Category Archives: Market Intelligence

Ignorance and Apathy were never the problem. Asininity and Exuberance were!

When those of us from the smartest generation were growing up, we were told that we shouldn’t be ignorant or apathetic, because “I don’t know” and “I don’t care” are not good answers. With hindsight, while ignorance and apathy aren’t great qualities, it turns out that asininity and exuberance, especially when mixed, have proven to be far worse.

After all, generally what happened if you were ignorant and apathetic was that you ended up in a remedial program, got your high school diploma, quit your job at the White Castle, and joined the trades. Spent your evenings at the local dive bar with your buddies and the weekends on the couch. (Unless, of course, you liked Mary Jane a little too much, then you kept your job at the White Castle and spent every evening on the couch watching Beavis and Butt-head, because you were convinced they were your alter egos.) You didn’t make your mark on society, but you didn’t ruin it either.

Hindsight is 20/20 and I don’t think that, when we were growing up, our educators could ever have predicted how powerful private equity and venture capital would become, how it would be dominated by the asinine and exuberant, and how much damage they’d collectively do not just to public markets but global economies.

All of the market crisis of the past 40 years have been caused by asinine and exuberant financiers, primarily in the private markets, which includes the loosely regulated investment arms of major banks and financial institutions where they are allowed to take “measured” risks.

I mean 40 years! Black Monday (on October 19, 1987), which was the largely unexpected stock market crash that wiped out 1.7 Trillion worldwide, or about 10% of Global GDP at the time, might have started as a result of actions of the US House Committee on Ways and Means with the introduction of a bill to reduce the tax benefits from financing mergers and leveraged buyouts, and been exacerbated by the the high trade deficit figures which both announced on the prior Wednesday, but the major losses stemmed from automated computer trading adopted by the portfolio insurers and mutual funds (to reduce their trading costs and quickly capitalize on market changes) that dictated very large sales (in response to significant selling pressures, which partly arose from their customers having the right to redeem their shares at will, and do so at the price of the last market close). With a glut of sell orders hitting the market as soon as it opened, and nowhere near enough buy orders, this resulted first in intense downward price pressure and then huge losses as the automated trading models automatically reduced prices and accepted lower buy orders. Had the market not been overvalued, had funds been properly managed (by investors not overly exuberant about the markets), and had trades still been manual, losses would not have been as severe — but the pursuit of quick gains built up a market that could come down just as fast.

Then we had the dot-com bubble, created by the first wave of exuberant and asinine VCs that overvalued any business with an online business model (even if never truly implemented, like Boo.com that blew through £125 million in just 6 months (and fire-sold for less than $2 Million), and was labeled by CNET as the 6th greatest dot-com flop. The bursting of the bubble wiped out over 5 Trillion, or about 15% of Global GDP! (The biggest dot-com flop, according to CNET, was Webvan, the original online grocer. It raised $375M in an IPO in Novemver 15, 1999 to build a gigantic infrastructure from the ground up, including a 1 Billion order for high-tech warehouses, and closed in July of 2001.) Hold onto this.

Next up, the 2008 Financial Crisis (that caused the Great Recession) as a result of the collapse of the U.S. subprime mortgage market from risky lending practices, complex mortgage-backed security, and mortgage trading that should never have been allowed. This cut the DOW in half in less than a year. Total losses were generally estimated to be between 19 Trillion and 22 Trillion, or about 32% of Global GDP! (With some more extreme estimates placing value losses at almost 50 Trillion, or almost 80% of GDP, including the estimate of the Asia Development Bank.)

Finally, the 202X AI Crash. It’s coming. And it’s going to be big!

20X valuations in any company that can claim “AI”, whether or not it’s actually AI and whether or not it actually works, have become all too common. Every month, a new 100 Million+ investment in yet another company valued at over 1 Billion dollars despite having sales of less than 50 Million. (And VCs valuing companies with 2 Million in sales at 40 Million dollars.) It’s insane. The asininity and exuberance are ridiculous. For every company to make those numbers in 5 years, which is the time-frame in which most Venture Capitalists (VCs) and Private Equiteers (PEs) [not to be confused with Privatus Equiterres, although that’s likely what they’re doing, facing backwards of course] expect a return. This means that, for those numbers to be hit, worldwide IT spend would have to quintuple, from about 6 Trillion today to 30 Trillion next year, or 25% of Global GDP would have to be dedicated to IT. That’s not going to happen. To put that number in perspective, that’s the ENTIRE US economy … the richest economy in the world that can’t afford to pay for universal education, basic health care, veteran benefits, and/or social security. So how would it ever pay for all that IT? But still, AI investment last year alone was about 600 Billion, or 1/10th of global IT spend. For a technology where the backlash is beginning since the compute costs are spiraling out of control (with companies having to significantly scale back, or even halt, their AI budgets as a result of skyrocketing costs — with one company burning through 500 Million in one month alone [Source: Yahoo! Finance]). (And the total investment in AI infrastucture and software spend since 2000 exceeds 2 Trillion, with some estimates going as high as 3 Trillion.) Open AI and Anthropic alone have raised over 310 Billion with a current combined run-rate of about 70 Billion. Investments are insane, budgets are being tightened, and with McKinsey and MIT reporting 94%+ failure rates on pilots, the backlash is coming.

The only question is, how bad is this crash going to be. If we look at the trend line, 10% of Global GDP for Black Monday, 15% for the dot-com bust, and 30% for the sub-prime mortgage crisis, this could be catastrophic and make the Great Depression look like the Little Dipper. With most IT assets overvalued by a multiple of at least 5, simple math says that 80% of total IT stock value (and the NASDAQ) could be wiped out overnight! (And while it’s not likely to be that bad, anyone with a bit of logic and math skills can see it’s going to be bad, even in a best case scenario.) And it’s all because of widespread asinine exuberance in the private finance industry!

So never complain about ignorance and apathy again. Those with it may never have amounted to anything, but they never caused any major problems either!

There’s NO Faster Path to a Markdown than “Growth At All Costs”!

THE PROPHET is bemoaning the start of markdowns in private equity when he should be happy (as a former investor) they took this long to happen, especially when the reality is that these markdowns are going to start coming fast and furious in any firm that wants to still be around by the end of the decade.

This is because most of their portfolios in Software, and FinTech/ProcureTech software in particular, have been pursuing growth at all costs as a result of:

  • the insane valuations during COVID for FinTech/ProcureTech that helped companies buy and pay online
  • the insane valuations during the current AI-HYPE for any company that could convince the investors they had a unique AI capability (even if it was just a clod or chat, j’ai pété wrapper)

… which has resulted in unreasonable, and practically unachievable, sales and growth targets being placed on them which they will not reach, especially in a flat, or down, market for software purchases as a result of the AI price squeeze (since “AI” offerings are currently cheap with the big firms underpricing compute costs to try and hook clients, even though it’s costing those firms Billions).

But as Garry Mansell, one of the Godfathers of Modern Procurement, has so eloquently explained in his can of worms post, growth at all costs is equivalent to self-sabotage. That’s because it comes laden with fallacies, traps, and brand value destruction!

Garry points out the three biggest harms we see every single time.

  1. Quarterly Earnings Trap: with the constant pressure to reach unreasonable, if not unobtainable, sales targets, it becomes all about delivering good news on the quarterly earnings call (whether to the public or the PE firm); it all boils down to revenue and cash in the bank, and sales teams are told to hit targets by any means necessary, including, but not limited to, deal-making, over-promising, and grand assurances the solution will solve that problem without any plan to ensure it will do just that once the deal is signed; this leads to unhappy customers when the implementation will take a year (vs. the three months they expected), the expected enhancement needed to solve that problem is pushed two years down the roadmap, and the customer support is non-existent (because all the support reps were fired to fund increases in the S&M budget to try and hit the insane targets)
  2. Heavy Discounting Fallacy: because it will get “not ready” or “likely to go with a competitor” customers over the line and get the deal in the door; first of all, it doesn’t always happen (as some customers see through it and then spot the “we have the right to reprice on a quarterly basis if your user base goes up, and we get to use LinkedIn growth metrics to do so” clause where, even if you hired a dozen janitors for your new office building or 50 fleet drivers for your new private fleet who never use the system, you will be charged for them anyway); secondly, even if it does, given that the smart ones know the old adage “you get what you pay for” is true, if they didn’t pay much, they will believe it’s not worth much and not put in the hard work that’s required on their end for a successful implementation (especially since they also know you can’t afford to, and thus won’t, support them at that price); third, voices carry, word gets out you’re cutting quotes 80% to 90%, and suddenly everyone knows (or at least assumes) you’re doing massive mark-ups with the sole intent of getting whatever you can (and not what the tech, and the IP contained within, is really worth — as you’ve just devalued the IP to the floor)
  3. Shelfware is the Reputation Killer that Keeps On Killing: Good software that generates value for a valued client that uses it daily is the gift that keeps on giving because a happy client, as long as you keep your prices fair, never goes away; but shelfware is the villain that keeps on striking at your darkest hour as that unhappy client will never tire telling people how you are robbing them blind in a contract they can’t get out of for software they aren’t using …

As Garry has said repeatedly, which SI has echoed repeatedly (while giving you a simple relative corporate debt equation to help you calculate how likely that vendor is pursuing growth at all costs, and, thus, likely to screw you [whether they intend to or not]), the only true growth is controlled growth with ready-clients at a sustainable year-over-year rate that allows all customers to be served to expected levels of service, all new employees to be adequately trained before being thrust into critical customer-facing roles, and all current employees to get the regular time off they need to prevent burn-out.

And, as Garry has also pointed out, where the model incentivizes utilization and renewal over implementation and sale, where every member of the organization is incentivized on those metrics, where the sales person doesn’t get a dime of commission until go-live and where the full commission depends on adoption and renewal, that’s where you will see success. (In other words, the sales person should NOT be happy if the client isn’t. That’s one of the best ways to de-incentivize bad deals — what salesperson is going to bend over backwards and/or pull every dirty trick in the book to get a deal he’ll never see a dime of commission on?)

Proof You Don’t Need AI For Procurement

And that you don’t need modern procurement technology. (No SaaS. No fluffy magic cloud.)

Or classical technology. (No Microsoft Back Office. No ERP.)

All you need is pencil, paper, and a good old fashion fax machine based on the classic 1966 Telecopier (that compacted the Xerox LDX).

Last year, Asahi proved it when they were hacked by the Ransomware group Qlin. The hack took all of their factories offline, and when they managed to get them back online, their computer systems were still down. Most of their global competitors would have remained completely shut down until the computer systems came back online, but instead Asahi rolled up their sleeves, powered up the fax, took out a pad of paper and a pen, and got to work. They placed orders, took orders, shipped out what they were able to produce to their largest distributors, and kept going. While it was a slow start at first (with some customers only receiving about 20% of their usual orders), at least they were able to start up again right away and maintain part of their revenue stream.

Could your organization do the same? Likely not!

It’s shameful because we’re one of the world’s oldest professions, possibly the second oldest, and early professionals were doing their jobs with reed pens and papyrus just fine!

The fact of the matter is that if you can’t do your job without technology, you can’t do your job with technology. True Procurement is human judgement. Judgement requires the expertise necessary to do the job — the entire job. Technology is just the execution that automates the tactical drudgery which allows us to focus on what’s truly important and spend most of our time on strategic activities. Nothing more.

Exact Purchasing Helps You Assess Your Reality

In our last post we explained that the Busch-Lamoureux Exact Purchasing Model not only puts you on the path to Category Intelligence (which it requires, and which you need to get to, even though you likely haven’t even adopted Category Management), but it helps you define what you need in your technology platforms so that you can go to market knowing what you need and not get sucked into vendor BS.

But it goes beyond just laying out the path to category intelligence and platform selection, it helps you understand the real Procurement reality that faces your organization, which is not only different by category, but vastly different by product and supplier once you dig into your high complexity, high risk, and high impact categories.

Let’s start with the low complexity, low risk, high impact continual transaction monitoring category where energy, RAM, and custom FPGAs will live for engineering firms and where fertilizer, tractor parts, and greenhouse panels will live for agricultural operations. Most of the time, this category is quickly and easily sourced since you bid out the contract in a deregulated energy market and the energy keeps flowing, DRAM is DRAM is DRAM, a number of suppliers exist that make customized FPGAs, greenhouse panels are pretty interchangeable, you don’t care who supplies your fertilizer (as long as it doesn’t sale on the Saskatchewan River, and tractor parts are made in bulk and almost always in the local shop.

But, sometimes, an energy production plant fails and then your energy provider files chapter 11, the once-a-decade plant fire happens and takes one of the few large RAM production factories offline (causing major RAM shortages), or your factory gets cut off by a border or port closure and then you need a replacement – fast. Similarly, global supply chain disruptions can cause tractor part shortages (as the major US manufacturers offshored production of some parts to China and Mexico — COVID proved this), you need your greenhouse panel replacements to be the right size and thickness (among other things), and you need that fertilizer (which all of a sudden becomes scarce, if not unavailable, if the shipping lane that sees up to half of the global supply of key chemical components cut off.

As you explore this category in detail you note that, most of the time, you can just send out an RFQ, get the bids, award the lowest bidder, and keep on truckin’ without a second thought. It’s only when an event happens that will lead to cut off supply from your current source do you need to do anything. But since there is usually other supply from other sources, even if more expensive, you realize that you don’t need to think about every possible risk or disruption — you just need to detect when one has occurred and go back to market right away.

All you need to do is monitor the transactions and make sure they occur on the required schedule, at the expected unit count, and at the expected price. Should a transaction not occur when expected, and for something with a lead time of more than 7 days, should a ASN not appear when expected, then alternate supply needs to be secured. The program should automatically place an order to the backup supplier (or the #2 supplier on the last event) and alert a buyer to investigate what happened. Should the buyer investigate and determine the delay is just due to a carrier f*ck up, you take solace in the fact an extra replacement order is on the way, and comfort in the fact that everything should be fine starting with the next order. Should the buyer determine it’s because of a border/port closing that could go on a while, she orders a new RFP (and uses Force Majeure to cancel any remaining commitment to the current supplier), invokes the (agentic) automation, and goes back to work. And should the buyer determine it’s because of a plant fire or plant damage from a natural supplier that’s going to go a while AND create a global supply shortage, she buys up all the supply she can as fast as she can before supply becomes very scarce and prices go through the roof. And then, knowing the only extra costs are inventory, she goes back to work knowing that the annoyance her organization is feeling due to a temporary sharp rise in inventory costs and a rapid reduction in cash flow, is nothing compared to the pain the organization would feel if all of a sudden there was no supply, they couldn’t produce their products in their biggest product lines, and defaulted on contracts and had to pay an extended legal team to defend lawsuits on Force Majeure claims while the organization sees a substantial drop in revenue.

Now let’s consider the high complexity, low risk, low impact spend governance category where you’d likely see BPO, facility management, and installation projects. Here you’re spending a lot of time on your vendor identification, vendor qualification, RFP, vendor selection, contracting with obligations, milestones, and risk management, and spend schedules and when you’re done, you think you’re done. But when you understand the sheer complexity, you know you’re just getting started. First of all, the vendor doesn’t know your processes or expectations as well as you think. Secondly, their improvements are theirs and theirs alone (and they’ll lock you in for life) unless you ensure, and capture, knowledge transfer. Third, once you become dependent you become damned if you continue and damned if you don’t. They’ll know the precise moment you can’t live without them and then prices will skyrocket on the next renewal. And even worse will be if they get into financial trouble and can no longer support you to the degree you expect.

This means that you not only need to capture as much knowledge as possible on the improved processes they deliver, but also the technologies they use and the providers who provide them. And then you have to, before each renewal, determine who the other providers are who could also deliver an equivalent solution based on your current process and technology requirements, and ensure you could contact them quickly if needed. The switching costs will be high, so unless you don’t have a choice, it’s not a trigger you’ll want to pull, but if you aren’t ready when you need to, you’ll be in deep trouble.

You realize you not only need to go through a very involved selection project when you need the BPO, regular engineering, or facility management service, but due all the market research to kick off another one on a (bi) annual basis to ensure that you are not caught in a very bad situation on the once-a-decade black swan event when the provider all of a sudden becomes unavailable or (possibly as a result of a merge or acquisition) raises prices so high you can’t afford to continue, even though you desperately need the service.

Finally, when you dive into each of the other six categories you realize that your reality is a lot more fragmented and diverse than you would otherwise expect in a Procurement organization and until you accept that, and start dealing with the different fragments differently, success will always be just beyond your reach.