Category Archives: Finance

Economic Damnation 02: Bank Failure

As per Wikipedia, a bank failure occurs when a bank is unable to meet its obligations to its depositors or other creditors because it has become insolvent or too illiquid to meet its liabilities. Since some banks, including the Federal Reserve, have a license to literally print money, most people think that bank failure is impossible. But since some banks over invest in hedge funds, high risk mortgages, or commodity markets, it can happen and it has happened.

Banks have been failing since they first incorporated, and the fiscal crises in the late 2000’s caused the failure of a number of really big banks, including Washington Mutual, Lehman Brothers, and Bear Stearns. And regardless of how many new acts are passed to try and insure banks limit their risk exposure or keep enough cash on hand to cover withdrawals or payouts in the case of a loss, banks will still fail. Regulators will never keep up with the new and inventive ways banks and investors will come up with to invest, and lose, money (and shady replacements for hedge funds and high risk mortgages will soon be on the way), and banks will continue to fail. Possibly even yours.

And if you depend on that bank for letters of credit and inventory based loans, this could be more of a problem than losing any cash above the FDIC (or equivalent) insured amount. Having your critical supply lines stop, your production lines go down, and revenue losses mount by the day as you search for a new bank, new lines of credit, and new inventory loans will be far worse than a short term cash loss which can happen anytime a market shift causes demand for a high-selling product to suddenly drop, forcing a fire sale of a large amount of remaining inventory.

And, as per the Wikipedia article, the failure of a bank is relevant not only to the country in which it is headquartered, but for all other nations that it conducts business with, especially if the bank owns investment subsidiaries in those markets. People are put out of work. The local economy drops. And everyone suffers. Yet another damnation waiting around the corner.

Why Finance is Failing Procurement

Today’s guest post is from Pierre Mitchell, the maverick of Spend Matters, who needs no introduction.

I’m doing a 5-7 minute poll (here) on Procurement-Finance misalignment (in conjunction with ISM).

This poll is basically geared around the question below regarding what Finance needs to do differently.

The long version takes about 15-20 minutes, but gets you entered to win an Apple Watch or one of 10 Spend Matters PRO monthly subscriptions.

I’m presenting provisional results at next week’s ISM Conference, and I’m going to take a snapshot of the data this Friday and need some good provisional data to present!

So, if you are a practitioner (and I apologize for not reaching out 1-to-1) I would like to personally appeal to you to take the 5-7 minutes required to help the profession build this case for change.

If you are a provider, I would greatly appreciate if you could pass this on to any of your practitioner contacts this week.

The study link that you can forward is here: http://bit.ly/ProcurementFinanceAlignment2015.

Thanks!

And here’s the question in question …

How can Finance reduce misalignment with Procurement and unlock impactful value for your firm?

Please choose all that apply that would have a favorable and meaningful impact on your performance.

These items would have a favorable and meaningful impact:

  1. Don’t reduce working capital at the expense of supplier health and TCO
  2. Look beyond headcount reductions for project justifications
  3. Provide more resources to get spending, contract, and savings visibility in place (for mutual benefit)
  4. Include Procurement in upstream strategy & planning activities (M&A, JVs, Innovation, Tax Efficiency, Variabilization, etc.)
  5. Fix the “use-it-or-lose-it” budgeting process that encourages end-of-period spending
  6. Establish a more effective procurement involvement/approval policy and process
  7. Be an advocate, enabler, and leader for strategic cost management processes/ practices
  8. Help manage external expenditures with the same rigor that is applied to internal expenditures
  9. Provide Internal Auditors and Controllers as change agents to help Procurement
  10. Treat procurement as a true partner and a profit center rather than just another cost center
  11. Don’t try to use the General Ledger as a spend data warehouse
  12. Move A/P from a payment efficiency focus to a spend management effectiveness focus
  13. Measure Procurement on value beyond purchase cost reductions (especially PPV)
  14. Help get Legal involved appropriately in the contracting process as an enabler and partner
  15. Help coordinate and prioritize corporate risk/compliance activities that should be taken out to the supply base coherently
  16. Get a supplier master data management process and policy that works for everyone
  17. Invest in needed supply risk management capabilities to help protect the business

When it Comes to Procurement, Don’t Forget Finance!

Surveys regularly ask Finance to rate Procurement effectiveness, but is this the right question to be asking? Maybe Procurement should be rating Finance effectiveness? After all, is it necessarily Procurement’s fault that there are usually noticeable gaps when the results of these surveys are published? Maybe, but maybe not.

The only way the gaps will close is if the root cause of the gaps is identified and addressed. Is Finance providing the necessary funding for the platforms, training, and resources that are required to effectively address all of the categories? Is the organization evaluating effectiveness against the right KPIs? Does the Procurement agenda align with the organizational agenda that Finance has a hand in shaping?

Now, I’m not saying it’s Finance’s fault, and I’m not saying it’s Procurement’s fault, but I’m saying there is a reason for the gap and the reason needs to be identified. Sometimes it will be a lack of effort or focus on Procurement’s part, sometimes it will be a lack of effort or focus on Finance’s part, but the doctor‘s guess is that more often than not it will not be anyone’s fault but be due to a lack of alignment.

As the maverick points out over on Spend Matters in his post on “What Does the CFO think of Procurement”, Procurement and Finance are misaligned in numerous ways, and this misalignment is costing companies a lot of money.

That’s why the maverick teamed up with ISM to conduct a new study on Procurement and Finance Alignment to help Procurement and Finance understand all the misalignment areas and the loss of value caused by this misalignment so that Procurement and Finance can work collaboratively to realign. the doctor had a chance to review, comment on, and contribute to the study before its release and can tell you that it’s well designed and well worth your time, especially since the average company will be able to complete the full study in about 15 minutes.

I strongly encourage every company, no matter how well they think their Procurement function is doing, to take this study which is designed not to assign blame but to detect areas of misalignment where Procurement and Finance can work together to improve performance.

Taking the study is easy. Simply e-mail the maverick at pierre (at) spendmatters (dot) com and you can get the study link and first access to the results.

Economic Damnation 07: The 1%

“The 1%” was coined in 2011 to refer to the US income and wealth inequality where the concentration of wealth among the top 1% is significantly above the national average. On average, the 1% earn well over a million dollars each year (and the bottom 99% all make less than 350K) and control over one third of the country’s wealth, meaning that, on average, their financial influence is 33 times that of an average person. In addition, the roughly 536 Billionaires in the US have a net worth that is over 10,000 times that of the average household net worth in the US (and in a couple of cases, almost 100,000 times).

And the US is not the only country with such a disparate income and net worth inequality. China has 213 Billionaires in US dollars, and the top one percent in China also controls over one third of the country’s wealth. The wealth inequality has widened significantly over the last 20 years.

And similar situations appear to be arising in other developed countries around the world. A recent article in the Guardian called the growing wealth inequality in the UK a ticking time bomb, the Broadbent institute recently published a report that found Canadians vastly underestimate the wealth gap in Canada, and even the Australian Institute is finding that the inequality between those with the most and the least is rising in what was once universally thought of as an egalitarian country.

This is bad, because it’s at the point where a select view individuals can not only single-handedly make life a living hell for a large number of Procurement professionals in a number of disparate companies across the globe (as Extreme Activist Investors, Damnation 64), but can individually cause a number of economic, infrastructural, environmental, regulatory, societal, organizational, and technological headaches all on their own. If a small group of these individuals buys a Fortune 3000 and decides it’s manpower heavy, they can cause 10,000 people to be laid off in a day in a small town and cause a major shift in the local, and even regional, unemployment rate (and the market who can afford the product being built). They can start new airlines to increase competition (and logistics headaches), or buy a competitor just to decrease competition. They can create new sustainability initiatives overnight, or turn the fracking dial up to 11! They can fund entire lobby groups to get their standards and requirements in place. They can single-handedly make your supply chains safer or lobby against worker’s rights to keep costs down. They can replace your entire Sales and Marketing teams overnight. And they can dictate your ERP for years to come.

The reality is that, in today’s world, Money Talks, and when you can buy and sell 99% of the world’s companies with your pocket change, their money talks the loudest. It’s another damnation we’d rather not know exists, but it does, so we need to be as prepared as we can (and always expect that even the best laid plans can be set awry by the whims of one wealthy individual).

Technological Damnation #77 e-Currency

We started out our series with the Economic Damnation of Currency Strength, which, thanks to the recent unexpected fluctuations in certain global currencies, probably has you shaking in your boots. But if you think trying to manage real currency exchange is bad, just wait until you have to start using non-country based e-Currency, like Bitcoin.

Bitcoin, a peer-to-peer payment system released as open source software in 2009, allows users to transact without using an intermediary using a decentralized virtual currency (or crypto currency) which has a value defined by the global market based on the fact that it’s limited and once all of it has been “mined”, there are no more units. Because of its structure, new units cannot be issued on a whim (whereas a country can print as much money as it wants, at the risk of hyperinflation), and, as a result, it’s value can, and has, skyrocket(ed) over night.

For example, up until late 2013, Bitcoin’s value was negligible, at which point it skyrocketed to a value of over one hundred. It stayed there for almost a year until early 2014 when it skyrocketed up to a value of almost 1200, before, over the last year, crashing back down to about 200 (in US dollars). On January 18, 2013 it’s value was 15.70. On April 9, 2013 it was $230. On April 16, 2013 it was 68.36. On May 4, 2013 it stabilized around 112.90. It stayed there until around October 15 when it began to skyrocket to 1,147.25 on December 4, 2013 then it crashed back to 522.23 on December 18, 2013 returned to 940.10 on January 5, 2014 and since then has been on a downward fall until January 18, 2015 when it was 199.56.

As virtual / crypto currency is still in its infancy, shocks like this can be expected and can be much more devastating than the recent drop in the Ruble. And, even worse, now that many vendors are starting to accept crypto currency as payment from global consumers that trust the currency, they will be expecting to pay with the currency as well. And your organization will have to hedge against new crypto currencies, which might also include Litecoin and Darkcoin (as well as a dozen others), as well as existing currencies. The fun is just beginning.