Initially posted on the e-Sourcing Forum [WayBackMachine] on Friday, 8 September 2006

In our first series of posts, we discussed some approaches that you might use to introduce innovation into purchasing and the organization as a whole. In our second series of posts, we discussed how the organization was changing, the important role purchasing will have to play, and how you can use new outsourcing methodologies such as crowdsourcing to reduce costs and improve productivity.

Before we get into this third, and final set of posts in our first Purchasing Innovation Series, I’d like to mention a little software company by the name of BrightIdea.com that provides an innovation management on demand software tool for only $49/month per user. If you don’t know where to start in your innovation improvement efforts, companies like BrightIdea (which reports clients that include Bosch, Honeywell, and Reliant Energy), can help you dive right in and increase innovation productivity from day one – using the same type of on-demand solution that you already use in your industry leading sourcing efforts. Innovation doesn’t take brilliant product and process managers, just brilliant people enabled by the right processes and tools to guide them. The tools offered by companies like BrightIdea are supported by analytics, archiving, financials, and rewards processes that allow a company to understand and save data created around innovations, compute the bottom-line impact, and recognize those most responsible.

In this series of posts we are going to discuss why innovation is so important and why purchasing has to lead the way. Tomorrow we are going to discuss some recent research from Aberdeen Group that quantifies not only how important innovation is in new product development (NPD), but the significant financial benefits it entails. Sunday we are going to wrap up the first part of this series by detailing how purchasing can lead the way in shaping the new enterprise.

When procurement is included in NPD in the design stages, product development cost is typically decreased by 16 to 18%, overall product cost is typically decreased 15%, and revenue is typically increased by 19%. Furthermore, whereas the majority of companies are not able to consistently hit product development targets with respect to percentage of products meeting revenue targets, cost targets, launch date targets, quality targets, or product development cost targets, the majority of best-in-class companies that have incorporated procurement into the process at the design stages hit these targets over 80% of the time.

For more ideas on how to innovate your purchasing – and your sourcing – see the Next Generation Sourcing wiki-paper over on the e-Sourcing Wiki [WayBackMachine].

Initially posted on the e-Sourcing Forum [WayBackMachine] on Sunday, 16 July 2006

Crowdsourcing is the New Outsourcing …
but what does it have to do with Sourcing?

That is a Very Good Question … but first we need to defining what Crowdsourcing is. However, I am going to first summarize yesterday’s blog entry on “Sourcing the New Organization” and the definitions it gives for “organisation man” and “networked person“.

The blog entry, which included a summary of a great piece in the Economist from earlier this year entitled “The New Organisation” (which in turn referenced an article by William Whyte entitled “The Organisation Man” published 50 years earlier in Fortune magazine), defined “organisation man” using Whyte’s classical definition of an employee who had “taken the vows of organisation life”. “Organisation man“, who lived in a highly structured world where lines of authority were clearly drawn on charts and decisions made on high, went to the office every day for his 9-5 job, acted very cautiously, especially with regards to networking, and protected his knowledge, which he believed was his power. In contrast, “networked person“, a new species observed in airport lounges, fast inner-city trains, and wi-fi Starbucks, lives in a connected world, is always on the move (with laptop, mobile phone, and blackberry), feeds off information exchange and constant communication, and makes her own decisions, guided by the knowledge base she has access to.

Now we can define outsourcing as the process of delegating non-core operations or organisation man jobs from internal production within a typical organisation to an external organisation that specializes in that operation or organisation-man job. (For more information on outsourcing, see Wikipedia’s definition.)

Then crowdsourcing becomes the process of delegating various tasks for which you do not have the manpower or expertise from internal production to external entities or affiliations of networked persons with the expertise, access to, or raw capabilities that you require.

A very interesting introduction to Crowdsourcing can be found in a recent article in Wired entitled “The Rise of Crowdsourcing”, which is also accompanied by “5 Rules of the New Labor Pool” and “Look Who’s Crowdsourcing”. It describes Crowdsourcing as “the new pool of cheap labor: everyday people using their spare cycles to create content, solve problems, [and] even do corporate R & D” and provides examples of tasks, once exclusively the domain of professionals, that are suitable to crowdsourcing. The four examples it elaborates on in detail are stock photography, content packaging, challenge-driven R&D, and technical repair flows. Other examples listed in the companion article are videography, online virtual-world generation, news, (fashion) design, and even financial services.

The first example elaborated on in detail in the article is stock photography. Once the domain of professional photographers who would charge $500 and above for professionally produced photographs, today they are being hedged out by internet stock photo sites that bring together large bodies of work produced by hobbyists and aspiring amateurs who, with the recent decline in equipment and software costs, can produce photographs of the same quality as those produced by the pros. Furthermore, since they are not dependent upon photography as a source of income, they can sell licenses for a fraction of the price of the pros, often for only a few dollars. For example, on sites such as iStockphoto, ShutterStock, Dreamstime, and Getty Images, you can license photographs for as little as $1 and high quality images for as little as $5 a shot – a far cry from the $500 often charged by a pro.

The second example is one in content packaging – with in depth material on VH1’s Web Junk 20 which was the first regular program to repackage the Internet’s funniest home videos and features the 20 most popular (viral) videos making the rounds online in any given week. The costs to produce the show are minimal, in the mid five figures, since all you really need is an editing / production team and a(n optional) host. Compare this to the average cost of a half-hour TV comedy these days, which now costs nearly $1M to produce (or more if you have superstars pulling that down for a single episode).

The third example, which really is the charm of the article, focuses on how crowdsourcing can be used to solve R&D challenges and how giants like Eli Lilly, Colgate-Palmolive, Boeing, DuPont, and P&G are using it to reduce R&D costs while propelling innovation forward. Back in 2001, pharmaceutical Eli-Lilly funded a new endeavor by the name of InnoCentive as a way to connect with brainpower outside the company – specifically, people who could develop drugs and speed them to market – and threw open the doors to other firms eager to access the network of ad-hoc experts. These companies post their most ornery (scientific) problems on InnoCentive’s Web site and anyone interested on the network can take a shot at cracking them, for a prize that ranges from $10,000 to $100,000 per solution. To date, more then 30% of the problems on the site have been cracked, which is 30% more problems than would have been solved using a traditional in-house approach (since these companies typically post the problems only after their internal R&D team has taken a shot and failed). And it’s extremely cost-effective – take the quoted Colgate-Palmolive example where they paid an InnoCentive member who found a solution to a fluoride powder injection problem a mere $25,000, a fraction of what it could have cost Colgate-Palmolive to dedicate their R&D team to the problem until it was solved internally.

And if this isn’t eye-opening enough to get your interest, note the quote from Karim Lakhani, a lecturer in technology and innovation at MIT who has studied InnoCentive. “The strength of a network like InnoCentive’s is exactly the diversity of intellectual background.” Lakhani and three coauthors surveyed 166 problems on Innocentive and “actually found [that] the odds of a solver’s success increased in fields in which they had no formal expertise“. Why? He believes it is due to a central tenet of network theory, “the strength of weak ties”. The most efficient networks are those that link to the broadest range of information, knowledge, and experience.

Another explanation not referenced in the article is the general applicability of methods and solutions to similar problems across many scientific and technological domains. If you remember our recent post on TRIZ, Teoriya Resheniya Izobretatelskikh Zadatch or the Theory of Inventive Problem Solving, the central step was the translation of a specific problem into a general problem since this allows standard solutions and processes to be reused across disciplines. Thus, solving an ornery problem in silicon chip manufacturing may not require access to the world’s foremost expert on silicon chip manufacturing processes, but merely access to an experimental physicist who has solved similar problems in research component fabrication. And a network of such specialists only increases your chances of finding the right individual and claiming success. Furthermore, a pay-per-solution scenario costs you next to nothing – merely the time required to define the problem in detail and analyze the presented solutions. And even if the presented solutions aren’t appropriate, if they are from an expert, chances are you’ll learn something just the same! So check out InnoCentive and similar sites such as YourEncore, and NineSigma when you get the chance.

There were other examples, but I’ll leave it to you, dear reader, to review the article if I’ve aroused your interest. For now it’s time to take up our question – what does crowdsourcing, the new outsourcing, have to do with sourcing?

Nothing. And Everything. Simultaneously. The answer, which can only be understood from a holistic Zen perspective, relates back to our previous post on Sourcing the New Organization where we stated that world class sourcing organizations will drive corporate transformation into this millennia and Jason Busch’s soon-to-be revolutionary presentation on the “Future of Supply Management” where he stated, among other insightful observations, that “Procurement will have a dotted line to all areas of the business“.

True Strategic Sourcing, built on sound principles of Total Value Management
tightly aligned with your supply chain strategy, is about to become the cornerstone of efficient business operations around the globe. What other function impacts each and every unit of the business with such criticality? What other function requires input from key stakeholders and experts in each area of the business to truly be successful? What other function, when optimized, can have such a dramatic positive impact to the top and bottom lines of the business? The answer to all of these functions is “none”. Furthermore, When you consider that, in an average business, sales and marketing will have to increase sales 500% to 1000% to have the same impact that a single dollar of up-front savings generates, the role of sourcing is only amplified.

As sourcing matures and becomes the center of the business, the view of sourcing will slowly shift from that of a reactive business unit that aggregates needs and demands into a proactive business unit that is looked upon as an enabler, problem solver, and even forecaster of future trends and consulted by the other units of the business. Thus, understanding new sourcing methodologies to reach out and find sources of innovative solutions, like crowdsourcing, will help you in your quest to become the “heart” of the organization, a role sourcing truly deserves!

For more ideas on how to innovate your purchasing – and your sourcing – see the Next Generation Sourcing wiki-paper over on the e-Sourcing Wiki [WayBackMachine].

Initially posted on the e-Sourcing Forum [WayBackMachine] on Saturday, 15 July 2006

Browsing through the economist recently, I rediscovered an article originally published in January, entitled “The New Organisation” that I believe to be worth a second read.

It starts of by saying that “the way people work has changed dramatically, but the way their companies are organized lags far behind“.

Fifty years ago, William Whyte, an editor at Fortune magazine, wrote a book entitled “The Organisation Man” that defined the nature of corporate life for a generation and described how America had recently turned into a nation of employees who “take the vows of organisation life” and who had become “the dominant members of our society“. The article was praised by the New York Times for recognising that “the entrepreneurial scramble to success has been largely replaced by the organisational crawl“.

Fast forward to now, and the organisation man seems almost extinct. Once upon a time, IBM was the perfect home for “organisation man“. All the managers wore only dark blue suits, white shirts, and dark ties as symbols of their lifetime allegiance to Big Blue. But today, 50% of IBM’s employees have worked for the company for under five years, 40% of its 320,00 employees are “mobile”, and about 30% are women. It has transitioned from a supplier of electronic and computer products to a conglomeration of transient suppliers of services. (Literally, see my first post in this series that noted IBM, once one of the biggest producers of computer hardware, now makes 50% more on its services then its hardware and that its global services accounted for 47% of revenue in 2005.)

This transformation has been brought about by the variety of changes in the environment in which business operates. Compared to the organization of 50 years ago, today’s organization is global, outsourced, and awash in modern communications technology. It’s employee is the “networked person“, a new species that can be observed in airport lounges, fast inner-city trains, and wi-fi Starbucks. Networked person is always on the move with laptop in case, mobile phone on belt, and blackberry in hand (or crackberry, as the case may be).

Whereas organisation man was cautious about networking and sharing his knowledge, which was his power, networked person feeds off of information exchange and constant communication. Organisation man lived in a highly structured world where lines of authority were clearly drawn on charts and decisions made on hide but networked person makes her own decisions all the time, guided by the knowledge base she has access to. A famous 1967 study by Stanley Milgram suggested that there were at most “six degrees of separation” between any two people in America. However, a more recent work along similar lines on the small world phenomenon suggests that the number may have fallen to 4.6. (See The Small-World Phenomenon: An Algorithmic Perspective by Jon Kleinberg and The Small World of Software Reverse Engineering by Ahmed E. Hassan and Richard C. Holt for some interesting perspectives, along with the 1998 Nature paper by Duncan J. Watts & Steven H. Strogatz entitled Collective Dynamics of ’small-world’ networks that inspired a new series of research in multiple domains.)

And yet, despite the dramatic evolution of organisation man into networked person, the organisation in which he lives has changed considerably less then expected. An article in the McKinsey Quarterly last year by Lowell L. Bryan and Claudia Joyce entitled The 21st-Century Organization argued that “today’s big companies do very little to enhance the productivity of their professionals. In fact, their vertically oriented organisational structures, retrofitted with ad hoc and matrix overlays, nearly always make professional work more complex and inefficient.”

The article points out that the main failing of the classic structure is that it impedes the spread of knowledge and limits the economies of scale that could otherwise be reaped. Ideas and commands move up and down from headquarters to the units, leading to the creation of vertical “silos” with very little communication between them. Moreover, the “matrix overlay” approach that attempts to take differing national markets into account by superimposing geographical silos that cut across traditional business units does not fix the problem. After all, the matrix structure has been called “one of the most difficult and least successful organisational forms“.

However, like many articles, it stops after it has thoroughly described the problem, simply noting that there is a need for a new kind of organization that is more appropriate to modern working methods. Although I will not claim to be an organizational expert and put forth a new structure herein, I will make the claim that it is the world class sourcing organization that will drive corporate transformation into the next millennia.

Why? World class sourcing organizations follow world class best practices. These best practices involve forming interdisciplinary teams that involve at least one key stakeholder from every unit of the business to make sure that the strategies they use and the buys they make are best for the business overall. World Class Sourcing teams not only cross, but eliminate organizational boundaries – and they do it for the good of the business. They are built on collaboration and knowledge sharing, everything the networked person believes in.

Furthermore, as Jason Busch, co-founder of Azul Partners and blogger extraordinaire of Spend Matters points out in a recent presentation on “The Future of ______ Management”, found here, in the future “procurement will have a dotted line to every area of the business. Procurement will increasingly be the road that bridges all aspects of the organization.” We may not know what the future will hold for the monolithic corporations of the past, but you can be sure on one thing, sourcing will lead the way.

For more ideas on how to innovate your purchasing – and your sourcing – see the Next Generation Sourcing wiki-paper over on the e-Sourcing Wiki [WayBackMachine].

Initially posted on the e-Sourcing Forum [WayBackMachine] on Friday, 14 July 2006

In our first series of posts in the Purchasing Innovation series, we noted that the companies that make the giant leaps forward and stay ahead of the game in today’s global marketplace are those that are continually innovating. We discussed various approaches, from the research of Professor John Bessant, which included “doing what you do, but better” (or continuous innovation), discontinuous innovation, and “thinking caps” and then introduced you to some techniques that you could use to manage or jumpstart your innovation process – TRIZ and the Verifier Approach.

This weekend we continue our discussion of innovation, and in particular, the role that we see for sourcing in what lies ahead. Tomorrow we will discuss the changing organization and where sourcing fits and Sunday we will discuss a new type of “sourcing” that you can use when you need to get creative.

However, before we get to that, I’d like to point out a recent article from a recent issue of Optimize Magazine that highlights the importance of innovation in today’s organization. Although somewhat misguided (as it seems to suggest that CEO’s and CIO’s should lead the way and overemphasizes technology – when it really should be the CPO or CSCO backed by the CEO), it is quite informative and serves to point out the importance of collaboration and good software tools to support your efforts.

The article, “Top-Down Innovation”, describes the importance of collaboration and IT in innovation and notes that a recent survey of 765 CEOs conducted by IBM’s Business Consulting Services group found that two-thirds of the respondents expect their organizations to be inundated with change over the next two years.

The article notes that successful companies will have a culture that makes innovation everyone’s goal and will reward innovative approaches. They will turn to a variety of sources for innovative ideas – including employees, partners, and customers. In addition, IT will be responsible for identifying the technologies that hold the greatest value potential for the company when it comes to core business problems.

In other words, you will be more successful when the other business units work with you, when you collect input from all available sources, and when you work with IT to help you select the technologies that best implement the processes that you define. All true.

I’d also like to point out a moderately recent entry from Frenk Gens’ blog “IDC Exchange” on “What Makes Innovation Special” which attempts to address how important innovation is to business leaders. In it, he points out that it is the #2 priority in IDC’s latest Line-of-Business Executive Survey (beat out only by Customer Service) and that IDCs recent inaugural Innovation Forum in Italy attracted over 1,500 delegates from business, IT, government, and academia – three times the turnout of IDCs CIO Conference. Furthermore, he’s certain that they could have had even more delegates if they had the room. In other words, innovation is important!

For more ideas on how to innovate your purchasing – and your sourcing – see the Next Generation Sourcing wiki-paper over on the e-Sourcing Wiki [WayBackMachine].

Initially posted on the e-Sourcing Forum [WayBackMachine] on Sunday, 2 July 2006

In yesterday’s post, I introduced you to TRIZ and the benefits it can provide across your organization. In this post, I’d like to introduce you to another methodology, hailing from the great halls of science, or at least the hall of a researcher trying to find a general purpose equivalent to the scientific method. Called the verifier approach, it may be of use to an innovative sourcing professional looking for new tips and tricks to solve problems, conduct thorough analyses, and help out the organization as a whole.

The verifier approach, which may have found its first recognition for its role in cracking the 400-year-old mystery of the Voynich Manuscript, was first served up to the masses in a 2004 Wired magazine article entitled “Scientific Method Man”. Shortly after Gordon Rugg, the inventor, and his co-authors, Joanne Hyde, Marian Petre, & Aspassia Daskalopulu released a short paper entitled “Verification of Expertise and Reasoning” that explored it more in depth.

The verifier approach is a seven-step methodology designed to solve problems that remain unsolved after the application of more traditional approaches. In its simplest form, the verifier approach may be applied to a problem using the follow methodology:

1. amass a knowledge of the discipline through interviews and reading,
2. determine whether critical expertise has yet to be applied in the field,
3. look for bias and mistakenly held assumptions in the research,
4. analyze jargon to uncover differing definitions of key terms,
5. check for classic mistakes using human-error tools,
6. follow the errors and gaps as they ripple through underlying assumptions, and
7. suggest avenues for research that emerge from steps one through six.

Like TRIZ, the foundations of the approach is that you should be able to use one problem solving kit to solve a multitude of problems. Experts might want to believe that their domain is unique, requiring specialized tools, approaches and thinking, but with the possible exception of physical tools, it is becoming apparent that this is rarely the case. Also, unlike other methods, one of the focal points of the methods is focusing on that which is commonly overlooked. However, unlike TRIZ, which does not provide much insight into where to look for general solutions or methodologies to translate those general solutions into specific technical solutions, it provides a methodology that can be used to zero in on the analyses most likely to lead to success.

The harsh reality is that most areas of specialization, and their experts, have “expertise gaps”, especially in academia and research labs. Although academic and research institutions want top-notch people, and offer incentives to attract and groom top-caliber experts, the only way for a young researcher to get noticed as an expert is for her to carve out a niche and confine her interests to a (very) narrow field of study. To quote the Wired article, “it’s not enough to work in spinal cord regeneration; it must be stem cell-based solutions to the problem“. These young researchers eventually become true experts in their narrow field of study, but their knowledge of related areas decreases exponentially the further away they get from their specialty. Thus, their knowledge of possible solutions – including what has been tried, what has not been tried, and what was never properly examined in the first place – is often quite limited even in the field in which they work.

In steps one and two of the verifier approach, you are working to map out the universe of knowledge on the subject to determine if there is an area of the map that is murky or empty. If there is, then identifying what is missing might be the key observation that leads to actually solving the problem. Furthermore, if all the experts agree that the murky or empty area of the map belongs to another research domain, chances are the perceived gap is very real. Filling it in might provide the expertise you need to solve your problem.

In step three, you try to identify researcher bias or assumptions that are commonly held but never validated or outright incorrect, in step four you analyze the jargon to determine if different researchers in the field have differing definitions of key terms, and in step five you check for classic mistakes. If the universe of knowledge that you built up in steps one and two appears more-or-less complete, but you still do not have a solution to your problem, chances are the universe of knowledge is incomplete due to the acceptance of mistaken assumptions, classic mistakes, or inconsistent term usage.

In step six, you follow the errors and gaps that resulted from your analysis in the previous steps and then, finally, in step seven you suggest research directions that emerged from your investigation.

So how does this help you, a sourcing professional, in your daily tasks when the methodology was clearly designed to attack problems in scientific domains? It provides a methodology you can follow when you have to make difficult sourcing decisions and it provides a methodology you can use to guide R&D in their analysis of alternatives when a new product is being launched (because their first choice is too expensive, for example).

One example where this could be applied is value-based global sourcing. For example, maybe your boss is all hot to jump on this “Low Cost Country Sourcing” craze because of the common belief that costs could be cut by as much as two thirds. Furthermore, let us assume that you are a major US provider of a new programmable electronic toy (via a PC) trying to outsource customer support for your offering. An unenlightened sourcing manager would probably read a few articles, determine that most educated people in India speak decent English, surmise that the costs of maintaining a call center in India is significantly less then maintaining one in North America, conclude that India produces a significant number of technical graduates, and then hold a simple sourcing event to qualify potential global suppliers, including a large number of Indian suppliers, to select the lowest cost alternative, which would likely turn out to be located in India.

But this failure to follow a well defined research or problem solving methodology might cause this unenlightened sourcing professional to overlook a number of key factors. While cost per headcount in the outsourced center might be significantly less, management costs would be significantly more. In addition to project management and the up front training costs, you have the costs associated with regular oversight to make sure that the call center reps are actually solving the customer’s problem. In addition, the reality is that although India, like China, churns out a high number of technology graduates a year, an in depth review will indicate that many of these degrees are barely equivalent to North American vocational / college / associate’s degrees and that the number of graduates suitable to work in a multi-national corporation could be as low as 1/10th of the educated population – increasing the amount of work you need to do to make sure the organization is up-to-snuff. (This last stat is especially true with respect to China.) Then, when you factor in the possible gap in quality and the potential decrease in your customer base and future sales that this quality gap could lead to, the overall costs might not be that much less then a near-sourcing solution and the risks substantially higher. (Especially when you could near-source to Halifax, Canada, for example.)

If you followed the basic precepts of the verifier approach, you would collect as many recent, relevant reports, articles, and studies on Low Cost Country sourcing and India as you could, organize it into R&D, production, and services, analyze the data on the existing services, and determine how much data, if any, is directly or indirectly relevant to the specific service(s) you want to outsource. You would then hire an expert research group to help you fill in the gaps, separate bias and assumptions from hard facts and statistics, determine what factors are truly relevant, and what their associated costs are. You would then be in a position to make a solid Total Value Management based analysis and come up with the right answer, be it opening an India office headed by the right expertise or near-sourcing to a low cost center in your Canadian neighbor. Fully informed, you’d make the best possible decision, guided by a holistic approach that left no stone unturned!

For more ideas on how to innovate your purchasing – and your sourcing – see the Next Generation Sourcing wiki-paper over on the e-Sourcing Wiki [WayBackMachine].