Category Archives: Cost Reduction

We Need Exact Purchasing … But It’s NOT a New Matrix!

We all know the Kraljic matrix is broken, and that it has been broken for a while. As Jason Busch starts off in his article on how Supply Management Must Become Exact Purchasing, Kraljic was right at the time, but it’s time to come back to where we started. And, more importantly, recognize that the Kraljic Matrix was designed as a starting point for supply management to think critically — and Supply Management was supposed to evolve from there. But it never really did.

Sure we got the Purchasing Chessboard by Kearney to supplement a host of seven step methodologies, procurement game plans, new techniques for managing indirect spend, lean supply management, and a slew of techniques from every niche consultancy to enhance your supply, and category management, strategies, but almost all of these are based on the classic 2 * 2 Kraljic matrix with refinement.

In his post, Jason, who rightfully says that procurement at scale is not one-size-fits-all tells us that answer is Exact Purchasing, or more specifically, The Exact Purchasing Quadrant, where he tries to map cost influence vs contract-and-supply complexity because Kraljic told you what a category is when he mapped profit impact vs. risk / complexity, but he didn’t tell you what to do with it. According to Jason, if you have:

  • low cost influence and low complexity, you transaction capture
  • low cost influence and high complexity, you govern the relationship
  • high cost influence and low complexity, you manage market risk
  • high cost influence and high complexity, you architect the cost

And Jason’s mostly right. Depending on the category in question, you’re generally going to apply one of those approaches.

Jason doesn’t stop there. He tells you that the thread that ties all four of these together is data at the core. And he’s right. Without a data-based (not necessarily database) approach, you’ll never effectively manage, and thus never effectively purchase, a category. Moreover, Jason does a great job at telling you what the core data is, where it resides, and where it could sit in your next generation enterprise Supply Management Solution (SMS). But he falls short when dictates the velocity, because that depends on the criticality. And even worse, the depth of data required depends on the criticality — which can also change the quadrant a category falls in!

For example, while packaging, print & marketing, and NPD are definitely strategic (Kraljic) cost architecture (Busch) categories for some companies (i.e. CPG, Advertising Agencies, and Manufacturers), they are tail-spend for other companies (i.e. Retail Store, Luxury Brands, and a Services Consultancy).

Jason’s improved approach still fails because it suffers from the same fallacy as the original Kraljic matrix — that complexity and risk are a single dimension. They’re not. Complexity is a factor of the product or service that you design and is an internal dimension that you have complete control over. Risk is a factor of the external environment that impacts your ability to create and deliver the product or service and depends on the financial stability of your supplier, the geopolitical situation in which it operates, the trade routes that exist between your supplier and your location, your supplier’s supply chain, and everything else in between — these are all factors you can’t control. Furthermore, it’s not profit impact (Kraljic) [which is short term] or cost influence (Busch) [which depends on spend], but criticality, which is measured in value impact [and what happens if the buy is unprofitable, of poor quality, or unavailable]. A category with zero savings potential can risk a 100M product line if your products can’t be completed without it (and we’ve seen this many times over the last two decades as critical sensors or single-sourced components shut down automotive lines or lack of RAM [from the decennial plant fires] or custom control chips [from trade slow-downs or insufficient production] greatly impacted personal computer / laptop or game system production — costing major brands hundreds of millions of dollars).

The reality is that Supply Management / Exact Purchasing / Get My Stuff (and Git-r-Done) is NOT a 2 * 2 matrix. It’s a(t least a) 2 * 2 * 2 pocket cube (and a 3 * 3 * 3 cube in large Enterprises) that is different for every organization where you take into account:

  1. complexity – low (med) or high
  2. market risk – low (med) or high
  3. criticality – low (med) or high

And as you progress from the lower left of the cube (where all dimensions are low) to the upper right of the cube (where all dimensions are high), you’re simultaneously following a three-dimensional path down a bi-furcating decision tree that takes you from non-critical items where you are simply managing as transactions to highly strategic items that you are cost architecting to the best of your ability, monitoring at least weekly, and alerting the category manager to on every major market event. In the middle, you will deal with your leverage and bottleneck items using well-timed market events to mitigate risk and managed relationships to ensure smooth supply, with the depth, and velocity, of the data correlated to the criticality of the item to your operation.

You do that, and you’ll finally be on the road to Exact Purchasing.

And I’ll leave it to Jason to work out the details of the starting cubic, as he’s so intent on fixing Purchasing (now that he’s semi-retired and can pontificate on the philosophical of purchasing).

(And once Jason does that, I’ll tell you how execution differs between small, medium, and large enterprises because “strategic” doesn’t mean the same thing at different levels, there is no one-size-fits-all platform, and, after a lack of operational readiness [which THE REVELATOR will happily fill you in on], this is likely the second biggest reason new technology acquisition projects fail in our space.)

Outcomes is a Dirty Word! Part II

And you shouldn’t have to hear it!

The word of the day is still outcomes, and, no matter where it’s used, it’s still a dirty word.

Yesterday we gave you many examples of where outcome-based pricing has become the norm which includes, but is not limited to:

  • GPOs
  • Recovery Audit Firms
  • AI-first services-as-software
  • Big Consultancy projects

and where every single situation the entire point of the “outcome”-based sales pitch was just a ploy to convince you to pay more for less because

  • suppliers will happily match GPO prices for reasonable commitments as they have to pay the GPO a 1.5% to 3.0%+ administrative fee to get that business, and, moreover, at the head of the tail you can always get as good, if not better, prices using a tail-spend sourcing solution that automates 3-bids-and-a-buy RFQs and auctions (in a standard format that allows suppliers to automate bids) … and this solution often costs a fraction of what you will pay the GPO based on transaction fees (and then the additional savings from being able to quote every category at the head of the tail and not just what the GPO offers adds up to a greater savings)
  • proper retail-centric e-Procurment augmented with supplier and product management could prevent 90%+ of overpayments to begin with (and Lavante, Inc. proved that over a decade ago — why else would PRGX have acquired it and taken it off the market)
  • for every reliable AI-first services-as-software solution (as we all know that hallucinatory Gen-AI enables and amplifies fraud, security risks, bad decisions, etc.), there is a traditional SaaS alternative for a fraction of the price that does the same thing if you can do without the natural language chatbot interface and a slick UX
  • once a consultancy gets you on outcome-pricing, they are going to focus on projects where they know you are doing particularly poorly, employ junior grunts with five year old playbooks guaranteed to increase efficiency and reduce costs (because you are way above market average cost or way below market average efficiency), and use AI to generate their reports and strategy presentations (and hope the junior grunts both do their job and catch all the hallucinations in the prepared documents)

But, as we said in our last post, that’s not the worst of it.

The worst part of all these “outcome”-based pricing offers is that they are masquerading the grift that keeps on taking! (Which is something any American reading this should be quite familiar with by now!)

It’s not the overcharging that is the most insidious part of “outcome”-based pricing models, it’s what’s behind them.

  • GPOs want you to turn over more and more and more of your procurement to them because, the more you turnover, the more you reduce staff, and the more dependent you become … locking you in for years to come as your fees skyrocket to the point where you’re paying more to them then it would cost you to buy a modern sourcing to settle solution (that supports regular and semi-automated tail procurement and a couple of buyers [who will simply review any tail-spend awards that are new or out of bounds compared to past awards and select the suppliers for regular sourcing events, which the platform will automate until award time])
  • recovery audit firms want you believe only they can keep millions in your pockets and software will never solve the rampant overspend the suppliers siphon out of you, will do anything they can to further the narrative that you’re going to lose millions without them, that you shouldn’t even try to improve your procurement processes, and it’s best to just turn more spend over to them … again locking you in for years and years when you could be taking steps towards reducing your overspend to almost 0 with the right technology, processes, and senior category managers preventing that overspend from ever happening
  • AI-first service-as-software firms want you to go all-in on their service, fire your buyers, and believe that only their tech can get stellar results before compute costs go through the roof, the AI bubble bursts, and/or everyone realizes that the whole thing is being orchestrated by the Wizard of New Oz, it’s a bigger circus than anything P.T. Barnum ever managed to assemble, and when the curtain closes, all you’ll be left with is empty pockets (and, when you’re not looking, just like the auto-classifiers of old, they will throw as many Another Intern at the problem as required to ensure you succeed)
  • the consultancies don’t want you do anything yourself because once you realize that, if you hire qualified people and installed modern systems, you can do it just as good yourself, do it for less, and save a lot of money … so they will try to keep up the savings and strategy show as long as they can

In other words, the whole goal of “outcome”-based pricing is to take away your self-sufficiency, capability, and even knowledge and ensure your entire existence is 100% dependent on them. That way, they stay super profitable at your expense with the grift that keeps on taking!

At the end of the day, the only vendor who won’t price on outcomes is one that knows they can’t actually deliver any, even with fakery, because any vendor who can will find a way to use this trend to inflate prices and grift your hard earned gains!

P.S. You shouldn’t be surprised. It’s the same old story with a new name. It’s been going on since the first modern Procurement solution hit the market.

Outcomes is a Dirty Word! Part I

And you shouldn’t have to hear it!

The word of the day is outcomes, and, no matter where it’s used, it’s a dirty word.

You all know that where DEI is concerned, especially in North America, it’s a dirty word. As @Jason Busch will explain in detail at every opportunity, DEI has replaced “equal opportunity”, but unlike properly applied equal opportunity, which took us two steps forward, DEI, or at least its “outcome”-focussed interpretation, has taken us two step backs.

These days, everything has to be measured, and the belief is that if you don’t meet the goals for whatever racial/religious/women/minority metric your organization has defined to be an appropriate racial/religious/women/minority mix for your organization, then you aren’t diverse, equitable, and inclusive and, therefore, you should go out and immediately hire the racial/religious/women/minority employees you need to meet the metric. Merit be damned. No longer is it the most qualified resource, where someone of a minority is hired when two or more applicants are otherwise equal, it’s the most qualified resource of the identified minority, who might not be at all qualified for the job! It’s the token black employee taken to a whole new level! Not only does it reward incompetence, but it insults minorities who study and work hard to be just as competent, if not more competent, than their white male counterparts.

But I digress — we already know outcomes is the dirty word of DEI. But what you don’t know is outcomes is a dirty word across the business, wherever it is used – and Procurement is no exception! Why? It’s only become the popular battle cry since the Age of (BS) AI, whereas its prior use was been limited to situations where the consultancy, vendor, or analyst firm could hide the darkness and venom that the word contained.

More specifically, until recently, outside of DEI, outcome was primarily the verbiage of GPOs, who were doing their best to convince you to turn over a significant percentage of your procurement to them, or recovery audit firms, who were doing their best to convince you their services were the only way to recover your money that your suppliers were assuredly screwing you out of.

But they reality is that they’ve been both misleading you since the get-go. Sure a GPO can get you better prices than you can get on the long tail with their volumes, but that’s only true for the long tail. Moreover, the reality is that the costs aren’t that much less, if any less, than what you could negotiate on your own if you did a winner-takes-all long-tail RFQ to a MRO, office supplies, electronics supplier who could meet the volume across your long-tail needs, especially since that GPO is charging the supplier an administrative fee of up to 3%, and they’d happily give you the same price to NOT have to pay that fee! Add to that the GPO is charging you for their services, and you’re not saving much. Plus, when you work your way up to the head of the tail, you are definitely in 3-bids-and-a-buy RFQ or auction territory, and the application of a well designed tail spend sourcing solution will save you just as much as a GPO, IF NOT MORE!

Moving to recovery audit firms, their outcome-based pitches sound great, as you only pay their 33% if they recover the money on your behalf and fatten your bank account, but here’s the thing. If you had a properly designed retail-focussed e-procurement solution that integrated supplier and product management, did m-way matches, and prevented payments where you didn’t have good receipts that matched the invoice that matched the PO where the prices matched the contract, rejected duplicate invoices, tracked rejected units and associated credits, applied those credit notes against future orders (with the matching product), etc., you could prevent all of those overpayments in the first place — despite the fact that all the recovery audit firms tell you that overpayments (and their services) are unavoidable.

But there are more, and more modern, examples. The worst is AI-first services-as-software vendors convincing you that you should pay based on “outcomes” instead of on a traditional SaaS pricing model. Their rationale? The majority of SaaS tools that you are paying for aren’t offering you immediate, measurable, savings and, therefore, are too expensive. But if you paid for software based on “outcomes”, you’d have measurable value and you could claim the fee was worth it. And the argument sounds convincing, even if it’s complete and total bullshit. The purpose of most software is to increase efficiency, not save money. That’s the value.

And when the real reason they are pushing outcome-based pricing is that they can’t afford to sell based on a SaaS model because the compute costs of their BS AI-first are too high to cover on traditional SaaS pricing — even though there is a traditional A-RPA SaaS application that does everything their app does for a fraction of the cloud and compute cost, as long as you don’t need a fancy-smancy natural language interface or a slick UX. In other words, if they were honest about the true value of their application, they could never charge enough to cover their costs and would be out of business yesterday.

A second, more modern, example is the big consultancies taking a queue from their GPO, Recovery Audit, and now AI-first services-as-software peers and trying to justify their highly inflated pricing (which has skyrocketed over the last decade as they became the go-to firms for all big tech strategy). Especially since it’s the only way they can overcharge for projects where they are primarily deploying a multitude of AI agents (which we know produce utter garbage, just look at the Deloitte fiascos in Australia and Canada) and juniors that they hope will catch and clean up all of the hallucinations in the deliverables. (Because if they charged based on what the tech and juniors were worth, in a climate where no one wants to pay inflated rates for consultants for projects with potentially guaranteed return, they wouldn’t be able to maintain their high rates.)

There are more examples, but by now you should see the common theme. Which is simply this: “outcomes” is always a way to charge you more for less (and sometimes next to nothing) (just like DEI is an excuse to replace people with actual capability with people with next to no capability).

But the worst part, the blatant financial rip-off that always accompanies a (pure) “outcome-based” sales pitch isn’t the worst of it!

Primary ProcureTech Concern: Cost Control

This is one of the oldest concerns of Procurement. After assurance of supply, control of cost is key.

Why?

Costs are rising. Inflation is coming back with a vengeance. And the trade wars aren’t helping. Rare earths are becoming more rare. Geopolitical tensions and actual wars are resulting in sanctions and cutting off primary supply lines. Everything is driving up costs.

Impact Potential

Shortages can cause significant cost spikes. The costs of raw materials and goods can increase 20%, 50%, 100% or more. During transportation shortages (such as those that occurred during the pandemic), transportation costs can increase as much as tenfold. Costs can cripple an organization, bring down a product or service line, and even an organization if they can no longer manufacture products at a cost that allows them to sell at a price point that consumers can afford.

Major Challenges/Risks

Price Prediction/Trend Analysis: understanding the past, current, and likely future price points to understand when the cost point of a good or service might get to a critical point where it could affect not just profitability, but operation

Impact Events: identifying which events could lead to a rapid, unpredictable, price increase for a good or service, detecting those events, and taking action the minute such an event is predicted

Sustainable Supply: identifying alternate sources of supply that an organization can take advantage of should a primary source become unaffordable or unobtainable, and ensuring those remain affordable until other primary sources can be identified

Final Words

Cost control will always be an issue because an organization can’t pay more for something than it can afford and can’t pay more for raw materials than it can sell the finished good for.

STOP PAYING PROCURETECH/FINTECH ADVISORIES A DOLLAR JUST TO LOSE THREE DOLLARS!

Last week, in our post where we asked if ProcureTech Generated Billions While Practitioners Lost Trillions, we noted three things:

  1. Approximately 1.8 Trillion Dollars (more than the annual GDP of 92% of the countries on Earth) will be wasted this year on Tech-Related Spending
  2. Approximately 600 Billion Dollars will be spent with the big consultancies and analyst firms who do Financial (Technology) and Procurement (Technology) consulting and advisory
  3. That’s three dollars lost for every dollar spent on big consultancy and advisory firms

So how do you stem the bleeding? Especially if you can’t STOP spending mooney on tech advisory because you can’t stop spending money on technology because you can’t survive in today’s digital world without it?

You STOP forking over (high) six and seven figures without a guaranteed return! In other words, unless they save you some coin, then your money they will not purloin!

More specifically, if they are promising outcomes, then (the majority of) their compensation should be 100% dependent on outcomes. If you don’t make bank, then their compensation will tank.

To be even more precise, don’t buy:

  1. any technology platforms where the majority of compensation is tied to successful sourcing events, transactions, etc.
  2. any GPO services unless it’s 100% outcome oriented
  3. any functional outsourcing unless the majority of compensation is tied to ROI

Now, the technology providers and consultancies will push back, steadfastly claiming that their technology and services are worth way more than they are charging, but here’s how you counter:

  1. you will pay a base annual fee for the platform that will cover 150% of their base hosting costs, so they won’t lose, and then a percentage of transactions, identified savings through sourcing events, contract value, etc. where the percentage is calculated such that if you save 100% of their promised savings, they will make 50% more than what you would pay on a fixed cost after negotiation — if they are so confident in their claims, this should be a no-brainer
  2. you will pay a fixed amount on each transaction, calculated based upon the expected savings before you sign the contract, and if they can deliver the savings, you will definitely be using them regularly — and, as with the Tech Provider, you will calculate this so that they win bigger than if you pay them a fixed cost IF they generate a return for you
  3. you will pay a fixed rate per hour that is enough to cover the assigned personnel cost (their salary plus 30% overhead), and any compensation beyond that will be dependent on the department delivering an ROI beyond a certain amount (which is the amount required to cover the basic fee you are paying them); and again, you’ll fix the compensation such that if they deliver 100% or more of what they promise, they will win big too

Now, you’re probably saying the doctor is daft by telling you to offer them 50% more than what you’d have to pay on a fixed cost basis if they deliver, but here’s the reality, without incentive, THEY WILL NOT DELIVER!

There is an 88% technology failure rate across the board, and 94% failure rate if it’s a (Gen-) AI project. The reality is, as we pointed out in our series on how, even if they have good intentions in the beginning, your (technology) vendor will screw you, the vast majority of systems fail to deliver, because, once the contract is signed and you have access to the system, they have zero incentive to do anything else for you.

Similarly, once they have you on a multi-year contract, why should the GPO or consultancy have any incentive to go beyond the minimum? If you want them to continually serve you and look for ways to generate a return for you, make it worth their while. And then you won’t be paying them one dollar just to lose three dollars in return!

This is where you start. Then, you question any consulting contract over 100K to 200K as a mid-market and 1 Million as a large global enterprise. At that point you have to define the value you expect and what gain-share agreement you are going to craft to ensure it.