Author Archives: thedoctor

Technological Damnation 80: The Cloud

Where to begin with this one? How about a review of just about everything Sourcing Innovation has written to date on the subject:

Software was good. Hosted ASP was better. True Multi-tenant SaaS was better still. And “Cloud” is the one step back that follows the two-steps forward. (And unless you want to be a frog in a well, you’d best steer clear of it.)

The Cloud is not a white fluffy cloud full of day dreams, it is a gathering storm cloud that will soon erupt and flood your operation while the hail pummels you to a bloody pulp.

Not only, as per the linked posts, will you:

  • lose your mail, and all the confidential IP it contains, then
  • lose your data when you find out your Cloud provider put your data in a data center with no backup, then
  • lose your platform, when the FBI or NSA confiscates the servers in the data center that was powering the Cloud, and
  • lose your customers, when your loyalty program fails and they take their loyalty elsewhere.

But you will also

  • lose your supply chain visibility, and your ability to assure supply, when the Cloud explodes,
  • lose your revenue stream, when you can no longer book those customer orders and process payments, and
  • lose your bank accounts, when the (class action) lawsuits hit.

So next time a provider offers to take you on a trip through the Cloud, SI recommends you take them for a walk out the door.

World Class Procurement Organizations Are Beginning to Align with the Business

A recent publication from The Hackett Group for Procurement Executives addresses “How Procurement Organizations Are Reinventing the Stakeholder Experience” that looked at world class procurement organizations, which continue to outperform their peer group by a wide margin (by up to 5M in cost savings for a typical company), and found a surprising result.

We’ve known for quite some time that world class Procurement organizations, also known as The Hackett Group Top 8%, outperform their peers. We’ve known that some of these generate savings up to 41% higher than other (laggard) organizations. But we did not know that almost twice as many world class organizations (83% vs. 44%) have dedicated resources that act as liaisons between Procurement and the rest of the business.

As the authors state, raising stakeholder satisfaction levels builds trust and helps procurement gain the organizational permission to take on higher-value work. This is confirmed by the Hackett Group’s database of thousands of benchmarks across hundreds of performance studies which found that organizations that continue to invest in activities that elevate their role to that of a trusted advisor are taken more seriously, especially when they communicate that activity appropriately to the other departments in the organization. Furthermore, when these Procurement organizations are seen as a valued business partner, they generally report 68% higher savings! (This comes by way of an average cost reduction of 3.5% vs. 2.1% and an average cost avoidance of 1.2% vs 0.7%.)

Simply put, world class Procurement organizations have climbed to the top of the hierarchy of supply (which the doctor and the maverick discussed in their piece on “The CPOs Agenda I: Availability and Delivery”), having mastered supply assurance, cost reduction, and demand management. They listen and engage the internal customer, understand the customer’s needs, manage the relationship, offer them a superior service experience, and get better results. They follow all of the best practices the doctor and the maverick have been, and will be, discussing* over on the spendmatters.com/cpo site, and are seeing the return.

* The Agenda series has been broken up into three series:

  • the Conundrum# serieswhich discusses the outside-in issues putting pressure on, and shaping, Procurement
  • the Agenda serieswhich discusses the most pressing objectives on the CPO’s plate that are required to respond to the outside-in issues
  • the Value Drivers serieswhich discusses the primary actions that a CPO can take to realize the objectives on their journey to master the hierarchy of supply

# the doctor‘s terminology

Procurement Outsourcing is On the Rise

But is it the dawn of a transformational era?

Everest Global just released it’s Annual Report on Procurement Outsourcing, which it called the dawn of a transformational era, where it found that the procurement outsourcing market is growing at a rapid pace (12% year-over-year in 2014) but that it is in a state of flux with record new deal signings intertwined with high end-of-year terminations (26%), indicative of service provider switching (or, sometimes, the pulling of the function back in-house because not all outsourcing decisions outsourced the right functions). (However, 2 providers, Accenture and IBM, still command over half of the Annualized Contract Value and the next two largest providers, Xchanging and GEP, command about 17% of the ACV, which means that two thirds of the market is dominated by four providers.)

This, and other findings discussed below, was based on Everest Group’s database of over 1,100 Procurement Outsourcing contracts (each worth over 1M with managed spend typically in the 50M+ range), its database of operational capabilities of roughly 20 Procurement Outsourcing providers, and ongoing surveys and interactions.

There were seven key messages in this report, including the rapid 12% year-over-year growth, but the three we are going to focus on are:

  • The value proposition is transitioning from a cost-focussed model to a cost+value model, where strategic drivers such as market intelligence, supplier relationship management, and operational excellence are gaining more importance
  • The scope of contracts is expanding to a more end-to-end approach
  • The role of technology is growing, with increased adoption of end-to-end platform-based offerings

Advancement of the Value Proposition

In the beginning, outsourcing was mainly focussed on economics (cost reduction):

  • procure goods and services at the best prices
  • optimize activities to be cost efficient

More recently, outsourcing has been focussed on efficiency (cost avoidance):

  • spend consolidation to drive further impacts (with volume pricing)
  • satisfaction of complex demands
  • quality as well as price (to reduce warranty/return costs and protect the brand)

But now outsourcing is starting to focus on value generation:

  • the outsourcer is trying to become a strategic partner and not just a cost centre
  • the outsourcer is trying to define and drive business outcomes that impact overall growth
  • the outsourcer is trying to predict market trends to help organizations adapt to, and take advantage of, macroeconomic shifts early

How? Outsourcing is becoming more interested in identifying innovative suppliers, tracking and enforcing compliance and risk management, and gathering and harnessing the power of market intelligence.

Increasing Contract Scope

While many outsourcing contracts start out as Source-to-Contract (S2C), where the outsourcer helps the organization identify savings in indirect, non-strategic, or even strategic categories where the organization just does not have the volume, many are transitioning to Source-to-Pay (S2P) contracts where the provider also takes over the back-office invoice management and accounts payable function. Similarly, those contracts that started out as (P2P), because the organization thought its first priority was freeing up resources for strategic sourcing, are transitioning to S2P as well because these organizations realize that a third party can source those categories that it does not have expertise in better than the organization can.

More Prominent Technology

“Cloud”, Big Data, Digitization, and Consumerization is reshaping the Procurement Outsourcing marketplace as organizations demand more from their outsourcing providers and outsourcing providers look for an edge over their peers. With the proliferation of S2P SaaS solution offerings on the marketplace, outsourcing providers can not only offer S2P services but also enterprise S2P platform deployments where the customer organization not only gets platform access, but the ability to use the platform for their sourcing projects as well.

These are promising findings. Given that most Procurement departments are under-staffed and that no Procurement department can be an expert in every category and every technology, it’s good that there are maturing outsource providers that can add value to the organization and not just drain dollars.

And the other findings, which can be found in Everest Global’s just released Annual Report on Procurement Outsourcing, the dawn of a transformational era, are promising as well. It’s worth checking out.

Organizational Damnation 53: Engineering

So far in our series, we’ve addressed Marketing, Legal, Logistics, and Human Resources. However, as you might have guessed, these are just a few of the organizational damnations Sourcing has to deal with on a daily basis.

Today we add Engineering to the list of organizational damnations that Sourcing has to deal with on a daily basis.

Why Engineering? Why is a department staffed by Engineers and Scientists who, unlike Sales and Marketing aren’t inclined to stretch the truth beyond all recognition; unlike Legal, are inclined to speak plain English; and, unlike HR, are not inclined to find new and innovative ways to suck the life force out of you, a source of eternal Procurement damnation?

Engineers are rigid stubborn perfectionists.

Let’s break this down.

Each engineer has a process, a design, a set of approved raw materials, and that is the process, the design, and the set of approved raw materials. Trying to convince them that there is another process, an alternate design, or other raw materials that might be usable is like trying to force molasses to flow up a glacier. Like doctors, who only want a specific operating tool from a specific supplier, they are rigid.

This is because they are also stubborn. In order to accept new processes, new designs, or alternative raw materials, they would have to accept that there are better processes, better designs, and better raw materials, and that they exist today. If they believe that they are at the top of their game, they will believe that better processes, better designs, and better raw materials have not been discovered yet and even if they are discoverable today, it won’t be by Procurement or the supplier Procurement is bringing for joint innovation, at least not without a lot of time and effort on their part — that they don’t have. Don’t read this to imply that they are arrogant, because they don’t mean to be (unlike ivory tower PhDs), it’s just that good engineers and scientists invest the majority of their time keeping up with their field and honestly believe that they have a much better idea than you, and they are usually right in that assumption. Since it’s not often that Procurement will actually stumble across a better way, and, moreover, since the past track record of Procurement and suppliers — before Procurement was seen as a strategic department and top talent brought in to staff the department — was poor, Engineering will naturally assume that Procurement’s zany idea of the day will be another dead end and will be stubbornly resistant to it.

And, finally, they are perfectionist. The cost model might say 98% reliability is good enough because, in practice, only 1% of units will break down before the warranty period expires and the cost of flat out replacement will have little impact on profit margin, but Engineering will say otherwise. They will insist on selecting the supplier with 99% reliability even though that will increase costs 30% and it makes no sense because it is a consumer electronic device which will cause no injury when it fails and which will have little negative impact beyond temporarily inconveniencing the consumer who will have to call in, get a replacement shipped, and send back the defective unit in the box that arrives. An Engineer takes pride in producing the best quality product possible, even if that would bankrupt the organization in the process.

Their insistence on being the best will be one of the worst damnations Procurement has to face. After all, how can you fault someone for wanting the best? And you can’t even dislike them because, unlike some departments, Engineering is not filled with blood-sucking leeches, sociopaths who figured out how to screw people legally, or evil creatures that take pleasure in your pain. But yet they will cause you anguish in every sourcing project you undertake.

As each and every post in this series explains, Procurement is truly corporate damnation.

For those of you new to the profession, welcome to hell. (And enjoy the archive knowing that we’re only halfway through our journey.)