend management technology — including sourcing, procurement, analysis, optimization, supplier information management, and trade management — are now mature low-risk technologies in the eyes of even the most conservative techno-phobes. Plus, SaaS has hit mainstream and advances in cloud infrastructures allow you to keep your costs, and prices, low enough to make your solutions, and the returns they offer, within the budgets of even the lower end of the mid-market. In other words, everyone needs it, everyone can benefit from it, and everyone can afford it — especially if you can offer SaaS and they don’t have to come up with a large amount of cash up front, before they see savings.

But you’re not going to see a single sale if:

  • they don’t know you’re there
    and they won’t if you don’t keep your brand out there where they can find it
  • you’re not keeping your technology up-to-date
    because even the most technology illiterate procurement professionals know that advantages are fleeting and the only real value will come from solutions that are continually being improved and updated
  • you’re not innovating ahead of your competitors
    because it is always a buyer’s market and customers are going to buy the best solution … and you’re not going to know what that is if you don’t bring in some expert help once in a while to help you do a competitive analysis and chart the right roadmap

Now, I’m not saying that you should go out and spend 50K to 100K on a trade-show and staff your booth with magicians, super models, and sports stars just to get attention; that you should double your development team and see how much you can pump out in the next year; or that you should go out and hire a McKinsey or A.T. Kearney to do a complete end-to-end analysis of your software and service offerings — just that you need to conduct business as usual against a thought-out growth strategy. Otherwise, you might as well pack it in and go home, because odds are that you have no future.

However, I am saying that you need to maintain visibility where it counts, and especially on-line as some recent studies have found that appropriately designed on-line campaigns can easily be three times as effective as print campaigns; that you need to continue to enhance your current offering and continue to develop one or more new offerings with a high ROI potential, and that you need to continue to validate your offerings and directions with an external expert. And if you’re smart, you can stretch smaller marketing, development, and consulting budgets and get a big bang for your buck.

Because if you decide to hoard your cash, here’s what happens.

  • You cut your marketing budget and fade from memory because no one remembers you exist in the face of constant marketing from your smarter peers; as a result, you don’t get invited to the table when new opportunities arise and your pipeline shrinks until there’s no one left to sell to.
  • You cut your development budget and your solutions get stale, and even when you do get invited to the table, you lose because your competition not only has more functionality, but has new features and functions that streamline processes, improve analysis, and identify more savings.
  • You cut your consulting budget and you lose touch with your target market, going down tangents that your CEO thinks are important but that, in reality, are only valuable to one or two companies with obscure processes and, as a result, what you thought was a great new feature that would put you ahead of your competition actually scares potential customers away.

And even if you manage to make it through the recession to the next boom, you’ll be one to two years behind your competition, who will likely grow by leaps and bounds and decimate you on all fronts when you emerge from your cocoon. So, unless you’re sitting on at least three to four year’s worth of cash in the bank, which I know is not the case for over 99% of companies in this space, remember this: those who hoard cash don’t last. Another shake-out is coming … and it is the predators, and not the prey, that are going to win this round. The question is, which are you?

Supply Chain Management Implementation Risk Minimization

As both an enterprise software expert and a supply chain technology expert, it’s a safe bet that the recent article in i2’s Supply Chain Leader on “Minimizing Risk During SCM Implementations” would get my attention. The reality is that a poorly executed supply chain management implementation across an enterprise can destroy your business. The 2.25 Billion Inventory write-down that Cisco had to take in 2001, due to a breakdown in its supply chain forecasting and visibility systems, might have been bad, but Foxmeyer, who in 1996 was the 2nd largest wholesale drug distributor in the US with annual sales over 5 Billion went out of business thanks to an ambitious IT revamp, that included a massive enterprise wide ERP upgrade to manage and automate its supply chain and distribution. It sold in a bankruptcy fire sale to a larger rival for a mere 80 Million.

As the article notes, while innovative SCM processes and technology tools have the strength and capability to revolutionize an organization, they can also disrupt business as usual, at least in the short term. And if not handled properly, SCM implementations can disrupt processes and technology in the long term as well … and even affect the viability of your business! They have to be intelligently managed, and risks have to be identified, mitigated, and monitored from the start.

As the article notes, the project team can’t just focus solely on achieving the deliverables when they are planning a new SCM implementation. They have to consider the risks that may arise during post-implementation, when the solution will be subjected to multiple process and technology changes that it will need to support, and possibly risk business viability. As the article points out, broader issues such as long-term performance and scalability, operating environment and hardware, and reporting and connectivity must be considered up-front to mitigate future risks.

So what advice does it gives? It provides the following three tips:

  • Identify Every Risk
    Collect information from multiple stakeholders and perspectives, identify any potential risks, asses them, and manage those that are likely or would have a severe impact if they occurred.
  • Track Critical Risks Over Time
    Information on the relative priority, likelihood, and status of of any risk should be available, and up-to-date, at all times.
  • Ensure Ownership of Solutions and Associated Risks
    Make sure that everything you implement is identified, documented, tracked, and maintained. No under-the-radar implementations without proper documentation and knowledge transfer. Otherwise, the next system update will be a total disaster when multiple systems that people depended on to their job, that no one in IT or upper management knew about, just disappear.

Not bad advice, but it only scratches the surface, doesn’t give you anything you can really use to start (or track your efforts), and, most importantly, doesn’t give you the best advice of all:

  • Bring in an Independent Expert
    Don’t trust yourself, or your vendor, to do it right. Let’s be honest … you’re not an expert in enterprise software, implementation, and integration and your vendor is not an expert in your business. You might use the same vocabulary, but, fundamentally, you don’t speak the same language (or at least not fluently). Bring in an independent third party who is an expert in both supply chain software and IT project management and in supply chain processes, and supply chain process reengineering, to manage the planning phase to insure you don’t miss any key risks, that you select the right systems, and that the implementation doesn’t disable functions or miss modules that you really do need for a subset of your staff to do their jobs. The right plan will go further to mitigating risk than any mitigation effort ever will. I guess what I’m saying is, if you don’t know where to start, don’t be afraid to call the doctor, because, nothing beats preventative medicine.

Just remember, Consultants are Cheap and it’s easy to get Maximum Value from Your Consultants.

Supplier Management Works … Even in the Public Sector

One of the presentations at the 6th Annual International Symposium on Supply Chain Management was a Supplier Management Case Study by Canada Post. Canada Post, which is the 6th largest employer in Canada, employs a workforce of 71,000 that has to deal with 40 Million items a day that can originate from 24,000 points of access (including 7,000 retail outlets), and that may need to be delivered to any one of 14 Million locations across ten million square kilometers. As a 7 Billion dollar organization, over 4 Billion dollars flows through Procure to Pay annually, with over 2 Billion dollars of that spend managed. Major categories include transportation (350 million plus), professional services (300 million plus), information technology (250 million plus), facilities (200 million plus), and mail operations (100 million plus). Approximately 80% of invoices are electronic, and approximately 64% of payments are through electronic transfer.

Given the magnitude of dollars that are at stake, Canada Post has implemented a score-card based supplier management system in an effort to reduce costs and increase value for money. It did this because a number of recent studies, including a study by Aberdeen, found that organizations that include supplier measurement and management in their sourcing programs save an average of 8% more than those who don’t, have an on-time-delivery performance that is twice as good, and a quality of product or service that is four times better. Furthermore, without a good supplier management program in place, an organization can expect 75% of sourcing savings to erode within 18 months.

To date, Canada Post has placed 60 of its 176 large (volume/spend) active suppliers on scorecards, and it intends to add 20 more by year end, with a goal of eventually having the majority of large (volume/spend) active suppliers on scorecards in the next couple of years. It’s goal is to increase value for money by implementing a common measurement approach that will allow for a comparative measure of of supplier performance within a commodity group, improve sourcing decisions, provide a foundation for supplier relationship management, and drive improvements.

It uses a multi-part scorecard that measures different aspects of on-time delivery, defect free delivery (of a product or service), continuous improvement, and value for money that rates a supplier on a 1 to 10 scale. Anything under 8 is unsatisfactory, anything between 8 and 9 needs improvement, 9 is on-target, and anything above 9 means that the supplier has exceeded expectations. The goal is to get as many suppliers as possible exceeding expectations because this is where savings and value materialize.

As part of their supplier management initiative, they did two case studies. The first case study was on a supplier who was perceived to be a poor service provider with major problems in invoice accuracy on a regular basis and unsatisfactory service. Over two quarters, the scorecard identified poor performance that ranged between 5.5 and 7.1. This got the attention of the supplier’s senior management who, committed to fixing the problem, performed a root-cause analysis, identified corrective actions, and implemented them. After the senior management implemented their corrections, overall performance improved to 7.7 over the next two quarters and the supplier is now trending to an 8.8 within the next two quarters, which is a considerable improvement.

The second case study was on a supplier with a history of excellent service who consistently exceeded expectations. The question was whether or not supplier management could be used to edge out even better performance. After implementing the scorecard, the supplier reduced spending by 3.5% over the next 6 months and identified and implemented a number of Joint Performance Initiatives that are expected to yield even further savings in the future.

In short, Canada Post found that a good supplier performance management initiative, which in this case was built on a variation of a common scorecard where both parties agree on the metrics and the supplier is tasked with maintaining the scorecard (which has to be signed off by a buyer before it is accepted), can save considerable money even in the public sector.


Editor’s Note: I wrote this before my colleague posted his take over on Spend Matters last month, but decided to delay it as a reminder to readers of both our blogs that good SPM programs achieve results. Jason’s posts can be reviewed here:
Supplier Performance: Lessons from Canada Post (Part 1)
Supplier Performance: Lessons from Canada Post (Part 2)