Happy New Year! Welcome to Hell.

One thing SI has always endeavoured to do is speak the truth. (That’s why there’s an ever-growing list of e-CHAOS vendors who will not have anything to do with SI and it’s no NDA, no play and no demo, no blog memo policy.) So SI is going to be the first blog to speak the truth and the truth is that, despite the ever growing importance of Procurement in a world where up to 80% of organizational spend is outside of its four walls, Procurement organizations still don’t get no respect. Whether they realize it or not, the average CPO is the Rodney Dangerfield of the C-Suite, except not nearly as popular. And that’s in the 9% of organizations lucky enough to have a CPO or a head of Procurement that sits at the table. Of the remaining 91% of organizations, only 51% have a CPO (or VP-level head of Procurement) and in the remaining 40% of organizations, there isn’t even a real Procurement organization with a real leader.

If Procurement organizations got the respect they deserved, not only would we have more than 9% of organizations with CPOs at the table, but 100% of these CPOs, instead of a mere 40%, would report to the CEO! While there are a few exceptions, they are as rare as a brass monkey’s red bollocks and even many of the situations where it looks like it is an exception, it’s not and the head of Procurement is probably walking around with a “kick-me” sign taped to her back.

But no respect is just the tip of the iceberg. When it comes to a day in the life of an average Procurement Professional, if that was all they had to deal with, life would be relatively easy. From the time they get up in the morning until the time they pass out, it’s one emergency after another, one demand after another, and one impossible goal after another. The shipment, that was never ordered, is late. Engineering needs more JIT configuration options. The C-Suite is demanding 8% savings on a category where the cost of the primary raw material, that constitutes 40% of the category cost, has risen 20% in the last year. (So even if there was 8% savings a year ago, that savings opportunity has now been cancelled out.)

And that’s just the internal stress. There are also dozens upon dozens of external economic, infrastructure, environmental, sustainability, geopolitical, regulatory, societal, customer, technological, and market stresses beating down on the Procurement organization on a daily basis. Currency strength is becoming unpredictable. Postal Services are deep in debt and would fail if not propped up by the government. Waste is becoming a serious problem and legislations are cropping up around the globe banning certain substances that lead to dangerous and toxic waste. Natural and man-made disasters are increasing at a rampant pace (and expected to increase five-fold over the next fifty years) and causing supply chain disruptions left, right, and centre. Governments are enacting new trade legislation and embargoes overnight. Tariff codes, updated weekly in some countries, are becoming nearly impossible to comprehend. Brand value is becoming more important than product quality. Technologies are changing faster than an organization can adapt. The market is in a constant state of flux. And the organization is united against you.

And even though proper Procurement is the one saving grace an organization has amidst the chaos of the modern global marketplace, Procurement professionals in many organizations have been relegated to hell. While Engineering, which only has to deal with Phil, The Prince of Insufficient Light, has it made, Procurement is still locked in the boiler room, and that’s only because the average organization runs out of an office building. (If businesses were run out of castles, Procurement would be in the dungeon.)

To prove my point, if Procurement got the respect it deserved in many organizations, it wouldn’t be fighting hopeless battles for budgets of less than 100K to get started on its e-Sourcing or e-Procurement journey, to bring in category experts who can often save ten times their fee on a large category, to get its team the training it needs, or to hire enough man-power to make sure that even if there isn’t enough time to strategically source the top 80% of the spend under its purview, that spend would at least be under management and tracked for future analysis and strategic sourcing. But most Procurement organizations are under-staffed, under-trained, and under-funded and expected to deliver miracles with faxes, spreadsheets, and a copy of the Wall Street Journal.

It’s hell. And we’re kidding ourselves if we don’t admit that it’s going to stay that way. But all is not lost. As the saying goes, it’s better to reign in hell than serve in heaven — and there’s no better time to make it happen than now, the 443rd year (20156). Not only is 443 a very special year as it is a rare prime (Eisenstein, Chen and Sophe-Germaine), but it’s the port number for HTTPS. It’s geeky, but so are the big brains we use to do our jobs. So in this, the 443rd, we’re going to learn what we need to in order to secure our rightful place in the organization.

So how are we going to rule in hell? First we’re going to learn to conquer every seemingly impossible task that our enemies throw our way. Then we’re going to use their own sins against them to take control. How are we going to do that? We’re going to start by studying the internal and external stresses that plague our existence so that we may learn to overcome them. Once we understand what we’re up against, we can formulate a game plan to come out on top. And once we’ve conquered all that is thrown at us, we can learn how to exploit the weaknesses of those who would stand against us. Only then will the days of the mad men be numbered and only then will we, by hook or by crook, begin to take our rightful place as the left hand of the CEO while the COO, CIO, and CMO cower at our feet (as the importance of all but the CFO, who will be fully dependent on our success, and the CEO, who will be forever in our debt, will be minimized).

However, this won’t be an easy task. Our enemies are many and the challenges they throw at us appear to be without end. But while there is infinite variety in their assaults, the enemies we have are aligned into only a dozen or so factions and the challenges they devise are usually variations on a dozen themes. It’s a long list, but, at least for the time being, a numerable one.

So, starting next week, we are going to enumerate this list, one by one, in our ground breaking, illuminating, blog series: 101 Damnations. (Because 50 Shades of Pay [50 shades of pay spend analysis many profitable pleasures, Spend Matters] doesn’t even tell half of the story!)

It’s time to get started. LOLCat is waiting for us to complete our journey.


Why TVM Optimizes Spend

Procurement needs to generate value. But Procurement is usually evaluated on savings. It’s a disconnect, but one that needs to be addressed. The best way is to start in the middle. What is the middle ground? Spend optimization. What’s the best way to optimize spend? Focus on total value.

When one focus on total value, one simultaneously optimizes

  • Total Cost of Ownership (TCO)
  • Customer Benefit and
  • Indirect Value Creation

which are the three occasions where one should spend more as per Spend Matters’ UK recent piece on “Three Occasions When Procurement Should Spend More”.

How does one focus on total value? One starts with the definition of Total Value Management as given in the e-Sourcing Wiki Paper on Strategic e-Sourcing Best Practices. In this classic wiki-paper, Total Value Management (TVM) is defined as a comparative cost metric that quantifies the overall cost of each acquired unit relative to the overall value of the spend category as it relates to the organization’s sourcing strategy and supply chain goals.

In other words, TVM not only maximizes the net benefit between the return curve and the cost line, which is computed during a calculation of indirect value generation, but identifies the cost line and associated return cost among all possible cost lines and their associated return curves that allows for the largest maximum net benefit. In other words, TVM does a Pareto optimization and identifies the maximum benefit to the business. Since cost is optimized relative to the return, not only is TCO optimized but the organization has saved as much as it could because any attempts to spend less would result in more dollars being spent somewhere else.

And when we review the three occasions where one should spend more, we now know that

  • TCO is directly optimized because it has to be to compute the cost line,
  • customer benefit is indirectly optimized because the return is only optimized if the activity results in more customer sales or more revenue per customer sale and
  • indirect value creation is directly optimized because marketing, services, etc. spend will be optimized under this model.

Good Strategies for Microsoft AND Big Software Co. Enterprise Renewals

A guest post earlier this month over on Spend Matters on “5 Mistakes to Avoid When Renewing a Microsoft Enterprise Agreement in 2015” had some good tips not just for Microsoft Enterprise Agreement renewals but Big Software Co. Renewals in general.

The major pieces of advice generalize as follows:

Waiting until the last minute for renewal negotiations.

While this may have worked in the past, the bigger providers have smartened up. They have learned that it’s not the month or quarter or the year, but profit that matters, and will wait a month to get more profit when they are sitting on a huge cash reserve. Also, they have learned that if you wait until the last minute, you probably haven’t identified any other options, and even if you did, would not have time to implement another option and it’s you they have over a barrel, not the other way around. In addition, as per the article, there are only so many sales people and, unless you are a really big customer, if the sales people are busy, they may not get to you before the licenses expire and the systems lock up.

An over focus on price and an under focus on terms and conditions.

Price is important, but, as per the article, so is matching the service offering to the organizational need. Not only do you not want to over subscribe, and end up with a large number of unused licenses, but you don’t want to subscribe for products that don’t meet organizational needs either. But this isn’t the most important thing — it’s the fine print. If organizational needs are in flux, the last thing the organization wants to be is locked into a multi-year agreement or a minimum license count, with a huge penalty if the organization tries to end the agreement early. Similarly, the organization wants to understand the full cost of a cloud service and, if additional bandwidth or CPU usage costs can be added on during periods of intensive usage, this needs to be understood as well.

Treating negotiations as a one-time event.

The buying organization may set-and-forget the three year renewal until thirty (30) months, or more, have passed, but the vendor will be analyzing the contract, and usage, every quarter and looking for ways to extend the offering as soon as possible. The organization needs to monitor its usage as well to be able to make an informed counter to a vendor who indicates that the company is nearing capacity in licenses, computing power, etc. when it is still 20% away from maxing anything out and only increasing in usage at 1% a month.

Not being audit ready.

Chances are your Big Enterprise Software Vendor has an audit clause in the contract for any licenses installed on premise. And chances are that if the organization has not had an audit in the last couple of years, that, unless the organization agrees to the default renewal (which will often be for more licenses than required at a higher rate), that the customer will be audited for usage. The organization should do it’s own software (license) audits on at least an annual basis and keep detailed records. Not only will it have the data to dispute any claims to the contrary made by the vendor, but it will be able to make sure it remains in compliance at all times.

Enterprise software is costly. But it doesn’t have to be a spend sinkhole.