Category Archives: Strategy

Has the Outsourcing Craze Finally Stopped?

According to a recent article in the CPO Agenda, in the recessions and its aftermath, companies are re-examining the business cases for keeping processes in-house or outsourcing them. It’s “return of make or buy”. And it’s about time.

Not that I have anything against outsourcing, if it’s the right function to the right provider in the right location at the right price point, I just have something against outsourcing everything you can put your hands on. At some point, there’s more being done outside your four walls than inside. At this point, chances are that if you haven’t already outsourced most of the value your organization produces, you’re pretty close to that point. And once most of the value is elsewhere, what reason do people have to invest and support your company?

If Back Office Boys are handling your back-office tasks, Marketing Madmen are handling all your marketing and advertising, Rocket Resellers are handling your sales and account management, Stylized Support is doing your support and CRM, Custom Manufacturing Inc is doing your product design and production, and Total 3PL is doing all of your forward and reverse logistics, what are you doing? Okay, you’re orchestrating, but how are you any different from anyone else with the same skill set? So if someone else comes along, builds the same relationships, and finds a way to produce a competing product 20% faster, 20% better, and 20% cheaper, how long are you going to last?Not long. Not to mention, if you are producing 100% custom products, or 100% (very) high volume products, there’s a good chance you can do it cheaper in-house if you build and retain differentiating expertise.

And if you have to invest capital in a supplier’s business to keep your own afloat (as 9% of CPOs in a recent survey by CPO Agenda had to do), or acquire a failing and/or strategic supplier (as 3.6% had to do), it kind of kills the argument for (going overboard on) outsourcing, doesn’t it?

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Resource Allocation Processes Have to Change

The March edition of the Harvard Business Review had one of the best articles on strategy and restructuring (in response to the recent downturn) that I’ve read in a long time. In finding your strategy in the new landscape*1, the author notes that for much of the next decade, we can reasonably expect to see weak global growth, pressures from overcapacity, persistently high unemployment, volatility in the financial markets, costlier capital, a greatly expanded role for governments, a much larger burden of regulation and taxation for all, and maybe even increased protectionism. Essentially, a global marketplace that is pretty common when you consider not the last 5 years, but instead look back through the last 500 years (and the last 50-60 years in particular as there is lots of detailed economic data available post WWII).

Up until the invention of the standard shipping container in the 1950s, global trade, and global growth, was very slow. Up until the exuberance of the IT boom, and the virtual wealth it created, capacity was limited, as demand was, more or less, steady and predictable most of the time. Even in the developed world, unemployment has been traditionally much higher than it was between 1997 and 2000 and 2005 and 2009 for most of the last few centuries which saw a lot of poverty, war, and suppression of the rights of women (who were encouraged to stay home). There have been booms and busts in the markets for hundreds of years. After all, the IT bust wasn’t the first great bust — at the very least it was preceded by the crash in the Dutch Tulip Market in the late 1630’s where, at the peak of Tulip Mania in February 1637, some single tulip bulbs sold for more than 10 times the annual income of a skilled craftsman! Capital has traditionally been much costlier than it has been in recent years — as recently as 1981, the Bank of Canada interest rate exceeded 20% (and from 1976 to 1992, it averaged significantly more than 10%). Throughout most of history, it was the governments, and not the global corporations, that held most of the reigns, regulation was the reaction to every problem, and when cheap imports threatened an industry, tariffs were slapped down faster than a bell clapper in a goose’s ass*2.

The author, Pankaj Ghemawat, then goes on to state that managers cannot afford to ignore the risks of pursuing a global strategy in the uncertain years ahead and that they must change their strategic approach in several dimensions. In particular, companies whose strategies currently emphasize smoothing differences and achieving economies of scale across national boundaries may need to shift toward adapting to local conditions and their resource allocation processes will have to change, too. And the changes will have to take place on the sell side and the buy side. Not only will the one-product fits all strategy be unlikely to work, but so will the one location produces for all. When you consider steadily rising shipping costs, increasing labor costs in “low cost countries”, and the costs of a single factory having to regularly shut-down and retool a line for different products (or variants), outsourcing sometimes becomes more expensive than near-sourcing or even home-sourcing. That’s why a strategic shift will need to be made across the board.

Furthermore, in addition to rethinking the scope of off-shoring, companies also have to:

  • simplify supply chains,
  • import process innovations from emerging countries, and
  • move R&D to where the (best) researchers and market growth are.

Your supply chain is too complicated.

You have two many products that use too many different raw materials coming from too many suppliers and travelling down too many lanes in too many shipments because you’ve never optimized and consolidated your suppliers, SKUs, and lanes. While you need redundancy to avoid risk, there’s a difference between using 3 suppliers and using 13-30 suppliers, which is what the average company who hasn’t fully analyzed the category (and the end-to-end supply chain behind it) is doing. (And since less than 10% of the market is using SSDO regularly, opportunity abounds!)

When you have to do more with less, that’s when you innovate or die.

When you have no money, you tend to think different than when you have more than you can spend. This often leads to completely different kinds of innovation than what we produce in the western world. And that’s likely the kind of innovation you need to tap an emerging market where the middle class makes 1/10th to 1/8th of what the middle class makes in the USA.

The best researchers know the market.

If you’re trying to innovate a new product for a market, you need people who understand what the market will like. Those kind of people are native. Maybe they’re not your people, but maybe that’s a good thing. Not only will they innovate for their market, but they’ll bring you new ideas, and some of these ideas might improve your global operations.

In other words, the elastic that holds the global market together is trying to snap back, and you’re going to have to be agile and adapt if you’re going to hold on.

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*1 I was thrilled that, unlike just about every other publication out there, the author did not use the all-too-common, and all-too-stupid, “new normal” terminology which drives me nuts because anyone with half a brain that either (a) studied her history or (b) lived through it knows that it’s just the old normal coming back with a vengeance, and doing it on a global scale.

*2 Ask a Texan.

The Strategic Sourcing Debate, Part IV

In Part I, we noted how Dalip Raheja of The Mpower Group decided to stir the global hornet’s nest last month by declaring that Strategic Sourcing is Dead and that The Sourcing Emperor Has No Clothes. This was quickly picked up across the supply management blog-sphere and resulted in powerful reactions from a number of prominent bloggers. Then, in Part II, we noted that of all the responses, only one blogger got it right. Joe Payne, the quiet cub among the roaring lions, was the only one to note that at most companies, the concept of strategic sourcing hasn’t even been born yet. In our last post (Part III) we reviewed each of the responses and pointed out what the contestants got right (as well as a few mistaken assumptions) in our efforts to help you get a better grasp of what Strategic Sourcing really is. And in this post we’re going to discuss Dalip’s posts that instigated the debate.

After our last post, I’m sure you’re wondering if Dalip got anything right as I just spent a page and a half pointing out how pretty much every other blogger had valid points in each of their counter arguments. The reality is that quite a lot of what Dalip said in the four pages that constituted Strategic Sourcing is Dead and The Sourcing Emperor Has No Clothes was right, especially if you look beyond the words to the points he was making. (Yes, his posts probably could have been a little clearer, but they were deliberately written in a way that was designed to make you think. As was clearly stated near the end of both posts, the point was not that you agreed or disagreed, but that you joined in the debate.)

So what did Dalip get right?

Strategic Sourcing has not delivered the results it promised years ago, and it isn’t delivering the right results today.

This is because, as partially pointed out by Bob, at most organizations, strategic sourcing is:

  • tactical procurement with bells and whistles,
  • dumbed down to the point where the process is not strategic, and
  • a bunch of supply management processes shoddily slapped together without any coherent strategy in hopes that the whole will be more than the sum of the parts.

Until organizations employ true, modern, strategic sourcing, they will never see the right results.

Flaws in a process sometimes lead to the destruction of overall, or system wide, value.

You can do a bang up job defining your sourcing strategy, defining the process, selecting an initial supply base, conducting a sourcing event, making an award, and drafting a contract only to see it all go to hell when the supplier delivers an inferior product that starts failing en-masse when it hits your user base or a product that poisons your customers. One flaw in quality control brings down the whole supply chain, which pulls the business down with it.

If we are to maximize results, at some point we must address the process itself.

As noted by William and Jason in particular, you can’t just take someone else’s strategic sourcing process and run with it, because the process has to be customized to your organization and your organizational strategy. Furthermore, as Dalip implies, if everyone else is implementing a particular process, it’s a commodity, and therefore not strategic. The process must be implemented correctly, and it must grow and evolve over time as the needs and strategic foci of the organization change.

Many organizations do need next practices.

“Best practices” don’t stay best practices forever. They must be evolved or replaced with new best practices on a regular basis, or they go stale. At one point, paper RFQ packages was a best practice. That’s a stone-age practice today. Then electronic Excel bid packages sent through e-mail. That’s bronze age technology. Today, it’s on-line, real-time, web-based bidding and negotiation platforms. (In other words, some of us have finally reached the iron age!)

While cost cannot be ignored, we firmly believe that a process rooted in cost can never be a strategic process (unless the organizational strategy is to compete solely on cost).

You can’t focus on cost if you are competing on value. ‘Nuff said.

Unless we start expanding our pool of stakeholders to start considering our stakeholders’ stakeholders’ stakeholders needs, and start with those needs, we will never uncover these value contributors.

Unless we’re meeting the needs of all organizational stakeholders and the end customers, we have not yet reached true maturity in our strategic sourcing process and we aren’t making the right trade-offs.

The conceptual frameworks of Total Value Management (TVM) and Demand Driven Value Networks (DDVN) go the furthest in extending current thinking.

I’ve been telling you for years that you need to move from TCO to TVM.To borrow a phrase, hallelujah.

Plus, if you read very carefully, you’ll realize that Dalip doesn’t truly believe Strategic Sourcing is Dead, just that the current, shoddy, implementation that is common at way too many companies that have not yet learned what true strategic sourcing is (and made the leaps necessary for a proper implementation thereof) needs to die. Dalip was just using shock value to bring attention to a subject that we’ve become too complacent with. As astutely observed by William, Dalip was masquerading his thoughts behind buzzwords, round table discussions and slogans to grab your attention. The lack of proper strategic sourcing processes across organizations of all sizes is a big problem, and one we need to collectively address. After all, if there are still Billion dollar plus publicly traded internationals that allow administrative assistants, IT gurus, and marketing people with no formal procurement training to manage million dollar spends, as pointed out by Joe, collectively, we have a problem!

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The Strategic Sourcing Debate, Part III

In Part I, we noted how Dalip Raheja of The Mpower Group decided to stir the global hornet’s nest last month by declaring that Strategic Sourcing is Dead and that The Sourcing Emperor Has No Clothes. This was quickly picked up across the supply management blog-sphere and resulted in powerful reactions from a number of prominent bloggers. Then, in Part II, we noted that of all the responses, only one blogger got it right. Joe Payne, the quiet cub among the roaring lions was the only one who didn’t miss the point. He was the only one to note that at most companies, the concept of strategic sourcing hasn’t even been born yet.

As Geoffrey Moore Moore would say, strategic sourcing has yet to cross the chasm. As a result, it can’t be dead as it has yet to be born at the majority of companies. However, as noted in Part II, that isn’t to say that the other bloggers didn’t make a number of good points that should be highlighted (just that they didn’t hit upon the most important point). In this post, we’ll address those points (along with the points they got wrong) so that you can gain a better understanding of what strategic sourcing truly is.

1st Runner Up: William Dorn

When William said that the sourcing process was only fundamentally flawed if you follow the original A.T. Kearney 7 Step Sourcing Process without adapting it to your own needs, he effectively squashed Dalip’s claim that the Strategic Sourcing Process is fundamentally flawed. There’s nothing wrong with the process itself, the problem is with the application. That’s why the process has so often failed to deliver the intended results and why we’ve even seen unintended consequences that destroyed value throughout the chain. We don’t need a replacement for the process itself, we need a new way to explain the process, and a new methodology for incorporating it into Supply Management departments at companies large and small alike as it is clear that most companies trying to do strategic sourcing just don’t get it. And while the few leaders who have been doing it right for over a decade might need “next practices” to take their game to the next level, most organizations aren’t even ready for “best practices”.

2nd Runner Up: Robert A Rudzki

Bob quickly realized that the whole debate was moot and sidestepped the question as he knows that most organizations who claim to do strategic sourcing aren’t doing it at all, instead “dumbing down” the process to a nonstrategic, tactical ghost of what it is supposed to be or adding a few bells and whistles to their current process and calling it “strategic”.

Jason Busch

When Jason said that the five, seven, or nine step strategic sourcing process never goes away [at companies that do proper strategic sourcing], rather, newer elements, such as risk and performance management, will begin to include themselves not just as separate areas, but as integral components of strategic sourcing he demonstrated that he understood, like William, that a true strategic sourcing process is not only molded to the organization, but evolves over time. However, when he unconditionally implies that a focus on total cost can be a “growth driver” for businesses, he only gets it half right. William was much closer when he implied that cost is an acceptable strategy by pointing out that some companies, like Acer and Asus in consumer electronics, compete on cost alone. A focus on cost is a growth driver only when it aligns with a cost-centric business strategy. If the business is about offering an undifferentiated product at a lower price, cost reductions will drive growth. But if the business strategy is about offering differentiated products with a high social value (like Apple), a focus on cost can be very detrimental if quality or perceived value is compromised (and it affects the organization’s ability to extract a premium for its products).

David Henshall was right when he said that strategic sourcing is a necessary early step in the development of procurement maturity, but wrong when he seemed to imply that a mature organization progresses beyond strategic sourcing. You never progress beyond the need for strategic sourcing, however, your interpretation and understanding of what strategic sourcing is continually evolves to the point where the initial implementation of the process hardly looks strategic at all when you look back.

Tim Cummins was right-on when he noted that, in general, most Supply Management organizations are not significantly relationship oriented, and that they need to become more relationship oriented, but wrong when he implied that forming a Trading Relationship Enablement Group (TREG) is the answer. The answer, as David seems to imply, depends on the category. For some categories, close, strategic relationships will be integral for success. For others, arms length relationships with a very competitive supply base (consisting of multiple suppliers) will be the answer. “Strategic” means that one size doesn’t fit all with respect to organizations or categories.

Josh Dials was right when he said the key to success was a true front-to-back sourcing strategy and dead-on when he said that the process also needs to include (true) spend analysis and decision optimization, but wrong when he implied that an end-to-end sourcing suite alone solves the problem. What about risk identification and mitigation? Up-front relationship building? NPD influence? While the proper sourcing platform is a necessary* enabler, it’s not sufficient in and of itself for true strategic sourcing success.

So what did Dalip get right?

We’ll discuss that in Part IV.

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* Despite ill-formed beliefs to the contrary, Microsoft Access and Microsoft Excel is not enough.

The Strategic Sourcing Debate, Part II (Who’s Right)

In Part I, we noted how Dalip Raheja of The Mpower Group decided to stir the global hornet’s nest last month by declaring that Strategic Sourcing is Dead and that The Sourcing Emperor Has No Clothes. This was quickly picked up across the supply management blog-sphere and resulted in powerful reactions from a number of prominent bloggers, including most of the heavyweights.

So who is right? Did Jason Busch (of Spend Matters) get it right when he insisted that “Strategic Sourcing Ain’t Dead, Regardless of What the Naysayers Suggest?” How about Robert A. Rudzki (of Greybeard Advisors and author of Beat the Odds: Avoid Corporate Death and Build a Resilient Enterprise) who focussed on “Returning the “Strategic” to Strategic Sourcing” (on Spend Matters)? Or Tim Cummins’ (who leads the IACCM) who lamented The Death Of Procurement: Nightmare or Nirvana?Then there was Steve Hall (of the Procurement Leaders Blog) who lamented on the “Rumours of the Death of Strategic Sourcing”, Dave Henshall (of Purchasing Practice) who addressed Procurement 2.0 – and Other Labels, Josh Dials (of Iasta) who said it’s time to ‘Put “Strategic” Back into your Strategic Sourcing’ (on eSourcing Forum), Joe Payne (of Source One Management Services) who shouted that “Strategic Sourcing Lives On!” (on the Strategic Sourceror),  and William Dorn (of Source One Management Services) who ranted that “Strategic Sourcing is Alive and Kicking”.

Only one person got it right. It wasn’t the Spend Matters prophet, Jason, the Greybeard Advisor, Bob, or the global contracting king, Tim. It wasn’t practice leaders Dave Henshall, William Dorn, or Dalip Raheja. It wasn’t Iasta’s newest blogger, Josh Dials, and it wasn’t the Procurement Leader advocate Steve Hall either. That’s right, it was:

Joe Payne. Source One’s Director of Strategic Sourcing, the cub among the lions, who rarely speaks up (and posts maybe twice a month) was the only who got it right. While everyone was arguing alive-vs-dead, cost-vs-value, fixed-vs-variable, etc. Joe was the only one who hit the nail on the head with his hammer by pointing out the one key fact that makes the whole debate moot:

At most companies, the concept of strategic sourcing hasn’t even been born yet. As Geoffrey Moore would say, strategic sourcing has yet to cross the chasm. This is true not only in the mid-market, which has just started to tune into sourcing and e-Sourcing, but, as Joe points out, at a large number of Billion-dollar multi-nationals as well. Even today, in 2010, strategic sourcing is still only being used at the leaders and innovators, which is never more than 20% of the market, and often not more than 10%. (This is clarified by the fact that the vast majority of companies still don’t use true spend analysis or decision optimization, the only technologies that allow you to strategically select the categories with the largest opportunities and analyze not only the total cost, but the total value of a proposed award, and the only two technologies proven to deliver double-digit returns, on average, every time they are used, with 11% for true spend analysis and 12% for decision optimization.)

This isn’t to say that the other contestants, and the heavyweights in particular, didn’t make some good points, as most of them did, but that many of them missed the key point. (Furthermore, just about everyone got something wrong too.) An idea can’t die before it’s born, and while you can argue that the continual evolution that is required as the organization gains maturity implies a continual death of ideas (until the original idea is barely recognizable), it also implies a continual rebirth of ideas.

So how did the other contestants fare?

I’ll let you know in Part III.

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