Category Archives: Market Intelligence

Supply Management Should Drive M&A Evaluations

But don’t look to e-Auctions to save the day. As per SI’s recent post, the entanglements of e-Auctions could get in the way.

Last fall, e-Sourcing Forum published a two-part series on M&A and e-Auctions, stating that what’s old may be new again, which claimed that e-Auctions could be a perfect tool for procurement in post M&A scenarios as they provide a competitive advantage for industries frequently involved in M&A activities. They can, if the situation is right, or they can be as useful as a trap door in a life-boat. There is no one-size fits all sourcing tool, and if you get it in your head to force-fit a sourcing tool to your situation, e-Auctions should be on the bottom of your list because they can bust as bad as they boom.

The rationale presented for their selection as the potential perfect e-Sourcing tool in the post-merger environment is based on the fact that e-Auctions can:

  • put negotiations directly into the hands of the suppliers,
  • create fair competition between suppliers by creating a level playing field,
  • provide suppliers with more direct/immediate feedback on their position in the market, and
  • drive “truer” market pricing and justifications for establishing baselines post-merger.

This is all true provided that:

  • the majority of suppliers, including those that are currently preferred, are willing to negotiate through the auction,
  • the buyer designs the auction in a way that is fair to all suppliers,
  • the auction platform can support real-time feedback to all suppliers taking part in the auction, and
  • the suppliers don’t collude and don’t make unrealistic bids in an effort to win the auction, hoping to make up the unsustainable loss either in volume or add-on fees or future business.

In order for auctions to work, especially in a post-M&A scenario, a number of conditions need to hold true.

  • supply has to at least equal, and preferably exceed, demand as per our post on the entanglements of e-Auctions,
  • there has to be enough qualified suppliers to make the auction competitive — if only two suppliers can supply the custom product or service you need, the auction ain’t gonna do squat except offend suppliers who should be your strategic partners,
  • there has to be enough volume to make the event worthwhile — saving 1% on 100,000 is not going to be worth the time and effort, and, most importantly,
  • there has to be enough categories that meet these requirements that are available to source in the first year, as it will typically be the case that both companies have contracts in place for a large number of their high-spend or high-volume categories, and, furthermore,
  • these categories have to be significantly larger than they were before the merger — if the merger does not yield enough common categories that are available to source at volumes that are high enough to be more attractive to the supply base than each company would source on its own, then the merger / acquisition is not going to yield any sourcing quick wins by way of e-Auction.

If neither company has a lot of spend under contract, neither company has a large number of complex products or services that can only be sourced from one or two suppliers, and both companies source a large number of overlapping products and services, then, if the market is ripe, the supply base is willing, and the buying team can design and deliver a fair and professional e-Auction, then e-Auctions can drive M&A success. But if the opposite is true, all e-Auctions will do is get the M&A team into trouble.

As with every sourcing exercise, it must start with a situational, and spend, analysis to see what’s what.

Top 12 Challenges Facing India in the Decades Ahead – 10 – China

China is currently everything India is not. While India is the land of contradictions, China is the land of conformity. While India is an infrastructure nightmare, China, which is already decades ahead of India in infrastructure, is investing heavily, building rapidly, and getting even further ahead. While India is in a perpetual state of energy crisis, the energy sector in China, where the government can effectively control the 11 companies that used to compose the State Power Corporation (SPC), is stable and increasing energy production year over year to meet the needs of its population which make it the world’s second largest electricity consumer after the United States. (In 2011, annual power generation was 4693 TWh, which was over five times the power generation in India that peaked at about 877 MWh.)

But it’s not just infrastructure and energy that China has the lead on. It’s just about everything else too. As per a recent NYT (New York Times) article on Why India Trails China, India has an even bigger problem. In particular, it’s the ever-increasing gap between India and China in the provision of essential public services. And while inequality is high in China (as the 1% control 70% of the country’s wealth, compared to the US where the 1% only control 35% of the country’s wealth), China has done far more than India to raise life expectancy, expand general education, and secure basic health care for its people. Plus, literacy in China significantly exceeds literacy in India at 95% vs 74% in India. While India has elite schools of varying degrees of excellence for the privileged, among all Indians 7 or older, nearly one in every five males and one in every three females are illiterate. And while China devotes 2.7% of its GDP to government spending on health care, India allots a mere 1.2%. (That’s probably why China has a much lower child mortality rate that is less than one third of India’s. See A View from the East.)

In terms of business, China is ahead of India in many respects. China exports goods almost twice as fast, registers property more than twice as fast, and business start-up times are almost 33% faster! (See: IndianEconomy.org) Despite being a democracy, India is less politically stable and more corrupt. (See: Interlink India) And the proof is in the GDP pudding. In 1995, when India represented only 3% of world GDP, China represented 6% of world GDP, and in 2010 when India was still only at 5% of world GDP, China was at 14%. (See: The India Site) And while India is expected to increase its GDP by a mere 4.4% next year, China is still on track to increase its GDP by 7%.

Infrastructure. Public Well Being. GDP. While just a few measures of global influence, they are a few important measures and China is leading on every single one. That’s why China is projected to have almost a quarter of the Global GDP in 2025 (by The Conference Board), more than triple what it had in 2000, while India is projected to have a mere 8%, only double what it had in 2000. If India wants to achieve its destiny of being the second most prosperous and influential country on the planet, it will have to at least keep up with China instead of losing ground every day.

If The Degree Is Doomed, So Is America!

The HBR blog has a lot of thought-provoking content, which is good, but also has a lot of philosophical content which, if misunderstood, or interpreted as more than a thought-experiment, could lead to very, very bad consequences. Take the recent post on The Degree is Doomed by Michael Stanton which ends with the value of a college degree has been in question since the Great Recession, but there have yet to emerge clear alternatives for the public to rally the around. There are plenty of contenders, though, and it won’t be long before one of them crystalizes the idea for the masses that the traditional degree is increasingly irrelevant in a world with immediate access to evaluative information.

Anyone who takes this literally, including the idiot software CEO I spoke with recently [who] said he avoids job candidates with advanced software engineering degrees mentioned in the post, is setting themselves, and the rest of us, up for massive failure. While I will be the first to admit that there are lots of relatively useless degrees in Academia from an industry perspective, not all degrees are useless and the mandate of a University is not to train you for a job — it’s to prepare you to think critically, solve problems, and improve yourself. This, in turn, allows you to learn the specific skills required for a job related to your field of study quickly and easily.

But this isn’t the point I want to make in this post. And while I agree with the author that the value of paper degrees lies in a common agreement to accept them as a proxy for competence and status, and that agreement is less rock solid than the higher education establishment would like to believe as many want to promise you a job in return for the considerable amount of dollars you need to fork over to get your degree, this doesn’t mean that the following notions presented in the post are true:

  1. On sites such as GitHub, user profiles contain work samples and provide community generated indicators of status and skill,
  2. Employers have never before had such easy access to specific and current information pertaining to a candidates’ potential, and
  3. The traditional degree is increasingly irrelevant in a world with immediate access to evaluative information.

SI has to disagree with all of these statements. Let’s take them one by one.

  1. Code samples a candidate presents to you through an online portfolio are not necessarily indicative of status and skill. The code samples could be someone else’s, stolen or paid for. The quality of the code could be the result of pure luck. I’ve seen developers struggle with a problem, copy fragments of code from various projects, and, through a lack of understanding of the depth of the problem, end up with a quick and dirty solution that just happens to work well in the real world, like Quicksort, due to the peculiarities of the data set. (Quicksort’s average performance as a sorting algorithm is on the same order of magnitude as its best case performance but it’s worst case is exponentially slower than it’s best case, compared to a merge or heap sort with a worst case that is essentially no worse than its best case.) And even if the code is the candidate’s and the quality is not due to pure luck, it could be based on someone else’s understanding of the problem. (A big part of development is problem solving — it’s much easier to translate an algorithm into code than to come up with one.) Plus, a single person can only do so much so there is no way to tell if the person can function well in large software projects or has the background to architect for such projects. And, to use a real-world metaphor that everyone understands, just because you can put up a shed using a do-it-yourself kit, doesn’t mean you can build an apartment building. Just because you can code a little utility library doesn’t mean you have what it takes to write scalable, reliable, adaptable, and responsive Enterprise Software.
  2. A few specific pieces of work product do not paint a full picture of a candidate’s potential. For starters, in addition to being able to create a good work product, a candidate has to work well with others, adapt to changing job requirements, learn on the job, and create new and different work products from the one he has already produced. A few static pieces of content are nowhere near sufficient to judge whether or not the candidate has anywhere close to the IQ and EQ that you need.
  3. Given our comments to 1 and 2 above, at the present time, the traditional degree is becoming increasingly relevant in a world with too much access to incomplete, non-illuminative, and unverifiable information. Provided it’s an accredited degree from an accredited institution known for high standards, it’s often the only way to judge if a candidate possesses the basic knowledge, skills, and EQ foundation that she will need to excel on the job today and tomorrow. While it is generally the case that an academic program will not teach a candidate everything she needs to know to do your job, it is the only program that will give her the foundation she needs to learn what she needs to know to do your job. You might have to give her some training, but you can be confident with the right training, she will get the job done.

I know Aerosmith told us to Dream On, but I really don’t think what the author presented in the HBR blog post is what they meant. 😉

Top 12 Challenges Facing India in the Decades Ahead – 11 – Energy

On July 30, 2012 a power blackout temporarily obliterated electricity from half of the country and wreaked havoc on the lives of over 620 Million people in 22 of the northern and northeastern states. (Source: Wikipedia) This was the worst power outage since the last major grid collapse in 2001. This wouldn’t be so bad if it wasn’t for the fact that major outages are not a rare occurrence. As per this recent Bloomberg article, the nation suffers from frequent power outages that last 10 hours. Persistent power failures, known as ‘load shedding’, are organized day in, day out in a great many places across the country by the power providers in an attempt to keep power production, and the grid, up. (Source: An Uncertain Glory) Nor would it be so bad if those 620 Million people who were affected had electricity. A third of the population in those regions, living in poverty (or, more accurately, squalor), never had power to begin with.

As it stands, peak supply, which was approximately 205,000 megawatts in 2012, fell short of demand by about 9%, and the situation is only getting worse. And it’s not being helped by the shift from predominantly a government-owned system towards one based on market principles, as this does nothing to insure that anyone who isn’t a large corporation or extremely wealthy or influential individual gets reliable power. As per the IEA’s (International Energy Agency’s) “Understanding Energy Challenges in India”, the huge blackouts that occurred in northern India in July 2012 could be seen as a consequence within the framework of incomplete market liberalization. Simply put, The goal of providing energy access to the entire population led to well-meaning policies designed to protect the poor, but resulted in a system of untargeted producer and consumer subsidies that prevent a more thorough implementation of a well-functioning and financially-sound energy sector.

And getting to a sound and reliable energy sector is no easy task. First of all, the six issues addressed in the IEA’s report need to be dealt with:

  • The core (production) capacities of the energy companies need to be improved in a financially viable way.
  • Pricing mechanisms must ensure commercial viability (but not price energy out of the range of the low-end consumer).
  • Significant investment is required to meet the growing energy demand and provide access to all citizens — and it must come from the government.
  • The effective implementation of policies is required and this must lead to the timely, on-budget, completion of energy projects.
  • The energy policy must be integrated and consistent as multiple objectives will undermine the policy and its implementation.
  • Strong political will is required as effective policy implementation will never materialize without it.

And then India will have to deal with:

  • Getting energy theft and transmission loss under control. It is estimated that 27% of energy generated is lost in transmission or stolen. This is intolerable considering the country can’t even meet demand at peak capacity.
  • Getting electronic payment and transfer mechanisms set up and in place. Money will need to flow from the federal government through the states to the districts who will have to then distribute the money to the private companies expanding the infrastructure. Considering that corruption is still rampant in India and administrative fees often at the discretion of the local officials, unless all money allocated to the energy infrastructure is electronically transferred and tracked, and the records made public, it can be assumed that at least 2% of this money will disappear due to corruption, which has cost India at least 345 Billion over the last decade. (Source: India Express)
  • Getting the population educated on safe and sustainable energy use. First of all, the country will need to invest in renewable options, which could be expensive when compared to, say, dirty coal. Secondly, the population and their government, which may want to spend the money elsewhere, will need to agree to the appropriate expenditure. Thirdly, they will make sure they are pugged into the grid safely and securely using modern, approved, legal technology. Otherwise, they may find that their meter bursts into flames when their power consumption is at its peak or their houses catch on fire because of unsafe, illegal hookups. (Unfortunately, neither of these situations is a rare occurrence in India.)

This is a tall order for a country that is faced with many serious problems, financial needs, and political divides, which are likely to get worse before they get better. If India can’t get its energy crisis under control, how will it continue to play effectively in global supply chains?

Does the Present Belong to the EU? And the Nordics in Particular?

Even though we don’t know precisely when, we all know that the future belongs to China. And we all know that the past century belonged to the USA. But do the years in between, starting with the present, belong to the EU, and the Nordics in particular? As per this recent article in the Economist on The Secret of Their Success, the Nordic countries are probably the best-governed in the world. As the article notes, the Nordic countries have not only largely escaped the economic problems that are convulsing the Mediterranean world; they have also largely escaped the social ills that plague America. On all of the standard measures of societal health — including productivity, innovation, inequality, and crime — the Nordic countries are gathered near the top.

This shouldn’t be a surprise to regular readers of Sourcing Innovation, which reported on the Global Creativity Index (GCI) in a post last May that noted We Have Supply Management Problems and we should look to Scandinavia for Solutions, as the GCI ranked Sweden first, Finland third, Denmark fourth, Norway eight, and the Netherlands tenth. In order to rank high on the GCI — which requires leadership in Technology, Talent, and Tolerance — you have to have good governance. (Technology, Talent, and Tolerance requires the right atmosphere to flourish.)

So how did they do it? How does this remote, thinly populated region, with its freezing winters and expanses of wilderness, prove so successful? I think the Economist hit the nail on the head when they noted that the Nordics are quite unique in the honesty and transparency of their governments, their pragmatism, and their tough-mindedness. Nordic governments are subject to rigorous scrutiny: for example, in Sweden everyone has access to all official records. Yes, we have Freedom of Information Acts in North America, but a) requests for information for records more than a few pages are usually accompanied by very large access fees (even though the information could be distributed electronically for a fraction of a cent) and b) if anything is deemed sensitive or classified, it’s blacked out. Furthermore, in the Nordic countries, politicians are vilified if they get off their bicycles and into official limousines. In North America, they have to fly private jet before we even frown upon their behaviour (as we are too busy giving a damn whether or not Miley twerked today.)

In addition, the Nordics recognize that they have plenty of problems, that they can’t all be solved overnight, but that they can tackle these problems one-by-one and continually introduce structural reforms to improve the situation. They could constantly blame their predecessors or the other party, but instead they focus on trying to fix the situation and do the best they can. It’s a very realistic, pragmatic, effective approach to their problems — which are not small by any means. As the Economist article notes their governments remain too big and their private sectors too small. Their taxes are still too high and some of their benefits too generous. The Danish system of flexicurity puts too much emphasis on security and not enough on flexibility. Norway’s oil boom is threatening to destroy the work ethic. It is a bad sign that over 6% of the workforce are on sick leave at any one time and around 9% of the working-age population live on disability pensions. But despite these problems, they are moving forward and creating an atmosphere that makes them the place to be.

Furthermore, being a tough-minded people, they are making progress without sacrificing what makes the Nordic model so valuable: the ability to invest in human capital and protect people from the disruptions that are part of the capitalist system.

If the rest of the EU latches on to the Nordic reforms, it could very well be that the EU could collectively control the present when it comes to GDP, innovation, and even the way we want to live our life. (They’re already standing up and telling the US they’re not going to put up with unwarranted spying, and threatening to pull out of Safe Harbour entirely* — which, because of EU privacy laws, would result in a large amount of data-based services being pulled off of American soil and out of American companies — and a lot more money staying in the EU. This could be enough to tip the scales to put the EU firmly in the lead on all of these measures.)

What do you think? Will the EU take the present?

Or will North America smarten up, read the detailed studies — in English — produced by the Nordic think-tanks about how the Nordics reformed their states, and reclaim their glory days? Springsteen said it best, if you’re not careful:


… time slips away
and leaves you with nothing mister but
boring stories of glory days**.

* The European Parliament Committee recommended suspension of Safe Harbour in October (Source: Lexology) and has since threatened to scrap safe harbour as early as this summer (Source: TechWeek Europe unless the NSA changes its ways)

** Just ask the UK. The British Empire once had an economic hold over most of the world. Now they’re 6th and destined for the 10th spot as it is likely that they will soon be overtaken by Brazil, Russia, and India.