Category Archives: Cost Reduction

The Public Sector is Giving Procurement Integrity A Bad Name … Can the Private Sector Fix It?

A recent article over on Global Government Forum on Procurement Integrity: A Big Problem That’s Worse Than Most Organizations Think, pointed out that errors, fraud and abuse in procurement cost governments and organizations millions of dollars every year, and even though recent headlines in the US (TriMark, Booz Allen Hamilton), UK (NHS, Royal Mail), and Canada (ArriveCan) are starting to shine the light on the extent of (public sector) procurement fraud, the problem is still bigger than you think. Much bigger.

Current estimates are that organizations, across the public and private sectors, lose 5% per year due to procurement errors, abuse, and fraud. Given that Global GDP is about 85 Trillion dollars, at 5%, that’s 4 TRILLION dollars estimated to be lost annually to errors, abuse, and fraud. And that’s probably a low-ball estimate due to the fact that we just calculated that Over One TRILLION dollars will be wasted on IT software and services due, primarily, to lack of knowledge and/or outright stupidity (and not malicious intent, but if it’s easy for consultancies and third parties to considerably over bill for legitimate goods and services that you need, imagine how much they are fleecing you for goods and services that you don’t need and may not even receive).

It’s highly likely that the true cost of errors, abuse, and fraud (internal, collusion, and external) is closer to 10% of total GDP, or close to EIGHT TRILLION. That’s at least twice the GDP of every country on the planet except China and the United States. That’s a BIG PROBLEM, which is definitely not being helped by the 100M to Multi Billion Procurement Frauds being reported almost monthly across major western economies — and multi-million dollar fines don’t repair the damage. (They don’t even come close.)

This is damage which Procurement needs to repair — because Procurement is the only department that has any hope of putting proper procedures, processes, and platforms in place to minimize the errors; training the organizational employees on proper procedures and monitoring the implementations to prevent abuse; and putting in place proper detection systems to detect, and prevent, potential fraud and quickly identify and track it when it happens.

Unless all the bucks go through, and stop at, a modern Procurement department run by a CPO who puts in place proper people, processes, and platforms, loss is going to continue to run rampant. Which means that while the public sector is failing us daily, the Private sector has to step up and restore the integrity of Procurement. It can start by utilizing some of the the techniques in the linked article, and continue by continually learning and implementing the best technology and processes it finds to not only uncover significant savings in inflationary times, but return integrity and trust into big business, and give governments who have lost their way a model to follow.

And for more details on Bad Buying to avoid, and how to achieve Procurement with Purpose, the doctor suggests you start by following the great public procurement defender, Peter Smith.

Roughly Half a Trillion Dollars Will Be Wasted on SaaS Spend This Year and up to One Trillion Dollars on IT Services. How Much Will You Waste?

Before we continue, yes, that is TRILLION, numerically represented as 1,000,000,000,000, repeated twice in the title and yes we mean US (as in United States of America) dollars!

Gartner projects that IT spend will surpass 5 Trillion this year. When you consider that 30% of IT spend is usually for software, and that one third (or more) of software spend is wasted (for unused licenses, which is why we have a whole category of IT and SaaS specialists that analyze your out-of-control SaaS and software spend and typically find 30% to 40% overspend in a few days), that means that roughly half a trillion dollars will be wasted on software this year.

Even worse, Gartner projects that spending on IT Services will reach 1.5 Trillion. And the waste here could be two thirds! Now, we all know that you need IT services to implement, integrate, and maintain those IT systems you buy. But how much do you need? And how much should you pay? Consider that an intermediate software developer should be making 150K a year (or 75/hour), that says that an intermediate implementation specialist shouldn’t be making any more than that, and not billed at more than 3 times that (or 225/hour). But how much are you being billed for relatively inexperienced implementation consultant, with maybe a few years of overall experience and maybe six months on the system that you are installing? the doctor knows that rates of $300 to $500 are not uncommon for these resources that are oversold and overcharged for.

But this isn’t the worst of it. As per our upcoming article Fraud And Waste Are Not The Same Thing, many implementation “partners” will try to get all they can get and make sure that when you go in for a penny, you go in for a pound and they will push for:

  • frequent change orders during implementation, usually billed at excessively high day rates as they have to “divert resources” or “work overtime”
  • unnecessary customizations or real-time integrations that are an extensive amount of work (and cost) when out-of-the-box or daily flat-file synchs are more than sufficient
  • extensive “process evaluation” or “process transformation” processes that are well beyond what you need to eat up consulting hours
  • extensive “best practice” education when your practices are good enough for now and/or those best practices are already encoded in the system you just bought and paid a pretty penny for and just following the default process gives you the same education

That will often double to triple the cost. But that’s not the worst of it. As per comments the doctor has made on LinkedIn, he regularly hears stories of niche providers losing 200K deals because customers said their quote was too low because all the Big X companies quoted over 1,000K for 100K worth of work. Literally. This is because, as the doctor has noted in previous posts and comments on LinkedIn:

  • they don’t have the talent in advanced tech (and even The Prophet has noted their lack of talent in areas of advanced tech in multiple LinkedIn posts, though he has been much more diplomatic than the doctor in discussing their lack thereof; but he did note in a 2024 advice post that consultancies are going to have a hard time attracting talent this year) — for every area, they’ll have a team leader who’s a superstar, two or three handpicked lieutenants who are above average, and then 20 to 40 benchwarmers who are junior and not worth the rate they are charging)
  • they have an incredible overhead — posh offices to house the partners making more than top lawyers who have a lifestyle to maintain
  • they don’t have the knowledge of, or experience in, modern tools — some of which are ten times more powerful than last generation tools; this, of course, means the Big X benchwarmers are using last generation tools which take ten times the manual labour to extract value from
  • etc.

There’s a reason the doctor said that if you want to get analytics and AI right, DON’T HIRE A F6CKW@D FROM A BIG X! and stands by it! Unless you want to pay 1K an hour, you’re not getting that one superstar resource trying to be the front end to two dozen projects that his three lieutenants are trying to manage, all of which are staffed by junior to intermediate individuals who can barely follow the three to five year old playbook.

There’s a reason that The Prophet predicted in his 9th prediction that SaaS Management Solutions [will] Start to Eat Services Procurement Tech and that many companies will go in house if they have tech expertise. Because he realizes that these consultancies will have a hard time not only hiring, but retaining, tech talent when they have hiring freezes, salary freezes, and reduced engagements as more and more companies can’t afford the ridiculous rates they’ve been charging recently. (Companies may not have had a choice during COVID where it was implement on-line collaboration and B2B tech or perish, but now they do.)

But there are still many companies who will, when they encounter a (perceived) tech need, immediately pick up the phone and call Accenture, CapGemini, Deloitte, McKinsey, etc. and bring them in to help them understand who to bring in for an engagement, instead of widening the net to niche providers who are 3 to 5 times cheaper, and who will deliver results at least as good, if not better.

Now, again, the doctor would like to stress that, despite how much he insists they are usually not the right solution for advanced tech implementation, that Big X are not all bad, and sometimes worth more than the high fees they charge. Most of these companies started off as management/operational/finance/strategy consultants and grew big because they were one of the best, and in certain domains, each of these companies still are. But being good at a few things doesn’t mean they are good at everything, and that’s very important to remember.

And while there will be exceptions to the rule (as every one of these companies has some tech geniuses), the reality is that when you need more bodies than there are talented bodies in an entire industry, you’re not going to get them and, because consultancies are not cool when you want to be a tech superstar (and join a startup that becomes a unicorn), the ratio of superstar to above average to average to below average talent in these organizations is much worse than in multinational tech companies (like Alphabet, Apple, Meta, Microsoft, etc.) where you know the majority of their employees are not the best of the best. (Because if they were the best of the best, there’s no way they’d lay off 10,000 employees at a time every time the market jitters.)

In short, manage that IT services spend carefully, or you’ll be double paying, triple paying, or worse and providing a big chunk of the roughly ONE TRILLION DOLLARS in IT services overspend that the doctor predicts will happen (again) this year. (Unless, of course, you agree with Doctor Evil who says, why make trillions when we could make … billions. Because that’s exactly what happens when you overpay for software and services. Don’t expect the Big X to say anything as they get the majority that overspend, and that’s how they stay so [insanely] profitable.)

Are Vendors Demanding Ridiculous Cost Increases due to “Inflation”? Maybe you should tie them to an index when you ask What’s The Price!

Buynamics WTP was founded by two former CPOs and a Purchasing IT Guru back in 2015 after they had spent years being stymied at every reasonable request for open costing and reasonable justifications for significant price increases from opaque vendors where the salespeople did everything to prevent cost insight so they could maximize their margin, and their bonus. Tired of being forced into 20% cost increases when only 2% were justified, the founders of Buynamics WTP decided to do something about it and started Buynamics to build a solution that would provide them with insights into the cost drivers, and actual material costs, that they could use to start fact-based negotiations. [ In other words, the solution we are about to describe in this article was designed and built by buyers, who know exactly what output is needed to negotiate. ]

Since their founding, Buynamics has hired only two types of people: Procurement People (who know how to buy and have expertise in the categories they bought to help Buynamics design a better solution and explain it to interested buyers) and IT People (to build it). They don’t sell (consultant) services, they sell subscriptions to a platform that can provide deep insight into just about any product you buy and, as of this year, many standard services as well. Plus, if you pay for the Upply data subscription, you can get deep insight into current freight costs in different regions and, in 2024, there will be extended cost modelling support for logistics, which we’ll discuss later.

Their primary product offering is Buynamics What’s the Price which is their index-based negotiation support product that, in their words, “gives [you] access to the one-pager that your supplier never wanted to share“. You are able to see it all: the commodity costs, the change over time, the cost breakdown (materials, labour, energy, transportation, and overhead) and the appropriate (estimated) margin calculation. You can verify whether their steel cost actually did go up 20% over the past year, and, even if it did, if it justifies a 20% increase. (If steel is only 30% of the total cost of the product, than the most the cost should increase is 6% unless there is also a transportation or energy cost increase, which could be the case in the EU right now [since the sanctions on cheaper Russian Oil and Gas].) It could be that only an 8% increase is justified, and that’s a lot easier to argue with the data.

The What’s the Price module is extremely straightforward with only 6 areas of functionality: cockpit (the entry dashboard), the prices & indices, the industry cost profiles, the cost models, the reports, and the settings. The platform is designed to help a buyer get to the point, and it does that, which is why it’s so great. (Buyers need insights, not complicated tools — those are for cost engineers in the plants.)

In the Prices & Indices Section, the buyer can pull up the prices and changes over time for any commodity, salary, or freight rate tracked by the system. For a commodity, they just have to select the commodity/salary/freight rate (using easy search) and define a date range and up comes the start and end price, average price over time, % change, and a detailed line chart (which can be swapped or overlaid with a mutation chart, moving average, or index). For a job description, they just select the job title(s) and it brings up the average price and typical range (per month). For freight, you simply select the index by country and type (contract, spot, domestic, cross-border, long-distance, etc.).

In the Industry Cost profiles, you can pull up any NAICS code or keyword and see the typical cost breakdown for all products in that category using industry census data — specifically, the direct materials, direct labour, manufacturing overhead (contract work, CAPEX depreciation, energy, MRO, rentals, waste removal, etc.), GSA & Other Expenses and Profit at a high level, with drill in capability to the labour, manufacturing overhead, and GSA. By selecting the country of origin, the data is then complemented based on labor costs and energy rates prevailing in that region.

In addition, you can dive in and the software will calculate the economies of scale based on your growth potential that you are entitled to claim from repeat orders (since you should only pay for so much CAPEX depreciation, etc.) by simply estimating the fixed overhead and G&A of your vendors. (In 2024, you’ll be able to select the transportation index of choice, and get a complete cost model with freight.)

Prices & Indices are useful when you are looking at contract renewals (for quick insight into negotiation with an incumbent), cost profiles are incredibly useful when you’re looking at shifting more business to an incumbent (to negotiate a bigger discount), but the core of the product is in the cost models. You pull in (or enter) your bill of materials, select the NACIS code and the country, and using the current prices and the most recent industry cost profile breakdown, the platform will calculate the estimated total cost of a product using all the data it has. (So if materials account for 33.3% of the cost and add up to $10, then the platform knows the that the total product cost is expected to be $30 and estimates the cost breakdown across labour, overhead, GSA, and typical profit using the region-specific cost data and industry cost profile.

The buyer can build as many cost models as she likes, set up alerts to get updates on a regular basis or when a change occurs in the price that surpasses a threshold (be it due to material cost, energy cost, labour cost, or other significant factor), and see how the cost models have changed over time (since the time they last sourced, for example). (Also, the alert can be set to a percentage change or a financial impact within your organization.) And if you provide the price you are currently paying, it will also calculate how much you are likely overpaying per unit by cost component.

With respect to settings, besides defining system alerts, a user can also maintain their own settings to not only see their interface the way they want to (currency, formats, auto-tracked prices, cost profiles, [active] models, etc.), but reset them on the fly (so they can see prices in Euros when they are negotiating with European suppliers, Yuan when they are negotiating with Chinese suppliers. etc.).

With respect to depth, it tracks index data for over 3000 raw materials and commodities across over 160 countries and uses this to power over 360 built-in industry cost structures. When it comes to services, it tracks salaries for over 750 positions across 37 industries, and over 115 cost profiles, for over 170 countries and regions. Buynamics integrates with the full extent of Upply data (which built their cost indexes from neutral freight pricing from over 750 million invoiced freight transactions) and has detailed up to date market pricing for air (freight; worldwide), land (road, esp. EMEA and North America), and sea (worldwide).

It’s literally everything a buyer needs to start a fact-based index-based negotiation as the buyer understands what the cost should be unless the supplier has a unique situation where certain costs are higher than average (and the supplier is willing to prove it). It also helps the buyer understand when they are getting a reasonable deal and when they are truly paying actual cost increases only, and not just claimed cost increases.

So if you want to understand what you should be paying before you start a negotiation; the extent to which commodity, energy price, labour, or transportation price changes really affect you; and what the real cost drivers are (or where the supplier truly isn’t competitive), then the buyer should acquire Buynamics WTP today. It’s really the only platform that does index-based negotiation support (vs. stochastic analytics, CAD driven analytics, process model analysis, or hand-built cost models that typically require cost engineers and sometimes even PhDs).

Fairmarkit wants to bring a fair market price to your RFQs

Fairmarkit, which claims to bring you from requisition to PO in as little as 5 minutes (or 5 seconds if you turn on full automation) is a provider of an autonomous sourcing solution for all tactical spend, and tail spend in particular (with more Fortune 500 customers using it for Tail Spend than any other tail spend provider). Founded in 2017 with the intent of solving the tail spend sourcing problem prevalent in the modern enterprise, it has grown from a point-based stand-alone simple tail spend solution to a fully integrated solution that can sit behind, and power, any enterprise sourcing or procurement application that is missing tail spend functionality, and does so for many of the enterprise customers that it has acquired in a mere six (6) years. Drilling in on that last point, Fairmarkit is fully integrated with Ariba, Coupa, Oracle, and ServiceNow and users can conduct tail spend events without ever leaving those platforms (should they choose) and can even setup the Fairmarkit platform to automate the entire event (and, should they choose, even the award according to well-defined rules).

For the average user doing an RFP or RFQ, who is not initiating the event from within a third party platform, the entry point to the platform is their new NLP-powered interface that allows a user to start the process by stating a request in Natural Language. Once the request is made, the platform does it’s best to extract all key details that will be needed by the buy-desk sourcing professional (for categorization, potential supply base, etc.) and then verifies its interpretation step-by-step with the user, asking additional questions as necessary depending on the category, etc. If, at any point, it determines that the amount is too small for an event (and should just be a P-card expense), then it will notify the user of such. If there are suitable products (or services) in a pre-loaded catalogue, then it will direct the user to the catalogue. If the budget or potential spend exceeds a threshold, it will notify the user that this needs to be a strategic event (possibly through an integrated platform) and/or that approvals will be needed to kick-off the project and make the award.

For services projects, if the user does not have an SOW, the platform will use GEN AI to automatically create an outline based on a repository of best practice SOWs. Once the outline is generated, the requester can then edit it as needed before sending it to the sourcing team for execution. The platform understands more than 100 categories and can generate SOW outlines for all common contracting categories.

Once the buy-desk receives the request, the buyer can

  • message the requester with any questions they need answered to fully understand the need
  • edit the request as required for clarity
  • turn it into a full-fledged RFP
  • create a quick-hit RFQ
  • archive the request (if inappropriate for a sourcing event)

Creating an RFP is easy-peasy as the process, and complexity, is completely defined by the user. Depending on the category, the user can:

  • create an RFP from scratch
  • create an RFP from a pre-existing template (which includes a library of defaults created in conjunction with SIG)
  • use the built-in AI to generate a suggested RFP

Regardless of the method chosen, at any time before it is released into the wild, the user can:

  • add, edit, or remove questions (or sections of questions)
  • add or drop existing (or new) suppliers to (or from) the invite list
  • define weightings for scoring
  • invite (internal) collaborators to the event (for review and scoring)

When the due date arrives, all invited collaborators can score the RFP, and when scoring is complete, the sourcing professional can go to the summary screen that shows, for each supplier, its score, diversity status, and internal (preferred status) as well as the cost of each supplier – line item pairing. The buyer can then award by supplier, or by individual pairing. The buyer can also pop-up the scorecard at the category level and drill in as needed. When the award is selected, the user can add notes to explain their decision, the day the contract or term will begin, any expected on-time costs, and the platform will compute the recurring costs and one-time savings automatically (and all of this information is logged and can be used to produce a report summarizing the full project history and decision criteria for any executive who asks).

RFQs are quick and easy. Define the items, select the suppliers, and send it out. And, as per our introduction, if Fairmarkit is integrated with another sourcing platform, RFQs can be fully populated through the API, automatically sent out, and even automatically awarded (for repeat buys for tactical products or services when appropriate rules are defined). For most RFQs, the buyer is just filling in missing information not passed from the source system and doing the final award.

In addition, Fairmarkit RFQs can also take advantage of the first industry integration of the new Amazon Business quoting module that allows a seller to offer different prices than what you see in the cart, guarantee those prices for 30 days, and even hold inventory. This, for the first time, makes Amazon Business a viable catalog for quick-hit RFQs for commodity purchases.

Supplier selection is quick and easy as the platform will automatically recommend suppliers based on the actual products and services being sourced (and not just the category) using a sophisticated AI algorithm that will match on all available details. If the user doesn’t like the suggestions, they can also quickly identify suppliers by category as well.

Finally, as expected, the platform also has some built-in reporting that can be used by the management team to track performance and progress over time. (It’s not a full analytics solution as Fairmarkit expects a client to use their own best-in-class spend analysis platform as the API allows all data to be extracted at any time.)

By default it will ship with the following dashboards (which can be tailored to your organization):

  • executive overview which summarizes overall platform utilization, event time, requests time, and platform-wide savings (which are averaging 11% across all events) as well as missed savings opportunities
  • buyer performance which summarizes the buyers by activity, savings, single vs. multi-sourcing, and other key attributes
  • buyer reporting which summarizes events and results by suppliers
  • supplier trends around bidding, response, and overall performance
  • RFQ Details which summarizes key RFQ statistics
  • Supplier Diversity (if there is supplier diversity data available, which can be obtained from a subscription to their partner by event, month, buyer, etc.

The platform is also highly configurable by the end user organization that can define

  • all company settings
  • users, requesters, buyers, and teams
  • suppliers and groupings
  • categories (and associated templates)
  • templates for RFPs
  • price books (which is their term for built-in catalogs)
  • project settings
  • API settings (and diversity)

Fairmarkit is a great platform for tail spend, and the proof is in the pudding. In September, 2023 FairMarket passed the 1 Billion mark for spend sourced. One Billion in quick-hit tactical RFQ across it’s enterprise customers that issue between 700 and 4,000 RFQs a month (because they are so quick and easy and save an average of 11% even in today’s turbulent times). Also, Fairmarkit is available in multiple languages and is being used globally in 72 countries and counting.

THE Sign That You Need a CPO

The Supply Chain Management Review recently published an article on the top 10 signs that your organization needs a talented chief procurement officer. They were all good reasons, but they kind of suggested that you needed multiple reasons to hire a CPO. The reality is that you only need one reason, it’s very straight forward, and it almost needs no explanation. In fact, most of you will get it right away, so we’ll give it to you straight away, and you can stop reading now if you like.

The Sign That You Need a CPO: Your organization spends over 10 Million a year.

That’s it. Easy, eh? No top ten list. No long winded explanations. No complicated requirements. Just one number. Just one check.

Why is it this easy? Simple. Good Procurement practices will save your organization at least 10% across the board, regardless of current market conditions. Why? Even if costs are going up, if best in class Procurement practices weren’t deployed in the past,

  • even previously sourced categories will not have maximized savings
  • the process will have been inefficient, which would have cost the organization time, resources, and opportunity costs on other categories
  • most tail spend categories would have been completely ignored
  • many orders would have gone out without POs
  • most invoices would not have been closely checked, resulting in over-payments
  • etc. etc. etc.

So, if you’re spending 10 Million, a CPO is going to save 1M at a minimum. That’s going to be 3X or more the CPOs fully burdened cost in a smaller organization. Simple calculation, simple rule.