Category Archives: Best Practices

There’s NO Faster Path to a Markdown than “Growth At All Costs”!

THE PROPHET is bemoaning the start of markdowns in private equity when he should be happy (as a former investor) they took this long to happen, especially when the reality is that these markdowns are going to start coming fast and furious in any firm that wants to still be around by the end of the decade.

This is because most of their portfolios in Software, and FinTech/ProcureTech software in particular, have been pursuing growth at all costs as a result of:

  • the insane valuations during COVID for FinTech/ProcureTech that helped companies buy and pay online
  • the insane valuations during the current AI-HYPE for any company that could convince the investors they had a unique AI capability (even if it was just a clod or chat, j’ai pété wrapper)

… which has resulted in unreasonable, and practically unachievable, sales and growth targets being placed on them which they will not reach, especially in a flat, or down, market for software purchases as a result of the AI price squeeze (since “AI” offerings are currently cheap with the big firms underpricing compute costs to try and hook clients, even though it’s costing those firms Billions).

But as Garry Mansell, one of the Godfathers of Modern Procurement, has so eloquently explained in his can of worms post, growth at all costs is equivalent to self-sabotage. That’s because it comes laden with fallacies, traps, and brand value destruction!

Garry points out the three biggest harms we see every single time.

  1. Quarterly Earnings Trap: with the constant pressure to reach unreasonable, if not unobtainable, sales targets, it becomes all about delivering good news on the quarterly earnings call (whether to the public or the PE firm); it all boils down to revenue and cash in the bank, and sales teams are told to hit targets by any means necessary, including, but not limited to, deal-making, over-promising, and grand assurances the solution will solve that problem without any plan to ensure it will do just that once the deal is signed; this leads to unhappy customers when the implementation will take a year (vs. the three months they expected), the expected enhancement needed to solve that problem is pushed two years down the roadmap, and the customer support is non-existent (because all the support reps were fired to fund increases in the S&M budget to try and hit the insane targets)
  2. Heavy Discounting Fallacy: because it will get “not ready” or “likely to go with a competitor” customers over the line and get the deal in the door; first of all, it doesn’t always happen (as some customers see through it and then spot the “we have the right to reprice on a quarterly basis if your user base goes up, and we get to use LinkedIn growth metrics to do so” clause where, even if you hired a dozen janitors for your new office building or 50 fleet drivers for your new private fleet who never use the system, you will be charged for them anyway); secondly, even if it does, given that the smart ones know the old adage “you get what you pay for” is true, if they didn’t pay much, they will believe it’s not worth much and not put in the hard work that’s required on their end for a successful implementation (especially since they also know you can’t afford to, and thus won’t, support them at that price); third, voices carry, word gets out you’re cutting quotes 80% to 90%, and suddenly everyone knows (or at least assumes) you’re doing massive mark-ups with the sole intent of getting whatever you can (and not what the tech, and the IP contained within, is really worth — as you’ve just devalued the IP to the floor)
  3. Shelfware is the Reputation Killer that Keeps On Killing: Good software that generates value for a valued client that uses it daily is the gift that keeps on giving because a happy client, as long as you keep your prices fair, never goes away; but shelfware is the villain that keeps on striking at your darkest hour as that unhappy client will never tire telling people how you are robbing them blind in a contract they can’t get out of for software they aren’t using …

As Garry has said repeatedly, which SI has echoed repeatedly (while giving you a simple relative corporate debt equation to help you calculate how likely that vendor is pursuing growth at all costs, and, thus, likely to screw you [whether they intend to or not]), the only true growth is controlled growth with ready-clients at a sustainable year-over-year rate that allows all customers to be served to expected levels of service, all new employees to be adequately trained before being thrust into critical customer-facing roles, and all current employees to get the regular time off they need to prevent burn-out.

And, as Garry has also pointed out, where the model incentivizes utilization and renewal over implementation and sale, where every member of the organization is incentivized on those metrics, where the sales person doesn’t get a dime of commission until go-live and where the full commission depends on adoption and renewal, that’s where you will see success. (In other words, the sales person should NOT be happy if the client isn’t. That’s one of the best ways to de-incentivize bad deals — what salesperson is going to bend over backwards and/or pull every dirty trick in the book to get a deal he’ll never see a dime of commission on?)

AI CANNOT TELL YOU WHAT TO DO!

And I’m so glad I’m not the only one saying it!

The (Strategic Sourcing Decision Optimization [SSDO]) Grand Master himself Paul Martyn recently wrote a great post on LinkedIn that made this exceptionally clear and how the real problem is knowing what to do.

Paul starts off with three critical statements:

  1. AI can tell you what’s happening
  2. AI can’t tell you what to do
  3. In sourcing (procurement) the hard part isn’t visibility, it’s choice.

More specifically, it’s making a decision when every decision has tradeoffs, constraints, and (sometimes dire) consequences.

Unless you have an operating model to make those decisions, powered by technology that can actually help you adhere to the constraints, make the tradeoffs, and understand the consequences, the best case with AI is you get overwhelmed with the complexity of what’s happening.

So if you want to be buried in data and complexity and pretend you know what you are doing, there are dozens of BS AI players ready to help you.

But if you want the ability to make good decision, understand tradeoffs, restrict your inquiries to scenarios that adhere to constraints, and model the potential consequences when things go wrong, you need decision optimization with multi-objective capability. That’s Coupa (Trade Extensions). Or Jaggaer (Bravo Solution). Or Keelvar (just Keelvar). Not some BS AI startup offering nothing more than a clod or chat, j’ai pété LLM wrapper.

And if you want to know how to build the right operating model backed up by the right multi-objective optimization model(s) (and save millions while reducing risk and increasing quality), you contact Paul Martyn. He’s saved Billions. (Whereas in 94% of companies, AI has effectively saved 0.)

Now for those who don’t know, not only am I one of the last original (independent) analysts standing in our space (20 years doing SI next month), but I am likely the last original strategic sourcing decision optimization model builder left standing too. (Mindflow [acquired by Emptoris], 2000. First multi-line item model. Before CombineNet [acquired by SciQuest, renamed Jaggaer]. Before Emptoris [acquired by IBM and sunset]. Before all of them. Twelve years before Keelvar. First model to do more: Trade Extensions, acquired by Coupa.)

So unless Thomas Sandholm or Arne Andersson want to come out of retirement and recommend someone better — it’s Paul Martyn. No one still active in our space goes as far back or has worked with as many platforms as he has. (And I helped a PM/Consultant who worked at 2 different optimization providers get hired at 3 others over the past 20 years, and even that doesn’t match Paul’s resume!)

Four Broken Procurement Processes You Wouldn’t Have With Exact Purchasing

Gaurav Sharma recently penned a truly great post on LinkedIn on 5 dated procurement processes/setups you can get rid of without AI or any tool whatsoever. This is the type of post we need more of because AI isn’t always the answer (and in fact, it’s rarely the answer), and AI shouldn’t even be considered until the technological needs are identified (which, if the right process is followed, require AI a lot less than the hype machine would lead you to believe).

Not only should you not have the five processes he outlined if you are a best-practice Procurement department, but 4 of them wouldn’t exist in the first-place if you built your Procurement programs off of Busch-Lamoureux Exact Purchasing.

Let’s take them one-by-one.

Spend it or Lose it at the end of the year.

Proper Procurement, and the proper business operations it would dictate, would never have this because budgeting based on historical spend is bad budgeting, as is pricing based on historical price points. The era of global stability is over, natural disasters are on the rise, critical resources are becoming scarcer by the day, and logistics becoming uncertain and unpredictable due to the fallouts of sanctions, wars, disasters, strikes, and uprisings. As a result, what you will pay this year, and what you will have to charge to maintain a fair profit margin, will not necessarily have any correlation to what you paid last year, especially in categories where more than half of supply comes from a single country (such as rare Earths from China) or flows through a single chokepoint (like oil, fertilizer, etc. through the Strait of Hormuz).

Budgets need to be based on expected costs using the most up to date data at the time, and revisited every time a category comes up for (re)sourcing. And, most importantly, be based on forecasted demand, which needs to be up-to-date when budgets are created and updated regularly based upon category velocity and actual sales/utilization over a typical, statistically significant, time window (which will be different for every category). This is the key: budgets should be based on expected, and approved, demand and cost ranges — not fixed spend buckets.

And you need to make three critical changes to budget management to be successful.

  1. If the purchases are needed (i.e. buying less will shutdown a production line, result in a costly stockout, etc.), the expected spend can be exceeded (as long as all efforts are made to keep it as low as possible) and the organization will react by either increasing pricing or cutting elsewhere if they can’t.
  2. If the forecasted demand has been reached, it cannot be increased without approval (or approved forecast updates for input components), even if the expected spend hasn’t been reached.
  3. For discretionary categories, if the organization was able to delay demand (by finding a way to get one more year out of that cell phone or laptop, delaying hiring through better automation and occasional overtime, or simply pushing off MRO restock until the next major project started), expected baseline demand is NOT reduced for the next year. In fact, if a valid argument exists, unused demand may even be carried over. Organizations that can reduce or defer demand need to be rewarded. In the long term, you’ll save money if you encourage delay of spend until absolutely necessary.

And if you use Busch-Lamoureux Exact Purchasing, you’ll have an infrastructure where you are able to re-compute forecasts as needed, query current pricing as needed, monitor for events in high risk or highly volatile categories, get alerted when you may need to accelerate an event, and have an infrastructure to take the right action at the right time where you aren’t sourcing based on a fantasy budget but a real, up-to-date, demand with real, up-to-date, market pricing.

Approval Chains

If you’re using Busch-Lamoureux Exact Purchasing, you have regularly updated, agreed upon, forecasts and expected demand. You have pre-vetted suppliers. You have market pricing, contracts, purchase orders, and m-way match. Once the demand, suppliers, and contracts / bids have been accepted and approved, if everything matches, there is no need for a human in the loop. You configure the (A)RPA and let it issue the okay-to-pay to the payment system and let the payment happen. Unnecessary approvals add unnecessary time, create unnecessary work, and potentially cost you not only the opportunity for early payment discounts, but even fines if you don’t make the payment windows mandated by the UK, EU, and other countries for paying small suppliers.

PowerPoint Category Strategies

A PowerPoint dies as soon as it is presented. No one ever goes back to it. With Busch-Lamoureux Exact Purchasing, for any high complexity, high risk, or high impact category (which are 7 of the 8 categories), you setup the necessary price, risk, quality, delivery, etc. monitoring systems from day one. You have alerts whenever a significant event occurs that could significantly impact your pricing, quality, or supply. And, for any category that is high impact, you have mitigation or response strategies already defined in your procurement systems that you can action.

KPIs that incentivize activity

In Busch-Lamoureux Exact Purchasing, you define KPIs based upon success factors, NOT activity factors. You’re concerned with savings against market (i.e. cost avoidance), not historical budgets. If market prices went up 15%, you’re not saving over last year in any managed category. But if market prices went down 10%, you shouldn’t count any decrease in spend against last year’s spend of less than 10% as savings, because if you didn’t reduce spend by 10%, you’re doing a lousy job. It’s not resolved issues, it’s straight through processing. And so on. With Busch-Lamoureux Exact Purchasing, you don’t have worthless KPIs in the first place.

The only process/setup it doesn’t eliminate is tolerating underperformance. That’s entirely a people issue, and if you have people that tolerate underperformance, they need to go. No process can fix that. Only your willingness to take action can.

* as a certain Western society does everything it can to pretend climate change doesn’t exist while its greatest ally does everything it can to bomb us to the next great flood as it unleashes over 2 million metric tons of carbon dioxide (tCO₂e) a month with the bombs it uses in a single conflict — a measurable level of emission equal to 0.05% of total monthly (tCO₂e) global emissions

AI Doesn’t Drive Savings, Innovation, or Performance. Sourcing Excellence Does.

And Sourcing Excellence requires (Strategic Sourcing) Decision Optimization.

As the Sourcing Optimization Grand Master Paul Martyn has clearly stated in his post on how Procurement is at an Inflection Point:

  • AI won’t fix Procurement.
  • Dashboards won’t fix Procurement.
  • Better Data won’t even fix Procurement.

ONLY structured, modelled decision making that gets executed in the practice of true Sourcing Excellence will.

And that structured decision making will be based on true multi-objective sourcing optimization that takes costs, risks, and goals into account to help you, the intelligent human, make the right decision that a dumb machine will never see.

And if you want to find out how that’s done, reach out to the Sourcing Optimization Grand Master himself who has saved Billions in his career WITHOUT increasing risk, liability, or complexity and find out how your organization could be the next to save millions (upon millions) while making less risky and more valuable decisions.