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 what should be 100K worth of work in their view (and, right or wrong, if a niche firm comes in less with a detailed proposal, they should be evaluated — maybe the Big X, with a very general request, over estimated your requirements and the effort, or maybe the niche firm completely underestimated it — how will you know if you don’t evaluate all the responses?). Literally. This is because, as the doctor has noted in previous posts and comments on LinkedIn:

  • they don’t have always 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, an average firm will 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 always worth the rate they are charging);  now, as with every general observation, there are exceptions (with some Big X recently acquiring a number of best-in-class technology, analytics, and AI vendors that give them top-notch world class talent, and others actively recruiting top talent form the best tech firms, but every firm is different, and, most importantly, every need is different — it’s up to you to fully qualify your need, review the proposal carefully, and vet the proposed talent, otherwise, it’s your fault if you overpay, fail miserably, and don’t get value
  • some of these firms have an incredible overhead — they got big in good times and built posh offices to house the partners making more than top lawyers who have a lifestyle to maintain (or, in some cases, they just acquired expensive real estate in premiere locations)
  • they don’t always 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 that, in these situations, Big X benchwarmers are using last generation tools which take ten times the manual labour to extract value from
  • etc.

Unless you want to pay 1K an hour, at some of these firms, you’re not guaranteed 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.   (While if you chose a different Big X firm that just acquired a whole consultancy with dozens of top analysts, it’s a different story.)

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 their favorite Big X firm and bring them in to help them understand who to bring in for an engagement, instead of widening the net to niche providers who might be 3 to 5 times cheaper, and who will deliver results at least as good, if not better, or, if their proposals won’t cut it, will validate when that multi-million proposal is a great value and will deliver the expected ROI.

Now, again, the doctor would like to stress that, despite how much he insists they are usually not the right solution for specialist advanced tech implementations that aren’t the enterprise systems and suites they usually implement, that Big X are not all bad, and sometimes worth many times more than the high fees they charge. [See when should you use Big X?] 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. As they grew, they added more areas and became experts in those.  But no company can, and should, be expected to be an expert in everything!

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 thinner than in multinational tech companies (like Alphabet, Apple, Meta, Microsoft, etc.)  (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 or Mid-Market to say anything as they get the majority that overspend, and that’s how they stay so profitable.  Plus, they usually need those revenues to deliver what you’re asking for, as ill-defined projects mean they need to make a lot of assumptions and often over engineer to decrease the chance you will be disappointed in the result!  In other words, if you overpay due to your lack of research and preparation, it’s on you. )

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.

How Medium Sized Enterprises Can Better Manage Spend

McKinsey & Company recently ran a long article on how medium-size enterprises can better manage sourcing that noted that the big reasons that mid-sized companies have difficulty reining in external spending are:

  • a lack of spending transparency
  • a myopic focus on the short term
  • talent gaps
  • underused digital tools and automation
  • exclusion of procurement and supply chain in business decisions

And noted that any action plan that a medium-size enterprise comes up with for procurement cost savings should include:

  • establishing CoE (Center of Excellence) teams
  • improving forecasting
  • expanding use of digital procurement tools
  • gaining greater market intelligence
  • establishing a culture of — and process for — continuous cost improvement
  • incorporation supplier-driven product and service improvements

And they recommend a ladder model that consists of the following steps:

1) Set Aspirations
2a) Rapid renegotiations with top suppliers
2b) Make-vs-Buy Analysis
3) Build spec catalog to enable market engagement
4a) Conduct request-for-quote (RFQ) rounds
4b) Build parts catalog
5a) Validation of suppliers and production parts
5b) Consolidation of SKUs and modularization

And this is all very good, and when you read the article for the details you will understand why it’s all very good, but it doesn’t really provide a clear, step-by-step, roadmap on where you should start.

Fortunately, Sourcing Innovation did provide a partial roadmap in it’s 39 Steps … err … The 39 Clues … err … The 39 Part Series to Help You Figure Out Where to Start with Source-to-Pay which outlined the order in which an organization should get the tools (and thus the associated market intelligence) it needs to effectively tackle spend (and forecasting), work with suppliers, and establish a culture of continuous improvement. About the only item we didn’t address on the McKinsey list is the establishment of CoE teams — the right structure is highly organization dependent, and will be better enabled by the implementation and adoption of the right tools.

So, if you missed the series, go back to the beginning and understand where you start, why, and how a proper, ordered, logical implementation of Source-to-Pay in a modular fashion will help you maximize savings, efficiency, and even sustainability within your allowed budget.

Where Should Procurement Have the Greatest Impact?

Ivalua and Procurement Leaders recently did a study on Purpose-driven Procurement: Entering an Age of Holistic Value that was partially covered over on EPS News that ran a typical, bland, headline on how Procurement’s Value Exceeds Cost Control.

Procurement can add value beyond cost control, and should add value beyond cost control, but what stands out the most in this article, and likely in the Ivalua/Procurement study, was the highlighted figures on areas in which Procurement has made the greatest impact (by % of respondents). Of the fifteen (15) areas presented in which Procurement should be making an impact, only three areas were selected by more than 30% of respondents, and the top 2 were the same old, same old responses of delivering cost savings and cost avoidance which are, in this market, the last two areas Procurement should be delivering value. First of all, times are such that there are, or soon will be no, cost savings in any category. Secondly, it’s not “cost avoidance” it’s “need avoidance“. It’s not just about saving money. In an age where your carbon footprint may soon be more important than your bank account, you don’t want to buy anything you don’t need, and you don’t want to waste anything.

In fact, today, the top ten things that Procurement should be doing are likely the bottom 10 things on the response pyramid, which were ten of the best responses such a survey could have included! Procurement is more than savings, cost avoidance, risk management, and theoretical sustainability (as most organizations won’t let Procurement spend a penny more than necessary to meet a need, even if that penny is to a much more sustainable supplier — there’s a lot more bark in the marketing then there is bite in the implementation; the doctor is aware of many surveys and has had many conversations where, if the buyer could pay 1% to 3% more than the lowest cost, sustainability would be substantially more; the reality is that, at most organizations, it doesn’t matter if the lowest cost is from the dirtiest, most unethical, supplier on the planet — the CFO wants cost reduction, the CEO wants profit, and the buyers were told to meet the targets and make the investors happy, not do the right thing. Hopefully more countries will pass carbon caps, carbon taxes, and sustainability laws because only then will Procurement get to serve the Purpose it wants to serve).

Procurement is the enabler that can transform the organization. And to demonstrate that, let’s review the bottom 10.

  • Supplier Diversity and Inclusion (16%): while you shouldn’t have arbitrary targets (as there is no one magic number that’s the right number), you should always look for diversity that you can include to widen your horizons — you never know where the next big idea, product, or saviour (when your strategic supplier becomes unavailable as the result of an unexpected event) will come from
  • Developing Team Skills and Talent (16%): while the first line to be cut from the budget is always the training budget when it should be the last line to be cut (when the world evolves faster everyday than the day before, and the job you do today will, in some ways, never be the same job in the future), Procurement can maximize the budget you have, find the right partner to improve your skills in a fair exchange (they train you for free if you use their products or services), and even train you on better processes and practices on their own
  • Digitalisation (11%): while this is not a conversation we should be having in 2023 (when Nicholas Negroponte told us all we should get used to Being Digital in 1995), most departments in most organizations are still woefully behind when it comes to technology (and the average employee has more modern apps on their personal smartphone than on their work computer), and that’s where Procurement can help as it needs to digitize to manage its sourcing, procurement, and supply chain and has already been through (part of) that process
  • Improving Cash Flow (11%): Procurement is in the best position to optimize outbound cash flow, balancing payment terms with cost reductions with risk minimization, and can even use that knowledge of cash flow optimization to help Finance select the right terms for short term investments, loans, or even factoring on the organization’s invoices to big, slow, clients
  • Contributing to Revenue Growth (11%): Procurement’s analytics skills that it uses to predict demand can also predict the products/services that are the most popular and the ones that the organization could use to grow revenue by shifting production, marketing, and sales focus to those product lines
  • Improving Product/Service Quality (7%): Procurement can do more than just find new suppliers, they can help with product innovation and service improvement; they can identify suppliers with alternate designs that use alternate, more sustainable, materials that can build a better product and consultants with more experience and expertise to offer a better service
  • Drive Innovation from the Supply Base (6%): Procurement is the perfect partner to drive innovation; it is the first, consistent, and for better or worse, the last department to interact with the supplier, and in order for it to keep the CEO and CFO happy (and get the mythical savings which, after a certain point, don’t exist), it has to develop suppliers to an extent — no reason it can’t be helping you drive innovation
  • Support Mergers and Acquisitions (5%): let’s put it this way, if there’s no synergy in Procurement, there’s no synergy in the companies, and the company being considered should NOT be a target; so at the very least, Procurement should be one of the first sniff tests; it can also determine the synergy potential, the cost avoidance and efficiency potential, the innovation potential from an improved supply base, etc. etc. etc.
  • Demonstrate ROI to the Bottom Line (4%): Procurement NEEDS to be better educating the C-Suite on how its activities hit the bottom line across the board, not just on a few categories it finds savings in
  • Asset Disposal Activities (1%): We need to move towards a circular economy, and that means buying goods that meet as many of the R’s (refuse, reduce, reuse, repair, recondition, refurbish, remanufacture, repurpose, recycle) as possible, which will always include recycling when it’s impossible to get any more value out of the asset, and Procurement, which understands the product best, will understand how best to dispose of it to ensure it is recycled and all of the raw materials reused in the most sustainable method possible

And this is where Procurement should be focussing. Let’s hope Procurement gets there sooner rather than later.