Technological Damnation 88: Algorithm / Computing Leap

This damnation is like damnation 76 Cybersecurity / Cyberattack. Unlike Social Media, Big Data, and The Cloud, it’s not even on the radar until it happens. And it will happen, it’s just a question of when. While rarer than Cyberattack, which although a daily event in the news, for a given company, unless you’re a public Global 3000, is probably only a potential issue a few times a year (and if IT is doing its job, the Firewalls are going to keep most hackers, and all of the wannabes, out). But every now and again, those walls get breached and if consumer, or credit, data gets stolen, then it’s damnation #1 (at least until resolved).

Similarly, new innovations hit the market every day, and every few years, some of them are big. Really big. So big they disrupt entire business models and those companies not ready don’t survive. But it’s not just IT companies that have to fear computing leaps, it’s Procurement too. Computing leaps and new algorithms will eventually seep their way into enterprise platforms, and while Procurement platforms may not be the first platform to see improvements, they are coming, and any organization that isn’t ready to be an innovator is going to be a laggard, and while innovators save, laggards lose. Innovators that adopted leading e-Invoicing platforms early, and got 85%+ of invoices electronically submitted using a standard protocol that allowed 85%+ of those to be automatically processed and approved without manual intervention, were able to reduce manual invoice processing requirements by 70%, reduce invoice overpayments by a similar amount, and, most importantly, free up that time to get more spend under management. If this increased sourcing events by 50%, and increased spend under management by 30%, that’s significant. Very significant!

So why is this a damnation, since every leap is good? Because you don’t know when it’s coming. You don’t know where it’s coming. And you don’t know what the fallout will be. And because you’re so overworked and so understaffed, you don’t even have time to think about this. Unless you are one of the handful of companies that is lucky enough to be in the right place at the right time and find out about the right product that you can be one of the few beta testers for, you’re not going to know about it until your competitor suddenly takes 5% off the bottom line, increases profit 3-fold, and gets the Procurement budget to advance leaps and bounds ahead of you, grow their supplier management teams, and have the resources to work 24/7 to be the customer of choice while the best suppliers relegate you to be an afterthought.

Uncertainty, while often forgotten and out of mind, is a damnation all the same.

Economic Damnation 08: Outdated Financial Models

Or, more accurately, outdated financial assumptions. Finance lives and dies by metrics that go by three (and four) letter acronyms such as CAPM, CFC, COGS, DSO, EPS, etc. If these don’t “add up”, Procurement can forget about ever getting any additional funding (and might even get rewarded with a budget cut by a CFO who thought that Procurement simply wasted his time with their last request), even though having these metrics “add up” isn’t always the right thing for the business.

Most CFOs are intensely focussed on CAPEX, COGS, DSO, DPO, ROI, and EPS. These have to look good because CAPEX and COGS take up most of the operating cash flow not swallowed up by salaries, DSO and DPO define how much cash flow there is to work with, ROI defines the return on using limited cash flow on an endeavour, and at the end of the day, all of this better add up to an acceptable EPS or the CFO can find himself in the unemployment line with the CEO if the shareholders get angry.

Now, the CFO is right to sweat these metrics because the organizational health depends on it, and it’s pretty much impossible to keep Procurement healthy in a sick organization, but if the metrics are misinterpreted or misused, and Procurement denied the budget it needs for talent, platforms, and services that will enable Procurement to deliver (significantly) more value (and bang for the buck), then in an effort to keep the organization healthy, the CFO will actually be making it sick by starving Procurement of the resources it needs to stay healthy.

Why would it do this? Because of outdated models and invalid assumptions. You see, most Finance organizations believe:

  • Unless your business is leasing, CAPEX should be minimal because all assets should be as liquid as possible.
  • COGS should be as low as possible, because minimizing COGS maximizes profit.
  • DSO should be as short as possible because the more cash on hand, the better.
  • DPO should be as long as possible because the more cash on hand, the better.
  • Only the projects with the highest, short-term, ROI should be funded.
  • At the end of the day, EPS has to increase quarter over quarter, year over year, because that’s what keeps the shareholders happy.

But not all of this is true. Do you know where the fallacies are?
We’ll give you a minute to think about it. And remind you to


Have you figured out where the fallacies lie? We’ll make it easy for you. Every single assumption is wrong. Why?

It’s not liquidity of the asset, it’s liquidity of the business. Sometimes it’s better to buy a valuable asset, and if cash is tight, use it as collateral against a low interest business loan than to lease at a rate that essentially doubles the cost of ownership over a 5 year period.

It’s not COGS, it’s POGS (no, not those annoying circular discs that plagued us during the mid-90’s) Profit On Goods Sold. If a few changes to the distribution and marketing strategy doubles sales, then it doesn’t matter that the COGS is increased 3% from 82% to 85%. 15% profit on twice as many units is much better than 18% profit on a base amount of units any day of the week.

It’s not DSO, it’s TSM – Total Sales Made. If increasing DSO allows a customer to buy more, well, if the organization has the war chest, or the credit rating to survive on a very low interest line of credit (compared to a weaker supplier or customer that might borrow at 12% to the organization’s 4%), then DSO should be increased for the right group of customers.

It’s not DPO, it’s TCO. If extending payment forces a supplier to take unreasonable loans or factor invoices at ridiculous discounts, that’s increasing their overhead operating costs considerably and, guess what, at contract renewal time, your rates are going up, up, up. Your short term gain translates into a long term loss.

It’s not always ROI, and the direct and indirect savings generated, sometimes it’s about the brand (image), such as switching to renewable energy or renewable materials which incurs a short term penalty due to the need to build new energy plants or switch to new processes, or about the knowledge gained, which would result from training, new systems, and the implementation of new processes. Organizations that stand still fall behind. Sometimes an organization has to take calculated risks and try a few high-risk investments to help it identify the best investments.

And while EPS is still the gold standard in the Wall-street led financial world, EPS cannot increase perpetually without investment, otherwise, at some point, the entire company will come crashing down. Remember, to continually increase EPS, one has to continually increase profit. To continually increase profit, that requires either continuously increasing revenue or continually decreasing costs, or both. Costs have a baseline that cannot be passed. And increasing sales almost always requires additional investment in marketing, which, at some point, will hit a point of diminishing return due to market size and consumable disposable income. And the faster one tries to grow, the faster the ceiling is hit, and the faster the rug is torn from beneath one’s feat when the dream comes crashing down. Just like leading Procurement organizations realized it’s not TCO but TVM, it’s not EPS, but VPS.

However, as long as Finance works on antiquated metrics based on antiquated assumptions, Procurement will be denied of the technologies, processes, services, training, and talent it needs to get the job done better. It’s damnation at it’s finest.

Consumer Damnation 73: Individual Consumers

Of course individual consumers are a consumer damnation (and you were just reminded of that while trying to keep the shelves stocked this holiday season). They are the consumer damnation. Corporations are bad. Governments are worse. But individual consumers take the cake, especially considering most of them bring their views to corporate and government purchases. And you are left trying to deal with the inanity and the insanity. When dealing with consumers, damnations are plenty.

Consumers are fickle.

Their tastes can change overnight. Today they want red. Tomorrow they want black. Then they don’t want the product at all because the competitor’s product glows radioactive green.

Consumers are demanding.

They want the newest operating system, the biggest screen, the fastest processor, the most spacious hard drive, the longest battery life, and the absolute lowest price for that new smartphone, even though all of these requirements might be mutually exclusive with today’s technology. And the minute you don’t deliver, they abandon your product to wait for the product from your competitor who is promising more than your current offering.

Consumers are impatient.

If you promise 72 hour service, you better deliver in 48 hours or they will be calling every hour asking where that service professional is. And if you can’t repair the product, you better have a replacement on hand or they will be demanding a refund for the service plan they purchased.

Some consumers are vindictive.

Your product didn’t perform. It broke a day after the warranty. The store wouldn’t take it back. Complaints are filed with every better business bureau and consumer protection agency the consumer can find, and that’s a best-case scenario. If the consumer discovers that there was a banned or dangerous chemical in the composition of the product, they rally a few friends, get a lawyer hungry for some media sensation, and launch a very public class action lawsuit. And if they get hurt opening the hard shell or sick licking the lead paint, that’s a multi-million lawsuit coming your way.

And of course Procurement will be on the hook for not getting the product on the shelves before the consumer tastes change, not getting the price point low enough to appease the consumers enough to buy the company’s product when it is missing a new feature just included in a competitor’s product, when the company contracted for service doesn’t deliver fast enough, or when the supplier ships a defective unit and a consumer gets hurt and sues in a very public way that is very damaging to the brand.

Consumers might be the reason the company, and Sales and Marketing, exist, but they are a perpetual damnation to Procurement who will have to deliver on every insane and inane promise made by Marketing or Sales (which are, as we know, their own damnations).