Common Challenges of Indirect Procurement

A recent article on “How to Leverage Outsourcing” over on Efficient Purchasing did a good job of summarizing the common challenges of indirect procurement across sectors and industries. Regardless of what industry your organization is in, chances are it has many of the following challenges, as illustrated by a recent NelsonHall study:

    • Effective Interaction with the Business Units
      While many executives are satisfied with the caliber of the personnel in their indirect procurement function, many are not satisfied with their ability to manage indirect procurement across the organization and control spend levels. Working with business units requires “softer” skills and the ability to act as “sourcing consultants” to the business.
    • Achieving Broader Category Coverage
      Indirect procurement is constrained by resources and by the huge range of indirect purchases made by a large organization. As a result, it is virtually impossible for an organization to have category coverage and market knowledge across all areas of indirect spend.
    • Efficiency
      The amount of indirect spend that is e-Sourced and the amount spent on indirect procurement personnel as a proportion of indirect spend under management is low in many organizations.
    • Process Improvement and Standardization
      There are generally huge issues around inconsistency of sourcing across subisdiaries or georgraphies in an average organization.
    • Lack of Time and Resources
      As a result, supplier databases and catalogs / punch-outs / product portals are generally out of date.
    • Lack of Management Information
      Detailed spend analysis is often unavailable for indirect spend.

Out-dated IT
Many companies, which take their time updating IT for direct spend, take even longer to update systems for indirect spend.

Now, the authors would have you overcome these shortfalls by outsourcing, but the reality is that many are overcome by implementing better technology and better processes, starting with spend analysis. If an organization can quickly identify which categories will yield sufficient savings to make a sourcing project viable, then it can integrate high-opportunity projects into the strategic sourcing plan, put mid-opportunity projects out to auction, and simply ignore low-opportunity categories as the 20/80 rule generally applies to indirect Procurement as well. Of course, if the department can’t get better systems, better processes, and more / better personnel, then it may have to consider outsourcing for results.

IT Outsourcing: The Two-Headed Beast

A recent article on “IT Outsourcing Category Management” over on Efficient Purchasing did a great job of capturing the nuances of the category in that the drivers will be dependent on whether it’s a first or subsequent sourcing event and so will Procurement’s role. In the outsourcing scenario, the number one driver is access to competence. Cost reduction and flexibility take a back-seat with Procurement, whose role is to facilitate the process, that is led by IT, and ensure a competitive environment. In a subsequent event, cost reduction becomes the number one driver and innovation, completely absent in the first phase, jumps into the back-seat. Procurement jumps into the driver’s seat, leading the effort to find qualified suppliers that can reduce costs and increase value.

However, the two events are not completely different. In both scenarios, Procurement must master stakeholder management, do its homework properly, understand risks and the nature of likely disruptions, accurately model cost, and get a grip on the value a supplier could bring to the table. The last part is key, since while 67% of IT leaders rely on outsourcers to turn ideas into new and improved processes, as per a Warwick Business School study, only 33% measure the impact of innovation delivered by service providers, which is key component of delivered value. Plus, as per an IDG Outsourcing Survey, IT Outsourcing has only led to cost reduction and flexible staffing in one third of engagements!

And contracts are a major headache for the unprepared. In addition to detailed descriptions of the services, service levels, and service management process, that need to be provided, a significant number of commercial terms and legal terms generally need to be provided as well. Plus, contract templates should be included in the bidding event as this will let potential providers know what is expected of them. As a result, many projects have to be planned six to twelve months in advance as it often takes four to eight months just to stipulate the scope of services and SLAs, which needs to not only define the services, but the transition plan and an exit plan should the contract not be renewed.

Some Great Ideas to Revitalize the Innovation Engine, Part II

In yesterday’s post, we discussed some of the suggestions from Henry Nothhaft’s recent book, Great Again, on “How to Revitalize our Innovation Engine”. These suggestions included the liberation of entrepreneurs and start-ups from start-up killing taxes and regulations, the restoration of the VC engine to an earlier design where it worked well, and ending the indifference to domestic manufacturing. These are all great suggestions, but probably the most important suggestion Henry makes is to:

  • Fix the Busted Patent System
    It’s an IP economy and (legitimate) patents are critical for a successful innovation economy, especially since investors (and VCs) want to see IP and protection for that IP before (continued) investing. However, the patent office has a backlog of 1.2B that is growing daily, primarily because, what should be one of the few self-funding agencies is being treated as a petty-cash drawer by the politicians, who have cut 150M in funding this year alone. The patent office needs to be fully funded, needs field offices where patents are filed, needs to modernize, and needs to be able to price with the market (including fast-tracking pricing options).

About the only thing I’d add to Henry’s suggestion list is to:

  • Abolish sotware and business process patents
    The EU has it right. Software should not be patentable and business processes have existed since the day after the invention of money. All these types of patents do is clog up the patent system, enable the patent pirates, and stifle innovation as funds that should be spent on innovation get spent on overpriced lawyers instead.

So what does this mean to your Supply Management operation?

It means that if you want to enable long-term success, you should:

  • help your company establish an innovation fund
    to fund innovative new start-ups that are working on technologies that could revolutionize your manufacturing or supply chain
  • source (some product) domestically
    as not only will this help insure supply if the overseas option(s) suddenly become(s) unavailable (due to political unrest, a shipping disruption, etc.), but it will give you ready access to another source of innovation that will complement your own and support the local economy (which needs to be strong to increase local sales)
  • NOT buy from companies that support patent piracy
    if a company is flooding the patent office with software and process patents, don’t buy from them. Period. They’re the reason we have patent pirates, and if they all go out of business, or change their ways to stay in business, things might get better.

What to Look For in a Spend Analysis System

These days, every vendor and his dog is offering “spend analysis” solutions to the market, but, as one can easily guess, not all “solutions” are appropriate in all situations, or even capable of producing a true picture of spend for an average organization. Therefore, in order to select an appropriate solution, one has to know what to look for. The right answer is often elusive, because there is a fundamental lack of understanding in the market of what a “spend analysis” solution actually is, and what it should be expected to do. Depending on who is asked, the definition of analysis will vary from the process of building predictive models using historical data, to deciding whether past events or transactions are statistically significant, to sorting through haystacks of data to find meaningful needles that will suggest patterns. Each is a valid definition, but it is not necessarily useful to an organization that just needs a better understanding of what it is spending, where, with whom, by whom, and, more importantly, why. From a practical perspective, spend analysis boils down to “finding stuff in your data” that the organization was not aware of, or was not sufficiently aware of. Spend analysis, therefore, is the process of deriving insight from spend data.

So how do you derive insight? You apply a well understood process to multiple data sets. Emphasis on “you” and emphasis on “multiple”. If the process can only be accomplished by a team of programmers in a back room, it is not useful from a business perspective. You have to be able to use the system to do the analysis you need to do. And if the system can only build one cube on one data set, then it is not a useful analysis system. Depending on your organization, there could be savings in the AP data, the invoice data, the HR data, or the ERP data. You don’t know until you look at all the data sources and build and analyze all the cubes.

So what does this mean from a system perspective? Find out in our article on “What to Look For in a Spend Analysis System” over on the new Next Level Supply site. True spend analysis is a fundamental requirement of a next generation supply management organization.

Some Great Ideas to Revitalize the Innovation Engine, Part I

A recent article over on Chief Executive that reviewed Henry Nothhaft’s recent book Great Again summarized some great advice on “How to Revitalize our Innovation Engine”. Tackling the link between innovation and prosperity that is diffused throughout society, Henry is worried that there are numerous forces that are severing this link. These forces include:

  • the divorce of innovation from production
    that has allowed other countries to advance, and become leaders in, technologies that were first developed (and patented) in the US, such as solar power (AT&T Bell Labs, 1957)
  • the lack of jobs in today’s web-based (social media) firms
    While Facebook has 500 M users and a market cap of up to 100B, it employs a mere 1,400 people while Sony (27 employs 170,000, Disney (75 employs 144,000, and Boeing (55 employs 157,000 people. Even Google had only 11,000 people at a comparable stage.
  • a lack of sustainable business(es) models
    since companies that are here today and gone tomorrow don’t have long to innovate

The first three suggestions he offers are the following.

  • Liberate Entrepreneurs from Start-up Killing Tax and Regulations
    Not only did a 2008 World Bank study find that a 10 percent increase in the effective tax rate reduces the investment-to-GDP ratio by 2.2 percent and foreign direct investment by 2.3 percent, indicating that lowering the effective tax rates for start-ups would likely have very positive results, but start-ups are expensive and taxes on necessary hardware and headcount are stifling. If a manufacturing start-up needs 10M of equipment, and the taxes on that equipment are 10%, that’s an extra 1M out of its pocket. While nothing to an established multi-million manufacturer, an extra 1M can sometimes break a start-up.
  • Fix the VC Engine
    In the 1990s, when most VC firms were staffed with executives with operational experience, firms were trying to build companies for the long-term. Today, most VC firms are led by financial types who want to “flip” companies for a quick return like PE firms do. They don’t want to invest unless you already have a product, beta customers, and the headcount to get the job done. At that point, a company could almost self-fund growth with customer partnerships and debt. It’s getting to that point that companies need money.
  • End the indifference to domestic manufacturing
    Most countries understand that manufacturing strengthens an economy and sustains a middle class like no other form of commercial activity. As Henry notes, decades of outsourcing have left the U.S. without the means to invent the next generation of high-tech products. Plus, R&D depends upon close contact with manufacturing for success. A design must be able to be manufactured efficiently and cost-effectively to be a success. R&D cannot be completely disconnected from manufacturing.

And they are all great. Tomorrow we will discuss his fourth suggestion and what your Supply Management operation should do to help revitalize the innovation engine.