If you still think you don’t need to get with the program … Part I

… maybe we should ask why?

Earlier this year, SI authored a paper, sponsored by Synertrade, on The importance of program management for savings and value realization (registration required), that laid it bare as to why you need to get with the program.

And then, over the past few months, over on Spend Matters Pro [membership required], the doctor, with the help of the prophet, the maverick, and the revolutionary, has been penning a series on Program Management and how you might go about actually doing it across the Source-to-Contract cycle. For those who might have missed it, here are the links:

But, of course, the how to is irrelevant if you don’t accept the why. Without getting into too many details, as you can download The importance of program management for savings and value realization for free upon registration, the main reasons we pushed you to get with the program were:

  • lost opportunities,
  • lost time,
  • lost innovation, and
  • lost value

But maybe you think you have all the answers with your current non-program based S2P platforms and systems. Maybe you think your processes are sufficiently refined such that you can identify all the opportunities, attack them efficiently, and still innovate acceptably without program management. And if this is the case, you’re probably quite happy with an easy to use, adoptable, second generation S2P platform(s) and see no need to modernize again. But you need to. Why?

Come back for Part II.

Is Procurement the Valley of Lost Souls?

Back in 1990, near the end of the hair metal days, Poison released their third studio album called Flesh & Blood with a deep cut called the Valley of Lost Souls. And since Procurement is the Zombie Function of the Enterprise (it’s dying, it’s dead, but it’s still here), I am nominating this as Procurement’s new theme song. If we analyze it carefully, it fits the bill.

I hit the highway
Touch life barely sixteen

… many Procurement newbies who didn’t get moved into the organization as a pre-retirement “reward” are fresh out of college and brand new to the business world …

No angel of mercy
Coming down to save the soul of me

… Procurement is the black sheep of the enterprise and gets no regard, no regard at all …

I took a Greyhound limousine
Straight to grand central NYC

… after all, we have to practice what we preach and cut costs, to the point it hurts

It was ass, gas, or grass, living fast
Nobody rides for free

… and don’t we know it!

Chorus:
Living it up, giving it up
Living in the valley of lost souls

… we have to give up too much to get our savings

Wanting it all, taking the fall
Living in the valley of lost souls

… and when things backfire, even if we’re ordered to make a suboptimal decision, we still take the fall

Miss Misery come ride me
How I love her company

… we have to love her to love this job

She did Boston justice
And wronged all the right out of me

… at the end of the day it’s no wonder why some Procurement professionals accept “Japanese” auction software where a supplier can bid against itself

The devil wears a black suit
He says I’m livin’ like a bum

… and he’s being nice …

So what I’m looking like I’m half dead
A gypsy on the run

… working OT to meet an unrealistic target …

Chorus

Feels like time’s running out on me
… it’s no wonder the average CPO changes jobs at least every 3 years …

But I wasn’t born to play nobody’s fool
… so gotta get out before they push me out

Ain’t nobody gonna hold me down to play nobody’s fool
Ain’t nobody gonna hold me down

… we got resolve … that’s what it takes to do this job …

I’ve got to roll, roll, roll, roll, roll, roll
… so we change jobs if we must

Chorus

Somebody save me
… because, someday, it may just get too overwhelming …

e-Procurement Benefits – What’s the ROI? Part II

In our last post we reminded you that there are valuable benefits to e-Procurement systems, as evidenced by the fact that many organizations are claiming to have saved millions of dollars thanks to their modern e-Procurement systems. This is great, but one shouldn’t just look at the savings, because if you spend enough on anything, you will likely show some savings for it. The real measure is the ROI.

And when you break it down as to where the ROI comes from, you see that it’s possible to get almost the same benefit from pretty basic systems that enable the proper processes and provide the right insight, often at a fraction of the price tag that comes with the big P2P/S2P systems. This means that the organization is not getting the ROI it could be — and isn’t the smartest business move to always chase the biggest ROI? (Since that leaves more money on the table for other high-performing initiatives?)

Yes, it is. So does this mean you go with the cheaper systems? That depends. On what? On what else the integrated system brings, your ability to use it, and your ability to define more sophisticated — and more appropriate — ROI models. If the benefits you expect to take advantage of in the beginning are few, and there are lower-end systems that give you 80% or more of those benefits for a fraction of the price, maybe you should acquire a low-cost SaaS subscription to a lower-end system for a few years. Reap the reward, improve your Procurement proficiency, and when you are ready to take advantage of more benefits, then you can upgrade to a bigger better system.

For example, a bigger, better, more integrated system can also bring the following benefits:

  • negotiation management and contract creation support — integrated redlining, audit trails, e-Signing
  • centralized supplier data and scorecards — make better informed, more risk averse decisions and identify opportunities for non-risky supply base consolidation and volume leverage
  • wider adoption throughout the enterprise — this is important especially when department managers are authorized to do their own purchasing up to 10K or 25K …
  • … and a slew of others …

But only if the organization is ready for them. In other words, in order to determine if an e-Procurement system is the best buy, the organization needs to evaluate the solution against an ROI model that accurately models the benefits its able to capture, not the benefits that are theoretically there.

In other words, just like there is still no one-size-fits-all P2P/S2P solution (and that’s why the doctor works with Spend Matters to make sure Solution Maps accurately capture and convey the differences), there’s no one size fits all ROI model either. Just because a competitor saved 9M on a 1.5M investment and saw a 6X return, that doesn’t mean you will. You have to take your time, do the proper evaluation, and run the proper analyses. That’s the only way to truly benefit from e-Procurement.

e-Procurement Benefits – What’s the ROI? Part I …

In our last post we provided an overview of the big benefits of e-Procurement systems, namely:

  • on-contract spend
  • market costs
  • one-off spend approvals

These are valuable benefits, and the reasons that many organizations claim big, multi-million dollar savings from their e-Procurement system. But are these the system? Or the process? And, the most important question, what’s the ROI? Remember, big P2P installations can run your organization a million dollars — or more — up front and millions more over the years.

At a high level, the ROI calculation is easy. The system costs 1M, but saves you 5M, so it’s a 5X ROI. Right? Well, if all 1M is the result of the system. But chances are, only a small fraction of that is the system.  But even if we attribute all 100% to the system, is it really the system.   Or is it just because you have a system.

Let’s start with on-contract spend. If before the system was installed the organization had a 65% on-contract spend rate and after the system was installed the organization has a 90% on-contract spend rate, then the system boosted on-contract spend by 25%. If this resulted in a 2M savings, 40% of the 5M savings is due to this boost. This also means that 40% of the cost can be attributed to the on-contract spend potential.

Let’s move to market costs. If the system reduces off-contract spend by 1M on average over what was 20M of market spot-buys, then the organization improves spot buy spend by 5%. And since this is 20% of the 5M savings, 20% of the cost can be attributed to this savings.

Finally, let’s end with one-off spend approvals. Let’s say the organization does a lot of big asset rentals and purchases and they are typically done whatever way the individual wants. But lets say the standardized approach supported by the system allows the organization to reduce costs by 20% on the 10 M+ they spend annually, then another 40% of the big savings is due to this ability and 40% of the cost is attributable to this capability.

In other words, the organization is paying 400K to increase on contract spend 25% and save 2M, 400K to save on one-off spend approvals and processes to save 2M, and 200K to take advantage of market cost data to save another 1M. At this point, you’re probably saying, so what? It’s still a 5X return any way that it’s broken down. And you’re right.

But what if an organization can acquire all the market cost data it needs from a subscription to a commodity price consolidation service that costs 50K a year? Is the 1M system worth it then? Especially since the amortized cost for what the organization is using is effectively 200K? Is it worth sacrificing a 20X return for a bit of convenience?

And if the organization just needs a better RFP process with embedded collaboration to reduce those one-off spend approvals by 1,600K, and that better process can be obtained from a simple e-Negotiation platform for a mere 50K a year, instead of 400K, the organization is sacrificing a 32X return for a bit of convenience. Is that worth it?

And if the on-contract spend can be increased by 20% with a simple best-of-breed catalog solution which can also be acquired for about 50K a year from a leading provider, then the organization could save another 1.6M for 50K, another 32X return.

In other words, the organization could acquire 3 basic systems for 30% of the cost and see 80% of the return for a 28X ROI. So why spend 1M on a complete S2P suite?

MoviePass and the Importance of Strategic Suppliers


Today’s guest post is from Bennett Glace, the primary contributor and Editorial Lead for the Strategic Sourceror. A prolific procurement and sourcing blogger, he is responsible for advocating the function’s value in podcasts, white papers, and other accessible content.

On an almost daily basis throughout this year’s summer movie season, cinemagoers have read headlines charting the struggles of MoviePass. The low-priced subscription service was intended to disrupt the traditional theatre model and get audiences excited to go to the movies once again. While initially successful, the service’s last few months now look like a cautionary tale.

In a recent Harvard Business Review essay, Eddie Yoon points out a number of flaws in MoviePass’ pricing model and approach to customer service. Using the company’s woes as an instructive jumping off point, he provides suggestions for its inevitable successors. His arguments also suggest that MoviePass and its disappointed customer base provide a case study in the importance of developing and nurturing strategic supplier relationships. MoviePass’ subscribers are right to feel burned, but it’s clear a more strategic, informed approach to assessing the ‘supplier’ could’ve saved them a great deal of exasperation and money.

To exist as a strategic function, Procurement requires a strategic approach to its supplier relationships. A key step in establishing an effective Supplier Relationship Management program is identifying suppliers who are willing and able to provide for a strategic relationship. These are suppliers who show an interest in engaging directly with Procurement, tuning into its unique requirements, and providing flexible, dependable services. When it comes to supplier selection, anything that strikes Procurement as one-size-fits-all should raise concern. Effective supplier relationships depend on personal, individualized attention. Whether this means favouring local suppliers and distributors over national options, or consolidation over dispersal, will vary based on the organization, but no supply chain professional would dispute the importance of suppliers who can offer hands-on, tailored services that enable a strategic partnership to take shape.

Over the last few months, MoviePass has shown itself to be anything but a strategic supplier to its more than 3 million buyers. Their one-size-fits all approach to pricing and customer service provided for such a massive expansion, but, in Yoon’s words, “MoviePass had to grow much faster than its customer support could keep up with.” Describing their increasingly hands-off service offering, he continues, “The constant price and product changes clearly show how little it understood what customers wanted.”

He begins by discussing the service’s much-discussed, outrageously-low price. Presented as MoviePass’ primary selling point, the $9.95 monthly subscription fee struck millions as a deal too good to pass up. Recent developments suggest it was something closer to too good to be true. Even rookie supply chain professionals know the perils of making supplier selections based on price alone. Cinema lovers, too, have now learned this lesson the hard way.

While moviegoers across the country would agree that tickets have gotten more expensive, Yoon points out that the definition of “expensive” varies considerably by region. MoviePass’ $9.95 monthly price point is a definite bargain for residents of New York or California, where ticket prices average more than $15.00, but most Kansans are unlikely to consider the service so cost effective. Yoon writes, “It is silly to think that a one-size-fits-all national strategy is the right approach for a market as technically and economically diverse as the United States.”

MoviePass’ dedication to a one-size-fits-all service offering not only left their customer base underserved, but ultimately left them struggling with unpredictable demand. As Yoon writes, “MoviePass failed to recognize how the behaviour of super-consumers, customers who are highly engaged with a category and a brand, differs from that of average consumers.” These super-consumers, attending numerous films every week are not unlike any suppliers customers of choice. Customers of choice expect and deserve value-adding incentives based on their particular needs and buying habits. It’s these extras that differentiate truly world-class suppliers and provide the foundation for long-lasting supply chain partnerships. By tailoring certain aspects of its offering to serve its loyal, high-volume buyers, MoviePass might’ve developed methods for better managing spikes in demand. What’s more, these customers would’ve felt appreciated enough to consider MoviePass a preferred supplier even through the recent growing pains.

MoviePass, for their part, seems convinced they’re here to stay. Speaking to NPR, CEO Mitch Lowe remarks, “Amazon lost money for 20 years. Netflix still loses money … our competitors are the ones who keep spreading rumours that we’re going out of business. And clearly, they’re afraid of us and would much rather have a clear playing field.” Lowe suggests that, as a supplier, MoviePass is less concerned with serving its buyers, less concerned with turning a profit even, than it is with instilling fear. The implications for the business’ corporate culture are eye-opening. Lowe paints a picture of an organization that will forsake its commitment to customer service and spread itself past the point of sustainability in order to appear intimidating. That’s not even to mention the lingering questions about how MoviePass intends to use consumer data. Back in July, Lowe (somewhat infamously) joked, “We know all about you.” While Procurement certainly desires suppliers who know its business in-and-out, these suggestions should raise red flags.

Yoon makes note of MoviePass’ troubling attitudes as well. He concludes his essay by remarking, “MoviePass’s struggles provide evidence that bullying is a bad business plan.” Here and there, Procurement has certainly impressed its peers as a cost-cutting bully. Within leading organizations, however, those days are over. The function is widely engaged in efforts to undo its negative perception, build a better brand, and contribute to a positive corporate culture. Identifying and partnering with ethical, dependable suppliers who share Procurement’s values is an important step in establishing this culture and making Procurement a strategic business partner. Continually, MoviePass has revealed itself to be a supplier of less-than-stellar character walking into a less-than-certain future. If Procurement wants to continue rehabilitating its image and protect the reputation of its organization, it can’t afford to do business with this sort of supplier – at any price.

Thanks, Bennet!