Category Archives: Procurement Damnation

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).

Societal Damnation 45: Lack of Math Competency

Back in 2010, SI ran a post on how This is Scary! We Have To Fix This that referenced a MSNBC article on Why American Consumers Can’t Add that reported on a recent study that found:

  • Only 2 in 5 Americans can pick out two items on a menu, add them, and calculate a tip,
  • Only 1 in 5 Americans can reliably calculate mortgage interest, and, most importantly
  • Only 13% of Americans were deemed “proficient”. That meansless than 1 in 7 American adults are “proficient” at math.

Ouch!

And while Procurement needs to be able to deal from a full deck of skills (and SI has compiled a list of 52 unique IQ, EQ, and TQ skills a CPO will need to succeed which will be explored in future posts over on the new Spend Matters CPO site where the doctor and the maverick are co-authoring a number of series on the CPO job description and the requirements therefore, starting with “The CPO Job Description: An Overview”), many of them rely on math. In fact, with so many C-Suites demanding savings, if a Procurement Pro can’t adequately, and accurately, compute a cost savings number that the C-Suite will accept, one will be tossed out the door faster than Jazzy Jeff gets tossed out of the Banks manner.

However, the United States is not the only country with a numeracy issue. If you review the recent OECD Skills Outlook report that presented the initial results of the global Survey of Adult Skills (that focussed on reading, X, and numeracy), you see that of the 23 countries listed, Australia, Canada, UK, and France, all of which are home to head-offices of global multi-nationals with big Procurement budgets and bigger need for top talent, are all below average with the United States. While over 60% of Japanese adults have a higher level of Math proficiency, in Australia and Canada, it’s slightly over 40% and in the US it’s barely over 30%. However, this still doesn’t meant that these people can do basic calculations required for tips, mortgages, or savings calculations. For example, higher starts at Level 3 (where the survey respondent scored 276 to 326 points) and the description of level 3 is “tasks at this level require the respondent to understand mathematical information that may be less explicit, embedded in contexts that are not always familiar and represented in more complex ways“. Tasks involving multiple steps and problem solving are level 4, and the percentages here are dismal. Less than 10% in the US and barely over 10% in Australia and Canada. (In Japan, it’s around 20%!) This means that less than 1 in 10 adults in many countries have the basic math skills necessary to do mathematically intensive jobs which include the majority of the sciences, economics and finance, and Supply Management!

And performance seems to be getting worse every year. This is not a good sign in an inflationary economy with restricted demand where advanced analysis, modelling, and optimization is required to find efficiency and savings. We need more math, and less electro-mechanical devices that purport to do it for us. (Otherwise, we won’t even be able to compute just how damned we are!)

Technology Damnation 82: The Secret Seven

We all think the internet, with its distributed design, open and thoroughly tested encryption and security technologies, and its foundation of our modern public, private, government, and academic culture is, despite regular security breaches (which are often a result of improperly applied security procedures and technologies of corporations that should know better), relatively secure and reliable and will remain outside of any one organization’s control for years to come. Especially since our global business functions, and global procurement functions in particular, rely on it.

And while that is the expected future, as no one corporation, nation, or conglomerate owns the internet, the reality is that ICANN, the Internet Corporation for Assigned Names and Numbers, which is a private corporation, has an awful lot of power over the internet as it manages the Internet’s Domain Name System (DNS) that links your domain to the right IP address. In order for a registrar to sell you a domain (to link to an IP that is typically made available to you by your ISP), the registrar has to be accredited by ICANN. In addition, IANA, the Internet Assigned Numbers Authority, which is another private corporation, is responsible for the Internet Protocol Addressing System and allocates IP blocks to the Regional Internet Registries (that allocate, in turn, to National Internet Registries, that allocate, in turn, to the Local Internet Registries that, in turn, allocate IP address to the local ISPs).

This says that if a body managed to gain control of IANA, they control your IP address, and, even worse, if a body managed to gain control of ICANN, they control the mappings, and since everyone uses domain names, and not IPs, they would essentially control who goes where on the information superhighway. This couldn’t really happen, right? Wrong. While not likely, all a villainous/terrorist organization of Bond proportions needs to do is gain control of, or replace, the seven key holders that control the core ICANN DNS system. That’s right. The vault that controls the entire global internet only takes seven keys to open.

And even though the key holders hold traditional safety box keys, the keys that control the internet aren’t regular keys you find on a key ring and are, in fact, smart cards, that can only be accessed by the key holder (with the safety box key) after going though traditional and biometric security screenings that are likely tighter than they have in place at Fort Knox (and the process required to complete the ceremony and gain access to the machine that generates the new master key has over 100 steps). And no key on its own can make changes to the master DNS. All seven keys are required to activate the machine that generates the master key that allows the DNS to be updated. (And whoever holds the master key, just like whoever holds a traditional master key, has access to the entire internet just like a traditional master key gives you access to an entire building.)

But at the end of the day, it only takes the keys and biometrics of 7 people to get the smart cards that activate the machine that generates the new master key for the internet which allows whomever holds it to redirect domains at will. It is true that these 7 people, who are some of the greatest minds in internet security and who are as trustworthy as they come, are spread all over the world, but still, at the end of the day, it would only take 7 samurai to slay the internet.

In other words, no matter how far we progress with technology and security, it all comes down to the trust and nobility of a select few to keep our global supply chains humming.

And if you start to think about this too deeply, you might really believe we’re all damned in the end!

Societal Damnation 41: Fraud and Corruption

Fraud and Corruption is everywhere and running havoc on your organization and your supply chain. A recent Kroll Global Fraud Report in late 2013 found that 70% of companies were affected by fraud in the prior 12 months, which represented an increase of 15% over the previous twelve months. In other words, at the time, 7 in 10 companies were hit by fraud in the previous year. But it gets worse. The Economist at the same time also found that fraud was on the rise and predicted that it would continue to rise. If the rate of increase remained steady, then 4 of 5 businesses got hit with fraud last year and 9 out of 10 business will get hit with fraud this year. Yowzers!

Moreover, Procurement Fraud can be particularly costly and damaging, in both the public and private sectors. For example, a recent article over on Supply Management on how “Councils [were] told to do more to tackle Procurement Found” found that there were 107,000 cases of Procurement fraud detected by local authorities in 2012-2013 that combined accounted for £s; 178 million! And this is just a drop in the bucket when compared to the total amount lost by the UK public sector to fraudulent purchasing on an annual basis, an amount that was estimated at £s;2,300 million in 2012! Zoinks!

It’s harder to find good numbers for the US, but a 2011 report by Computer Evidence Specialists found that Fraud cost the US $1.32 Trillion in 2010, of which 733 Billion was Corporate (with 68% committed by corporations and 32% committed by employees). This number might sound surprising but when you consider that between 2000 and 2007 a small South Carolina parts supplier collected about 20.5 Million from the Pentagon between 2000 and 2006 in fraudulent shipping charges, including $998,798 for sending two 19-cent washers to an Army base in Texas, it puts things in a different light. (Source M4Carbine.net archives.) Hamana, hamana!

If your organization is not on full alert 24/7, it is going to get hit with fraud from somewhere in the organization or the supply chain. It’s just a matter of time before an attempt is made. This fraud can take many forms, which can include, but are not limited to:

  • invoices from non-existent suppliers
    usually submitted by an employee for services (not received) or goods of questionable origin to try and defraud the company of money (or by a random third party trying to hope a small invoice slips through unnoticed)
  • invoices from suppliers for off-contract goods and services
    usually for smaller dollar amounts for services “to be received” or for goods that are priced above standard list price for “emergency provision and delivery” where a supplier is trying to eek out more revenue or an employee is colluding to get a kickback
  • bait-and-switch
    where the supplier promises you the newest high-end laptop with the top-of-the-line processor and memory chips, but you actually get last year’s model which has depreciated 30% less (because, not being an IT shop, the supplier thinks you won’t know the difference) or charges you for Grade 5 Bolts when in fact they are only Grade 2 Bolts (and which you intend to use in commercial busses used to transport passengers, giving you a legal liability as well as a case of fraud)
  • inflated T&E claims
    where meetings across town are 50 miles instead of 10, all meals are $1 below the per diem limits, significant “entertainment” charges (especially on the first and last day where the employee or manager was actually entertaining friends and relatives), etc. (or, and this happened, the same receipt is accidentally submitted on consecutive expense reports)
  • inflated performance claims
    where a buyer “negotiates” a year-end rebate in exchange for guaranteed volume at unnecessarily higher prices next year so that he can exceed his savings target and get a bigger bonus
  • “lost” / “damaged” stock
    that is “walked” off the truck by an employee during a pre-lot entry inspection or, if the merchandise is un-returnable / too costly to return, declared damaged and purchased at pennies at the dollars by an employee who will resell the undamaged products on his own

In other words, fraud can happen anywhere, and at any time, and if a Procurement organization is not vigilant, it will happen to them. Fortunately, steps can be taken to reduce the chances of most of these frauds. Having a policy that invoices will only be accepted from approved suppliers, that all invoices from approved suppliers for non-contracted goods and services and/or for goods and services at non-contracted rates will prevent most external fraud from slipping through the system. (Collusion can still bypass the best of controls, but, unless the system is hacked, you know exactly who perpetrated the fraud in this instance.) Having T&E limits without budget manager approval, automatic zip-code based mileage checks, and fixed per-diems (while more costly) can weed out a lot of T&E fraud. Careful inspections and a two-step process can minimize the chances of a bait-and-switch and good stock being written off. And waiting a quarter to verify the numbers then and now before issuing a bonus will discourage many employees from trying to inflate their savings (or sales) claims.

However, no system is perfect and a lot of process transformation, and diligence, will be required to minimize the risk of fraud and corruption and limits its impact if it does happen. For Procurement, it’s another damned if you do (as the effort takes time and resources away from good category management that is often the largest source of value generation) and damned if you don’t (as the losses from a single fraud could wipe out most of the captured savings).

Organizational Damnation 56: Legal

While not quite as many organizational damnations in our list as there are technological (which are enough to drown us on their own), there are still quite a few and Logistics, covered back in our post on organizational damnation 48, was just the beginning. Legal can be just as big of a thorn in our side as Logistics, if not bigger.

Everyone hates lawyers, unless, of course, we’re talking about their lawyers working for them doing exactly what they want and succeeding. In your organization, the lawyers work for the Chief Consul who works for the CEO and orders his organization to do what he feels the CEO wants him to do, even if it is not what anyone else in the entire organization wants him to do. So if the CEO has mandated the Chief Consul to get a standard legal template in place for all direct materials contracts, that’s what the legal team is going to try and do (even if half of the clauses are irrelevant to half of the categories or are so onerous that no supplier worth it’s weight in salt would ever, ever sign). If the CEO orders the Chief Consul to make sure the organization doesn’t get mud in its eye due to child labour in the supply chain like the competition did, you can bet the Chief Consul is going to order an operational review of each and every supplier you do business with and their suppliers and so on. And while neither of these are bad things, the Chief Consul and the legal team could get dangerous tunnel vision and make Procurement’s life very, very miserable in the process.

But it’s not just tunnel vision and insistence on onerous clauses or unnecessary deep supply chain reviews (on suppliers you already vetted over the last two years, a vetting process which included surprise audits) that’s the problem, it’s their definition of what a good contract management system is. If you’re a leading Procurement organization, chances are you’ve noticed the similarity between a good Category Management Process and Contract Lifecyle Management (CLM) and are looking to obtain a good CLM or Strategic Sourcing (SS) / Supply to Contract (S2C), or Supplier Relationship Management (SRM) solution with strong contract management capabilities. However, the minute you mention you want a solution which either has “contract” in the title or “contract X” as a significant module, Legal is going to insist that “Contracts” are their domain and they need to be the solution owner of the “contract” solution.

Why is this bad? Because, at the end of the day, all that Legal cares about is contract creation (drafting, authoring, and signing), contract archival, and contract retrieval and their definition of a Contract Management solution is one with strong drafting and authoring capabilities, version control, audit trails, clause repositories, Microsoft Word integration, etc. In a 3-phase, 22-step contract lifecycle management process that starts at the need identification and the production of a business case and ends with a proper post mortem, contract creation is one step — but they will ignore everything else, including all important workflow management, change management, performance management, relationship management, and risk management — among other significant features from a Procurement / Supply Management point of view. The best solutions will be immediately eliminated from consideration if they are missing one unnecessary bell or whistle that Legal wants in the drafting phase and the Procurement organization will end up with the best contract authoring tool on the planet — that does absolutely, positively nothing else.

But this doesn’t come close to the hell you’ll get the first time you try to help them with cost control. The minute you bring spend up they’ll get all defensive that the organization needs the best outside consul it can get, that talent doesn’t come cheap, but the extra cost is well worth the reduced risk that comes from having a high-risk contract drafted by a true expert or the best litigator defending your organization in what could be a very costly court case if the organization loses. They’ll do this even though you agree with them 100%, have no intention of reducing legal spend just to increase legal liability, and only care about getting spend under control for everyday cookie-cutter services and legal firm expenses.

For example, many real-estate transactions, franchise transactions, insurance transactions, etc. are templated, sold by nimble, specialist firms at fixed rates, and do not differ in quality or risk whether you pay $1,000, $5,000, or $10,000. However, many large organizations with a lot of local offices or branches will often pay significantly different amounts for the exact same service that should be a fixed price across the state, or even the country. the doctor knows a number of spend experts who have analyzed legal spend for large organizations and the differentials on some of these cookie cutter category are often a factor of 3 to 5! There’s a huge savings here, which can be used to insure that the organization always has enough in the legal reserve to hire the best talent for the strategic transactions and legal challenges when talent truly matters. Plus, allowing every law firm to choose their own e-Discovery firm and technology, their own business centre / copy house, and even their own messenger service / delivery carrier can lead to significant variations in expenses as well. If the organization takes control of the expenses and insists that it’s lawyers and outside law firms use it’s contracts, non-talent expenses can often be halved as well. Like the Marketing Sacred Cow, the Legal Sacred Cow represents a huge savings opportunity which, when approached correctly, does not increase the organization’s risk one bit. In fact, the increased control, standardization, and visibility reduces risk while increasing the funds in reserve for Legal in case of a law-suit or similar emergency. But Legal never sees it that way at first, and sometimes doesn’t come around.

Legal will drive you nuts. It really is the case that you can’t live with them, can’t kill them. Because, at the end of the day, no matter how miserable they make your existence, there will always be that big contract where you need them to make sure your behind is covered. And, just like the lawyer, you will have to take two sides.