The Hubris Hypothesis is Alive and Well in Supply Management

It looks like we’re back to the merger and acquisition frenzy again in the space, which seems to begin anew at the start of every boom in the continual boom-bust cycle that Wall Street so favours. Big cash-rich giants are again gobbling up cash-poor gnomes in an effort to bolster either the breadth of their offerings or expand their (potential) customer base. This is a good thing and a bad thing. If you’re on the market for supply management technology, or a customer of one of the cash-rich giants, this can be a good thing. If you’re a shareholder of the cash-rich giant, or a customer of the cash-poor gnome, this can be a bad thing. If you’re anyone else, it probably doesn’t affect you.

It’s probably a bad thing if you’re a shareholder of the cash-rich giant as 4 out of 5 mergers and acquisitions fail to deliver the expected value, and often fail to do so spectacularly. As Richard Roll notes in his classic paper on “The Hubris Hypothesis of Corporate Takeovers”, decision makers in acquiring firms pay too much for their targets on average. I believe this to be especially true in the enterprise software space where the value of a platform decrease at a rate that is in-line with the expected depreciation of a new car purchase. Every time a newer, better, piece of software hits the market, the value of all existing platforms drops. And since, in the enterprise software space, all acquisitions tend to do is freeze innovation on the platform of at least one party, if not both, until integration is achieved, value drops — and in this space, it’s rarely regained. While the value associated with software doesn’t disappear as fast as it does on Wall Street every time a newly created bubble finally bursts, it still disappears. And it’s not like we don’t have our own horror stories like the i2-Nike PR nightmare, the Hershey Foods WMS failure, or the ERP/MRP fiasco that brought down the multi-billion pharmaceutical Foxmeyer. And while none of these are directly related to M&A, they do demonstrate how any attempt to integrate even partially incompatible systems can wipe out hundreds of millions (or more) of value.

Similarly, if you’re a customer of the cash-poor gnome, it can also be a bad thing if your system is “locked down” until the features/functionality is integrated with the giant’s platform, that you will eventually be forced to implement (when the term of your original agreement runs out). Chances are that you bought the gnome platform because the giant platform wasn’t what you needed, was way more extensive than what you needed, or didn’t deliver enough value from the extra functionality relative to the cost.

But if you’re customer of the cash-rich giant, who, chances are, is no longer capable of innovating it’s way out of a wet paper bag, this can be a great thing. As soon as the initial integration headaches are solved, you’ll have access to new, innovative to you, functionality without having to find a new vendor, do custom integration, or even do extensive mods to the platform you have — especially if you’re using a hosted/SaaS service and it just gets enabled in the next release. And, if the giant is fair to you, as a loyal customer who had to wait, the additional cost won’t be that significant and will be drawfed by the new-found value your organization can generate.

But if you’re not a customer of the cash-rich giant or the cash-poor gnome (and not a shareholder of the cash-rich giant either), this is definitely a great thing. As we’ll delve into in more detail in a future post, when you’re on the market looking for a new supply management technology platform, you’re asking three questions (if you’re doing it right) before seriously considering a vendor: can the vendor support me, are they stable enough to support me, and are they still innovating. While it is often straight-forward to answer the first question, it’s hard to answer the second if the company is private and hard to answer the third if you’re not intimiately familiar with the space and the competition (as innovation can be relative). But if a vendor gets acquired, you know that it likely wasn’t stable enough as most companies that get acquired are cash-poor, have limited growth options on their own, or have a specific innovation or customer a cash-rich giant wants (and once a cash-rich giant sets their sights on a target, that target’s resources will be consumed with either friendly bids, or hostile bids, which would still limit its ability to support you). And if a vendor does the acquiring, then there is a good chance that it’s not innovating (at the rate it used to) or not capable of further growth without a fresh blood infusion (which would eventually limit innovation).

This means that every merger and acquisition identifies two more companies that, at the very least, should be given serious scrutiny before being added to your list of potential solution providers, if they should even make the list at all (at least until a succesful integration is completed — which, if one of the fish is really big, could take years) as a merger or acquisition usually signals a lack of innovation on one side and cash on the other. And, more importantly, it shines a light on those companies in the middle — stable, growing, and full of innovation ready and waiting to take your Supply Management practice to the next level.

A new wave of best-of-breed players is rising in the space. Since they haven’t yet been entangled by the hubris hypothesis, it might be time to give them a serious look.

The (Board) Gamer’s Guide to Supply Management Part V: Small World

I’m tickled technicolor to continue this one-of-a-kind summer series that will help you whether you are just interested in finding out about this new and exciting career opportunity, or ready to take your Supply Management career to the next level. Not only is it more fun than reading the latest study on the daily migration patterns of the three-toed sloth, but when you can grasp a lot of the basic concepts by playing the right mix of strategic (and sometimes tactical) board games with your friends, it’s three blasts and a half!

While we are still putting off the economic games (like Puerto Rico) that we are going to get to at some point, we’re going to make use of the fact that, thanks to unprecedented generosity of Wil Wheaton (@wilw) and Geek & Sundry, we have yet another fantastic TableTop episode where Wil Wheaton introduces us to the mechanics — and fun — of the game. Until we run out, we are going to take advantage of the priceless gifts that Mr. Wheaton has granted us with this spectacular educational series.

As with every other episode in the series, Wil Wheaton gives us a very succinct introduction to Small World in TableTop Episode 1, a classic victory-point game with near endless variations that give it exceptional replay value.


Small World combines the military strategy of risk with the delightful art and fantasy races of cosmic encounter. Whoever has the most points at the end of nine rounds wins the game. We earn points by conquering and ? territories. Empty territories cost two units to conquer. Every item in a territory costs one more unit to conquer. … At the beginning of every game, each player will choose a fantasy race, like Orcs, Elves, or Dwarves. Each race is combined with a unique special power like seafaring, flying, or heroic. These power and race combinations change every game, giving Small World tremendous replay value. No empire lasts forever, so don’t get too attached to your diplomatic skeletons. You will inevitably run out of units to conquer new territories. But don’t worry. When that happens, you simply put your active race into decline and choose a new one from the board and begin conquering all over again. It’s a very small world. And only one person can be the victor atop the bloody stinking heap of his vanquished opponents!

So what does this have to do to supply management? It introduces us to the intricacies of the markets that marketing and management expect us to indirectly support not only with products and services, but with market-entry advice (because, after all, we’re already sourcing from there so advising the organization on how to sell into there shouldn’t be that hard, right?). An alternate introduction to the game could be:

Small World combines the military strategy of risk with the marketing strategies of an MBA program. Whoever has the most money at the end of year wins. We earn money by conquering and maintaining market territories. Empty, blue ocean, territories cost two units to conquer. Every competitor or obstacle in a territory costs one more unit to conquer. At the beginning of every game, each player will choose a primary market strategy, like brute advertising force, niche marketing, or price-undercutting, and combine it with a perceived marketing advantage such as a big war chest, coveted partnership, or new manufacturing process that allows production costs to be drastically slashed. The primary market strategy and perceived marketing advantages change every game, giving Small World tremendous replay value. No market lead lasts forever, so don’t get too attached to your past successes. You will inevitably run out of units to conquer new market territories. But don’t worry. When that happens, you simply put your current market strategy into decline and choose a new one from the board and begin conquering all over again. It’s a very small world. And only one company can be the victor atop the looted corporate carcasses of its vanquished opponents.

And the great thing about Small World is that victory points are measured in victory coins, for which a player gets one victory coin for each region his race tokens occupy. Whereas some games, like 7 Wonders, give you half a dozen ways to score victory points, scoring victory coins in Small World is straight forward. It’s simply a function of how many regions you occupy, and how many extra bonus coins you get as a result of race or special ability. Plus, conquests can be first (it’s a blue ocean market and you are the first entrant, having only to conquer obstacles such as resistance to foreigners or geographic distance to your target market), takeovers (where you use overpowering force to take over a market from another player), or a hail-mary conquest where a player knows he does not have enough resources to take over any more regions with certainty, but chooses to make one last attempt, literally betting everything on luck (that boils down to the roll of a die). Finally, when all is said and done, a player may redeploy his resources among the various markets he controls in an effort to either maintain them in the next round or move into adjacent markets.

The game is brilliant, and should definitely be in your organization’s lunch room. Forget about those boring seminars and brown-bag lunches. If you really want to push your Supply Management brain cells into overdrive, this is the way to do it!


It’s a small world
But it’s the only one we’ve got
Huey Lewis

What the Heck is a Supplier SuperCycle?

A recent post over on Procurement Leaders chronicled the results of July’s Procurement Intentions Index graphs that record changes in CPO strategy intentions over time, based on a survey of their CPO panel. According to the post, their results show the clear intention of CPOs to consolidate their supply chains by reducing the number of suppliers they work with, while, at the same time, spending more time collaborating with those that remain.

Based on these results, the author believes that the supplier collaboration and consolidation results are part of a “super-cycle” and that we will see the Index positions of both of these remain broadly the same for months if not years to come. That is until future CPOs believe they have reached the perfect number of suppliers and want to increase price competitiveness by taking more on board.

I don’t get it. I do agree that a subset of Supply Management organizations will be focussed on supply base consolidation and that a further subset of these will be focussed on collaboration in the hopes of mutual innovation, but I don’t think this is a super-cycle. A supercycle is a long period, or wave, in the growth of a market, as described by the Elliott Wave Principle. By definition, a super-cycle has to be market wide, and include all Supply Management organizations in all stages of maturity, not just the ones that are smart enough to be involved with a leading Procurement organization and respond to their surveys. While I do think that this is a mini-cycle in the above-average supply management organizations moving towards best-in-class status, most below-average organizations are still focussed on cost-reduction at any cost (to justify further investments in technology and transitions to better processes), and this typically involves auctions and negotiations that open up the procurement process to new bidders in hopes of getting more-cost effective, or higher-quality suppliers, for the organization.

This does mean that, as some organizations advance up the maturity curve, the mini-cycle will repeat, but then, as the post points out, the organizations that have optimized their supply-base will begin to open it up to new suppliers in an attempt to get even more value. Thus, if there was a super-cycle, it would be an oscillating contraction/expansion cycle that would emulate the cyclic cosmological model — an infinite contract/expand loop.

Diverging thoughts?

Thirteen Years Later, And It’s Still All About the Pentiums

Rock on, Al Yankovic, Rock on!

Because It’s All About The Pentiums (Original Video!)

Al may have been Running with Scissor, but no one did a better job of predicting the future of the IT industry.

     
My new computer’s got the clocks, it rocks
But it was obsolete before I opened the box
You say you’ve had your desktop for over a week?
Throw that junk away, man, it’s an antique
Your laptop is a month old? Well that’s great
If you could use a nice, heavy paperweight

  It’s All About the Pentiums
    by “Weird Al” Yankovic (@alyankovic)

SCD’s Seven Habits of Highly Effective Supply Chains

A recent article over on Supply Chain Digest touted The Seven Habits of Highly Effective Supply Chains 2012 in honour of Stephen Covey, who noted that too many people focus on “urgent” and not what is “important” and that changes are required to reduce the need for “urgent” activities so that more time can be spent on the “important” ones. According to SCD, these are the seven habits of highly effective supply chains.

  1. A written strategy that is regularly updated
  2. Alignment with the business is a constant priority
  3. Focus on Talent Management
  4. Fact-based Cultures
  5. Savvy Users of Technology
  6. Smart about Collaboration
  7. Organized for Innovation

While it’s hard to whittle down supply chain best practices to seven, these are a great start. In fact, if you asked the doctor what the top seven priorities were for your supply chain, you’d get:

  1. Talent Management
  2. Innovation in Process and Product/Service Offerings
  3. End-to-End Technology Platforms
  4. Mid-Term and Long-Term Strategy
  5. Organizational Alignment
  6. Data-Driven Fact-Based Decision Making
  7. Cultural & Emotional Intelligence

The only real difference, besides the order of priority, is that the doctor thinks cultural & emotional intelligence (given the global nature of supply chains) takes priority over collaboration, because CQ and EQ will enable the necessary collaboration.

The SCD article, penned by Dan Gilmore, is a good one. Check it out.