Category Archives: Risk Management

The Change Management Myth: Why e-Procurement Initiatives Fail

One of at the presentations that I really wanted to see at the Fourth Annual International Symposium on Supply Chain Management was Jon THE REVELATOR Hansen’s presentation on The Change Management Myth: Why e-Procurement Initiatives Fail. Unfortunately, as happens from time to time, the author could not make it. However, Jon Hansen, formerly of e-Procure Solutions Corp. (and now of Procurement Insights), did send in the paper his presentation was to be based on, which had some really good points that I am going to discuss herein.

Before I get to what may be the fundamental reason, I’d like to reiterate a statement by Dr. John K. Potter who stated in his eight step process for change (in Leading Change) that transformation within a company can take between 5 and 10 years while, conversely, employees will abandon the initiative if the do not see compelling evidence that the change is working within 12 to 24 months. In other words, major organizational changes typically take 2.5 to 10 times longer than an employee will wait – so the pace of change, and your change management, needs to be relatively rapid if you want to succeed.

Secondly, I’d like to point out that despite their potential to revolutionize your organization, e-Procurement failures, especially partial ones, are much more common than you might think. Studies (IDC) and publications (Fortune Magazine) have reported that 75% to 85% of all e-Procurement initiatives fail to achieve the expected results. In other words, according to these studies, your chances of complete success are at most 1/4! Those aren’t good odds.

As an example, I’d like to point out the results of INCO’s eProcurement Transformation. At the conference INCO, one of the world’s largest nickel producers, presented the results of the initiative they started in 2001 (primarily through Quadrem (acquired by Ariba in 2011) an eProcurement marketplace) as a success. However, given their reported results, I would only classify it as a partial success.

As of last year, INCO calculated that their eRFQ initiative has saved them $3M on 907 events worth $300M – a mere 1%! If, like me, you’ve been tracking the industry studies by Aberdeen and AMR over the years, you will find this quite low. Now, an eRFQ initiative is not going to save you double digits like an eAuction or decision optimization can, but, considering the size of their organization and their spend, I would have expected efficiency savings at least 2 or 3 times that amount.

Furthermore, they have only run 26 events to date for a savings of 17M! Now, I don’t know all the baselines for this statistic, but I expect that their savings could have been a lot higher with more events. After all, industry statistics would suggest that they could have run considerably more events than they did (since at least 30 to 50% of events should be suitable for their eAuction tool and they have been running 180+ events a year through their eRFQ), and doubling or tripling the events should significantly increase savings. After all, their public financials indicate capital expenditures of almost 1.2B a year, and given average first time auction savings typically in double digits, if they had run even a third of their spend last year through an eAuction, I would conservatively expect that they should have been able to achieve a savings two times what they actually did. I could be dead wrong, but I’ve seen some considerable successes first hand when projects are appropriately implemented, managed, and, most importantly, supported. (And I’m sure the change management and the slow pace of a large corporation was the issue for the long implementation and what I consider to be weak results, and not the technology or their procurement team, who struck me as very on-the-ball.)

Back to the topic at hand. Most initiatives fail to achieve the expected results. (And sometimes drastically so! Consider the State of California who entered into a 6 year, $95M contract with Oracle on the basis of an unverified vendor savings estimate of $163M, which was not backed up by the $111M estimate by Logicon, Oracle’s consulting partner. When the deal was audited by the State’s auditor, the forecasts were found to be wildly inaccurate and the conclusion was that instead of saving money, the 6 year, $95M contract would actually cost taxpayers $41M.

The major reason, as hinted at by the above example, is typically lack of technology alignment. I’m a technology guru by training (PhD in Computer Science specializing in Multi-Dimensional and Spatial Data Structures and Computational Geometry), and I know (from experience) that great technology, including technology with a multi-million dollar price tag, can produce an ROI many times what you invest – but the truth is that it only produces results if it is aligned with your needs and solves the problem you need to solve. More importantly, even though the right solution can often save you millions and millions of dollars, the wrong solution can cost even more!

So why is the wrong technology often selected? There are a number of reasons for this. One reason, as I inferred in the software panel at the conference, is that the decision is not always made by the right person, but the primary reason is probably due to a lack of strategy. If your strategy is to simply “select an eProcurement / eSourcing tool” and reap rewards, you are bound to fail.

As Hansen says, any e-procurement strategy should be built upon a solid foundation of process understanding and refinement before technology is introduced into the equation. This way, when you make the decision to investigate the available applications, you are doing so with a clear understanding of how technology can work to accelerate the process, not define it. In other words, you need to know what you need before you select a solution, so that you can properly evaluate the solutions on the marketplace and select the one that is best matched to your needs.

Key Concepts for Major Procurements

In the humble opinion of the doctor, one of the best presentations at the Fourth Annual International Symposium on Supply Chain Management was Paul Emanuelli’s presentation on Key Concepts for Major Procurements.

Most of the time in procurement, you’re procuring orders of direct materials, indirect materials, MRO, or services – basic acquisitions which, with a few notable exceptions, will not break the bank if something goes wrong. However, sometimes your purchases are bigger – much, much bigger. For example, a new office building. A new fleet of aircraft. New heavy machinery. These procurements, if not handled properly, could, literally, break the bank, and the business, if not handled properly – possibly even before the law suits start flying.

The very nature of major procurements implies that legal counsel should be involved from day one – not brought in during final negotiations. When you consider Mr. Emanuelli’s checklist for empowering major procurements:

  • The Role of Lead Legal Counsel
    • Expanded in Major Procurements
    • Embedded in a Multidisciplinary Team
    • Multi-Faceted Legal Advice
  • Internal Governance
    • Awareness of Internal Governance Issues
    • Approvals Roadmap
    • Decision Making Framework
    • Roles and Responsibilities
    • Distinguishing Internal and External Audience
  • Plans and Strategies
    • Providing Strategic and Tactical Advice
    • Distinguishing Process from Purpose
    • Building a Business Plan
    • Developing a Procurement Strategy
  • Selecting the Appropriate Format
    • Critical Decision Point
    • UN Model Procurement Law
    • Three RFP Formats
    • Selection Depends on Circumstances
    • Impact of Pro Forma Agreement
    • No Negotiations Calls for Certainty of Terms
    • Criteria for No Negotiation Format
    • Major Projects Require Flexibility
  • Critical Project Details
    • Front-Line Considerations
    • Disclosure Duties
    • Reconciling Requirements
    • Coordinating Concurrent Drafting
    • Horizontal Integration
    • Tailoring a Legal Agreement
    • Developing a Negotiating Strategy

… it quickly becomes obvious that legal counsel is crucial from day one.

In order for a major procurement project to succeed, roles and responsibilities must be hammered out from day one. This is where good legal counsel can be of significant assistance. They can help you identify all internal stakeholders and create a solid decision-making framework and governance structure to provide direction to the cross organizational procurement team during all facets of the project.

Solid legal counsel can also help you distinguish process from purpose, separating the means from the ends, which assists you in drafting documentation that clearly differentiates between the procurement process rules that lead to the selection of a preferred service provider and the objectives that should be achieved under the contract once awarded. Unclear language alone has been the basis for a slew of lawsuits north and south of the border, especially in the public sector, and well drafted documentation up front effectively mitigates your risk.

Legal counsel can also assist in the creation of a solid business plan at the beginning of the project as well as the definition of a customized procurement strategy tailored to the project, including the selection of an RFP process and associated drafting. This will also help prevent problems down the road.

When it comes to RFPs, you essentially have three options, as recognized by the UN Model Procurement Law:

  • No-Negotiation RFP
    invitation to tender style commonly used in the public sector
  • Simultaneous Negotiation RFP
    allows the purchaser to negotiate with all bidders
  • Consecutive Negotiation RFP
    allows the bidder to negotiate with the highest ranked bidder and proceed down the ranking until an agreement is reached

The No-Negotiation RFP is one of the strictest formats and requires absolute certainty of terms in order to prevent problems down the road. Considering that it needs to:

  1. include all of the general governing terms and conditions;
  2. incorporate all of the purchaser’s business and technical requirements;
  3. enable bidding based on the same set of common assumptions regarding performance terms and conditions; and
  4. enable contract formation without recourse to any post-bidding negotiations that materially change the terms contained in the tender call;

I would submit that you should never embark on any significant no-negotiation tender without the advice of legal counsel from the beginning. In summary:

The complex and multi-faceted nature of major procurement projects requires legal counsel to play an intensive role in the project team. By integrating into that team and understanding the broader context within which these project operates, legal counsel can be a key contributor to the success of a project. To increase their chances of success, project organizers would be wise to retain this key player at the early stages of their major initiatives.

For those of you in the public sector, Paul Emanuelli has recently produced a textbook on Government Procurement and, even though it was written from a Canadian perspective, I would suggest that the advice is sound whether you are in Canada, the US, the UK, Australia, etc. Paul also produces a free quarterly National Tendering Law Update which can be electronically subscribed to on request to paul<dot>emanuelli<at>sympatico.ca.

Managing Business Risk

There were a number of really good presentations at the Symposium on Supply Chain Management on Friday, but one of the ones that really stood out was the presentation by Francis Borromeo of Shell Oil Canada on Business Continuity Planning.

Business Continuity Planning is one of the best ways to manage risk, including supply chain risk, and last year, Shell Oil proved it. Hurricane Katrina devastated multiple oil refineries in South Texas. The effects were that plants were closed for months, with a mid-term effect on supply and a detrimental effect on oil prices. It was all over the news. However, what they didn’t tell you was that it could have been much, much worse.

Oil refineries process more oil than most oil tankers carry. And we all remember how many years it took to clean up those spills off of Alaska. And multiple refineries were almost destroyed. Had they been processing oil at the time, it could have been one of the worse environmental impacts of the decade, putting the plants out of commission for years, if not closing them down permanently. But not one dropped was spilled. Why?

Shell Oil, like the other major producers in the region, had rock solid business continuity plans that identified all of the major risks as well as measures to not only recover from disasters, but prevent the severe ones from occurring in the first place. As soon as the hurricane started heading toward the region – processing stopped. Tanks were emptied. Above ground pipes were pumped empty. Stockpiled oil was relocated inland.

In addition, thousands of people could have been seriously injured or killed. This did not happen. All non critical personnel, and their families, were airlifted out of the region well before the storm hit. Critical personnel were evacuated as soon as possible. The end result, only buildings – easily rebuilt – were destroyed. It was a disaster, but it paled in effect to what it could have been.

And you can do this too. Business continuity planning and risk management does not have to be ridiculously expensive. The key is that you

  1. have a business continuity plan with
  2. prioritized risks and recovery plans that you can use to
  3. manage the recovery process in order to
  4. transition to business as usual in a manner that permits an
  5. after action review to allow you to improve and thrive.

A business continuity plan not only provides a framework for the recovery of the critical business processes, but it allows you to safeguard your brand and reputation.

But it’s probably last on your management priority list. After all, you only see a return when a major disruption or disaster happens. However, considering that Aberdeen recently found that your average international company experiences two significant disruptions per year, it is critical that you have one. So how do you get the support and resources you need to initiate one?

Francis outlined the following arguments that you can use. On their own, chances are not one of these will win you the support you require – but taken as a whole, the business case becomes very compelling.

  • the insurance provided vs. the cost of insurance;
    a well designed plan will only cost pennies on the dollar and will deliver a ROI many times what it cost to prepare in the event of a disruption … many times …
  • a business impact analysis is bound to identify process improvements
    no business does everything optimally … and often the only way you figure this out is through documenting the process and identifying recovery methodologies
  • tangible, documented, business knowledge
    which can then be shared throughout the organization vs. silos that reside in your employee’s head
  • validation of organizational focus
    once you’ve identified the critical processes, you know what you need to focus on … and chances are you’ll discover a few processes that are a lot more critical then you otherwise thought
  • customer requirement
    a marquis customer will only work with you, or stay with you, if they know you can recover as fast as they can in the event of a major disruption

Global Supply, Visibility, and Performance

Not too long ago, I wrote about Aberdeen’s “Global Supply Visibility and Performance Benchmark Report” in my Global Supplier Visibility and Performance post where I noted that Aberdeen has found that the average company has had an average of two major supply chain disruptions per year and that industry average and laggard companies are only able to meet customer-requested ship dates 40% of the time. I also noted that I would post more of my own thoughts on it later.

First of all, the great Sudy Bharadwaj, your report author, is absolutely and positively correct when he said that spreadsheets and in-house software development are not the answer! Considering the requirements for a real-time GSVP system, and the expertise required to build one, you really should be using best-of-breed software from a best-of-breed provider.

Secondly, your humble report author is also dead-on when he states that any GSVP process must be repeatable year-over-year. GSVP is not a one time quick-fix, and the real benefits only materialize as a result of year-over-year continuous improvement.

Thirdly, you should focus on the top 10% of your suppliers in the initial implementation of a GSVP program and start within a specific product line, business unit, or geographic location. All the big, scary software failure stories you hear about are generally simultaneous-wide enterprise roll-outs of a new system or methodology. Start small, work out the kinks (more often in your processes than your technology if you make the right technology choices), and build up gradually. Before you know it, 90% of your business will be GSVP enabled.

As I indicated previously, there are more great insights in this report and I highly recommend you download a copy before the sponsorship disappears.

Apexon and Performance Visibility

I’ve been blogging a lot about visibility lately and mentioning Apexon (acquired and merged with Infostretch in 2022) rather frequently even though I’m sure most of you haven’t heard about this little company or what they do. Last week I had the opportunity to sit down with Kevin Brooks (an occasional guest blogger here on Sourcing Innovation, in other words, his commentary on The Future of Sourcing is not slated to be his last post) and discuss where Apexon was, where it was going, how Apexon goes beyond spend visibility to performance visibility, and how this will eventually translate into actionable intelligence. (A topic I’ll be diving into in the future.)

Whereas most visibility solution providers (like Zycus, Procuri TrueSource [Procuri was acquired by Ariba, which was acquired by SAP] and biq [which was acquired by Opera Solutions, which rebranded ElectrifAI]) focus on spend visibility, or the determination of how much you spend on each of your suppliers, Apexon focuses on performance visibility, or the determination of how each supplier you are spending on is performing. Spend visibility solutions slice and dice on dollars, performance visibility solutions slice and dice on performance metrics – and the good ones slice and dice on the performance metrics of your choosing .

At this point, you’re probably asking are not all visibility providers equal, since all they do is aggregate, slice, and dice raw data ? Technically, they are very similar, but functionally they are quite distinct. The difference lies in the presentation, reporting, and intelligence they provide. Spend visibility solutions are configured to slice and dice on dollars, the data they extract from your underlying systems is your transactional data, and the drill down reports they provide are all pivoted around spend. Performance visibility solutions are custom configured by you to slice and dice on the metrics you track, the data they extract is the data relevant to your metrics, and the drill down reports they provide are all pivoted around metrics. Could one system do both? Yes. Do any current systems do both well? In my view, not really. (But I’m up for a conversation and a demo if anyone disagrees with me!)

However, to truly be useful to you, a system should also provide actionable intelligence. Dashboards that tell you where you are performing well, where you are performing poorly, and provide you with alternatives to improve these poor situations. Although still a young product, with 2.5 slated for release in the near future, this is where Apexon is starting to break away from the pack. Dashboards let you view your performance relative to your key metrics, and then the system lets you drill down into the root causes of poor performance and the root enablers of good performance. Comparison reports can then be used to determine possible solutions – such as shifting supply to a better performing supplier or shifting certain components to different manufacturing lines.

If supply chain performance is a concern for you, and it should be, I’d say it’s worth checking out the solution, especially if you are a traditional manufacturer, particularly in the automotive, aerospace, defense sectors, since Apexon has a strong client base in these sectors that have helped shape the solution since day one. Furthermore, since the solution is a 100% on-demand solution through your browser, the effort required to test-drive it is minimal. The solution works on a push model – at regular intervals (which can occur as frequently or infrequently as you desire), you push updated data to it, and it slices and dices that data on your metrics to give you the intelligence you need to improve your operations.

Is it all it can be? No, I think it can improve in future versions – but more importantly, since Apexon is intent on building its roadmap from customer feedback, I think it will get there. More importantly, you don’t have a lot of choices, most are new offerings, some companies are not as eager to work with their customers to improve the solution, and visibility is an area you can not ignore. Make sure it’s on your list of candidates, and if you’re nearby, check them out at one of their upcoming executive breakfast series in Milwaukee, Chicago, and Detroit (on October 17, 18, and 19). And keep an eye on Sourcing Innovation and Spend Matters – if he’s not traveling, I’d guess that you can bank on Jason hiding out in the back row of the windy city presentation, pounding out notes on his Dell and posting them to you hot off the wire.