Category Archives: Procurement Innovation

The Sourcing Maniacs 2008 Vendor Tour Part VI: Coupa

When we left the Sourcing Maniacs, they had just finished learning about Co-exprise and Sourcing Lifecycle Management. We join them wandering the streets somewhere in Pittsburgh, PA.

Yakko Enterprise Cost Management and Predictive Analytics.
Wakko True Spend Analysis.
Dot Sourcing Lifecycle Managment.
Yakko The Sourcing World is sure a whole lot bigger than we ever thought it was!
Wakko Maybe it was good we got canned.
Dot We’d never have learned all of this if we were still locked in the corporate boardroom.
Wakko So where next?
Yakko Good question! Do we stay with the C’s or move onto the D’s?
Dot I’m curious what that little upstart by the name of Coupa is up to.
Yakko So am I. When they first appeared, I remember we laughed about the idea of an on-demand SaaS e-Procurement application … but after everything we’ve learned so far on this journey, I’m thinking that maybe we wrong and they were right … that maybe new technology is the future of e-Procurement, not legacy behind-the-firewall ERP add-on technology.
Dot After all, new best-of-breed sourcing technology appears to be revolutionizing sourcing, so maybe procurement can be revolutionized as well!
Wakko So where are they?
Yakko I think they’re back in California!
Dot I don’t want to go back to California just yet.
Wakko So what do we do?
Yakko They’re SaaS … and I hear they’re covered regularly by new media – so that should mean that everything we need to know is online. Let’s use the web! I think that’s a cyber-cafe up the street.
  The maniacs enter the cyber-cafe.
Dot So where do we start?
Yakko Coupa.com, of course!
  The maniacs go to Coupa.com and start surfing.
Yakko Wow … what a diverse customer base. Government organizations, science institutes, universities, mid-size companies, even a hockey team.
Dot Multiple major releases a year … I remember that sometimes we couldn’t even get one major release out in an 18-month period!
Wakko And look at that Pricing! It’s even more insane than I am! How can they possibly start at only $295/month and make money? We’d be losing money hand over fist at $2995/month if we were still at our old job!
Yakko Must be something to do with SaaS. Let’s read more about that.
Yakko surfs.
Here’s a great article by the doctor on the e-Sourcing Wiki. According to the article, SaaS allows for great economies of scale, a single multi-tenant instance, and a total cost of ownership that is much, much lower than the traditional on-premise model that we used to promote. Plus, as per this article I found on Sourcing Innovation, they deploy on the Amazon cloud that allows them to keep their infrastructure overhead ridiculously low and only pay for the computing resources they use.
Dot Is on-Premise really that much more expensive? I thought we had a great TCO in the old days.
Yakko I just found this great on-premise vs SaaS TCO calculator on the Coupa site that allows you to factor in license, support, upgrade costs, database costs, application server costs, implementation costs, and annual internal support costs for an equivalent procurement system and it’s surprising. If you managed to score a great deal and get an installed e-Procurement license for only 50K, with an annual industry average support fee of about 20K, and get it installed for 25K, and your tream trained for 25K, your first year cost would be $158,000 and your five year cost would be over $350,000! On the other hand, an enterprise level coupa license for a mid-size business with 1000 users, that costs about 17K with equivalent training costs, if my math is right, would only cost $42,000 the first year, and have a five year cost of only $110,000 … which is less than 1/3 of the five year cost for an on-premise application.
Wakko Wow! That’s less than my annual baloney bill!
Dot And what I spent on Gucci when we had a full time job!
Yakko I guess SaaS really stands for Sumptuary Allowances Actuate Savings!
Dot You’ve been reading the dictionary again, haven’t you?
Yakko It’s almost as interesting as the Universe.
Wakko But I thought you already knew all of the words in the English language!
Yakko I did … but they keep adding more! Did you know that almost 20,000 words are added per year?
Dot Plus all the ones you invent!
Yakko Yassuredly.
  At this point the sourcing maniacs really get off topic and start arguing how many parts of the brain it takes to source, so we’ll skip ahead until they get back to their Coupa discussion.
Dot So what we we doing before Wakko demonstrated how to eat sphaghetti with chopsticks?
Yakko Investigating Coupa I believe.
Wakko And their wacko pricing that’s less than my annual baloney bill!
Yakko And SaaS … which appears to totally rock …
Wakko … almost as much as I rock America!
Dot So, I guess the big question is … at that price, does it do what it needs to do?
Yakko Well, according to the doctor, who wrote an introductory e-Procurement Wiki Article, e-Procurement has up to 9 steps, with the first seven being key: requisition, authorization, purchase order, receipt of goods, invoice, reconciliation, and payment.

Now, according to the Coupa site, it supports requisitioning, multi-level rules-based and workflow-based authorizations, purchase order management, goods receipts and inventory management, invoicing, and integration with existing platforms which allow you to do reconciliation and e-payment.
Dot Shouldn’t it do reconciliation and e-payment?
Yakko Considering that the data you need for reconcilation is probably in your ERP or CM system anyway, built in reconcilation probably isn’t that important, and considering that not only do many companies use AP systems to pay, but that most e-Procurement platforms don’t include a built-in e-Payment mechanism, and simply interface with external e-payment systems, it looks like it’s pretty competitive.
Wakko Okay … there’s got to be something missing at that price! We would have charged $500K a year for this back in the day!
Dot Heck, we would have tried for a million! Gucci and Prada ain’t cheap, you know.
Yakko I guess we’ll just have to try it out!
(Coupa has a 30 day free trial!)
  Silence ensues for about 15 minutes while they try it … all of it … out.
Yakko That was …
Wakko, Yakko, & Dot Awesome!

Editor’s Note: For more information about Coupa, see this list of indexed posts.

Also, since I’m a little tired of typing, we’re going to break for a week or so … and pick up where we left off early next month.

Are You Still Relying on the Mallet and the Carrot?

In the old days, purchasing had two levers in negotiations: the (rubber) mallet, which they used to bonk their suppliers over the head when they did not like the way negotiations were headed, and the carrot, which they used to try and convince suppliers to lower their prices. The particular mallet and carrot would change depending on the negotiation in question, but the goal was always the same — to convince suppliers to offer better terms in exchange for an award (the carrot) or to convince suppliers to offer better terms to prevent a loss of business (the mallet). For example, the buyer might offer the widget supplier part of the gadget buy as well for a 10% decrease in price (the carrot) or might threaten to take the gadget business off the table (if the supplier already had both categories) if a price decrease of 5% across the board was not agreed to (the mallet). A traditional purchaser would alternate between the strategies depending on the supplier, and might even use both in the same negotiation to try and extract the best deal.

However, these days, purchasing has more levers than just the carrot and the mallet, including win-win levers like total cost awards enabled by optimization, new opportunity identification enabled by cutting edge spend and data analysis, and innovation enabled by supplier collaboration and enablement technologies. But many organizations, who are obviously not innovative best-in-class, fast-acting leaders, or even average supply management organizations, still rely almost exclusively on the mallet and the carrot.

Why?

It’s a very good question that needs a damn good answer, especially given today’s economic climate where, thanks to the multiple financial crises, your average supplier is probably in, or about to be in, a credit crisis, if they weren’t already in a crisis with the explosive increase in most commodity costs over the past year and the recent increase in DPO (Days Payable Outstanding) at organizations trying to improve their working capital that failed to see the big picture. (This is one of the three sure-fire finance strategies for supply chain failure.) Now more than ever you need to work with your suppliers to find the best-deal that allows both of you to win … and this means abandoning the time-honored mallet and carrot negotiation techniques of supply management past.

The three techniques identified above will save you millions on their own if you haven’t applied them effectively before:

  • Total Cost Decision Optimization
    It will help you jointly identify savings that can come from better inventory distribution, manufacturing distribution between plants, and raw material cost savings on raw materials that can be bought in bulk, by or on behalf of your supplier, across needs in multiple categories — allowing you to save money without forcing your suppliers to accept unsustainable margins.
  • Spend Analysis
    As pointed out in Opportunity Identification, the savings opportunities that arise just from knowing where you are overspending, and where you can consolidate spend, is significant. Just focussing your efforts on the right buys will save you more than hammering an extra 2% in a negotiation on an insignificant buy.
  • Collaboration and Enablement
    When you work together to help a supply manufacture more efficiently and cost effectively, you can often find significant savings opportunities that would otherwise go undiscovered. Consider a recent client of Apriori who found that a different manufacturing process could reduce the production cost on a $4.80 part to $0.80, a savings of over 80% on a six figure annual buy!

And this just scratches the surface of the innovative techniques for savings that have been covered in this blog over the past few years. So if you really want to succeed in the new supply management economy, throw away the mallet and the carrot before you bonk yourself on the head and bite off more than you can chew.

Procurement Fundamentals — A Path to Innovation

Today’s guest post is from Bernard Gunther of Lexington Analytics.
He can be reached at bgunther <at> lexingtonanalytics <dot> com.

Every year, I look forward to going to conferences with the hope that I will get a chance to see a great deal of innovation and learn something new. Most years, I am largely disappointed. Is there innovation? Yes. But much of what is being presented relates to operational excellence, operational success or even operational “good-enough.”

Why is this? It’s a lot harder to innovate when you are still struggling to set up standard practices. Procurement systems and processes tend to be a patchwork of different approaches for different spend areas all jumbled together. Many organizations are just catching up to best practices. Let’s take the “101” starting point for any procurement organization, the basic spend analysis of vendor payments — understanding how much you are spending with each of your vendors. Recent surveys indicate that less than half of companies have a system for this. For those companies without a system, they seem to be doing ad hoc dumps of data from their AP system into Excel or a data warehouse with no consistency in the analysis. We all know this is not a best practice in procurement. If companies are not doing the basics well, they have little time to focus on innovation.

It’s not surprising that there are so many presentations about operational successes and so few about innovation at sourcing conferences. Operational success is a key element of a strong function and can deliver significant value, but should it be considered innovation? At a recent conference, I attended a wonderful presentation on Negotiation Fundamentals. One would think that everyone in a purchasing group would be well versed in this and applying the fundamentals regularly. But if you look around procurement organizations, you find that many people are not applying the core disciplines of procurement in effective ways.

Is there support for innovation at organizations? Successful companies are continually investing in innovation and developing new products and processes. These new products rarely just happen and not every new product idea is a success. This means that a procurement group interested in innovation should be doing three things:

1. Look for innovation. Innovation usually comes from new companies but it can also come from unexpected areas. But, in order to recognize it, you’ve got to be open to it. I remember when my grandmother came to visit us one summer from Germany. Like many older people she wasn’t open to trying new things. Her attitude was, “I don’t know that food, so I don’t want to try it,” or, “We have that at home too.” Because she wasn’t open to new things, she didn’t see anything new. She wrongly concluded at the end of her stay that food in America was just like Germany. Are you saying the same thing to innovation?

2. Invest in innovation. Is it 1% of your budget? 10%? Is it 5 projects? Is it 3 new vendors allowed in? Don’t know? If you don’t know, how are you making it happen?

3. Allow for “failure”. A group that is innovating is going to have failures, or “less-than-total” successes. But that’s okay if your environment rewards some risk taking. If not, your people will only attempt things they know will succeed — which is not innovating, it’s following. You need to be able to work on projects and initiatives that aren’t perfect. Success is usually the product of many such small failures. There are far too many projects / programs / implementations that are deemed too big to fail by the owners. Projects promising innovation in a company may get viewed as another procurement initiative ready to fail — over promising and under delivering. This atmosphere is rarely one that fosters innovation.

If you are already innovating — wonderful. But I suspect that most organizations would be delighted if Purchasing were to deliver better operational performance. If your organization is not ready for true innovation, perhaps focusing on operational success is the way to build your organization’s credibility. By demonstrating your ability to add value through the fundamentals, you are setting the stage for future innovation. When you do innovate, you can present it as delivering more of what the organization already values.

Public Sector vs. Private Sector Procurement : Does One Size Fit All? II

Yesterday we noted that if you were looking for a way to quickly and easily segregate the vast array of companies offering procurement solutions in the marketplace, you’d quickly find that they could quickly be divided into those that almost exclusively serve the public sector and those that almost exclusively serve the private sector. We also noted that public sector organizations operate quite differently than their private sector enterprise counterparts. We then discussed the differences in day-to-day procurement public sector organizations vs. private sector enterprises.

Based on the operational differences we identified, we reviewed the fundamental differences in workflow, awards, and approvals and discussed the underlying technology required to support both the public sector and private sector needs. And we found something quite surprising – pretty much the same solution was needed in both cases. Which left us scratching us head and asking, so what’s the difference?

Well, when you get right down to it, there are no differences in the fundamental e-procurement technology requirements for public sector and private sector organizations. They both need to create RFXs to solicit information, accept bids, generate awards, create and approve contracts, cut purchase orders and goods receipts, accept invoices, issue (e-)payments, and track and report on spending. And they need to be able to do it in a smooth and integrated manner that minimizes data entry (and eliminates rekeying of data already in the system, as that just leads to human error).

The fundamental differences are in the processes they use. Public sector organizations have one set of rules for whether it’s a public RFX, renegotiation with an incumbent vendor, or a direct award and private sector enterprises have another. Public sector organizations tend to use the RFX, Bid Management, and Contract Management solutions more heavily than their private sector counterparts who are free to chase the award with the greatest long-term value and use non-discriminating e-auctions and cutting edge decision optimization to get the best value for their shareholders. But the fundamentals of procurement don’t change.

So why are most e-Procurement companies either or?

I think the answer is two-fold.
(1) Most technology-focussed solution companies don’t understand the differences between public sector and private sector procurement, and thus focus on one or the other.
(2) Most technology solution providers are still selling B2B 2.0 solutions, which have been customized for one environment or the other. In order to support both environments on one platform, you have to have very flexible workflows that are extremely customizable by the customer (to meet their needs) and a user interface that is trivially easy to use. This is easy with flexible B2B 3.0 solutions, but almost impossible with rigid B2B 2.0 solutions.

And if you have the right platform, you can easily support both types of customers.

Public Sector vs. Private Sector Procurement : Does One Size Fit All? I

If you were looking for a way to quickly and easily segregate the vast array of companies offering procurement solutions in the marketplace, you’d quickly find that they could quickly be divided into those that almost exclusively serve the public sector and those that almost exclusively serve the private sector. And if you’re like me, you’d wonder Why Is That?

It’s true that public sector organizations operate quite differently than their private sector enterprise counterparts, and that’s good, because they’re supposed to. A public sector organization is supposed to first and foremost serve the public good, a private sector organization is supposed to first and foremost bring value to its shareholders. Public sector organizations need to be fair when awarding contracts in terms of minimum minority awards, small business awards, disadvantaged business awards, and woman-owned business awards, especially when all else is equal. Private sector organizations need to select the best vendor for the job — every time, as that is their duty to their shareholders.

But does it mean that the solutions have to be different? Are not the fundamentals of good end-to-end e-procurement the same whether you’re public sector or private sector? I guess that’s the Trillion Dollar Question, isn’t it.

Let’s start by examining your average public sector procurement organization a little more closely. Public sector is not only very policy driven, it’s very stake-holder driven. In the private sector, most purchases don’t require more than two approvals — the procurement specialist and, if the dollar value is high enough, her boss. Yes, the stakeholders need to be consulted and have to be given a chance to provide their input, but the contract can be inked once the procurement manager, and her supervisor with enough fiscal authority, sign off. In the public sector, most procurements require no less than four or five signatures. You have the procurement (or contract) specialist, her supervisor, the project/program/department manager who needs the product or service, the Equality Awards Office (EAO) responsible for insuring that enough awards are made to MWBE and disadvantaged vendors, and, if any clause or term in the agreement is non-standard, legal. If the procurement carries risk, you might need the signature of the officer responsible for risk management, if the procurement will result in recurring payments, you might need the approval of accounts payable or finance, and if the spend is significant enough, you might need a senior VP in addition to your boss’s signature. But all of this can be handled by a flexible workflow with a configurable approval chain.

In the public sector you primarily have RFPs and sealed bids where the award often HAS to be given to the lowest bidder who can fulfill the demand at the minimum level of quality, safety, and performance, whereas private sector organizations can select the bidder that they believe will generate the most value for them in the long run. This means that the public sector requires an extensive RFX application with weighted scorecards and good comparison reports … the same thing that the private sector has gotten for years since GE implemented the reverse auction and FreeMarkets made it famous.

The public sector needs to support the lowest common denominator in terms of issuance of POs and receipt of invoices. If a supplier still operates out of a 1970’s production plant and can only accept and receive faxes, then the organization has to deal with paper for part of its procurement process whereas a private sector organization can dictate that it will only accept invoices electronically. But e-Procurement solutions have been accepting attachments for over a decade, and allowing the user to define the appropriate meta-data (vendor, po #, contract #, line items, quantity, amount, taxes, total invoice amount, etc.) for just as long. So it’s still easy for a data entry clerk to create an e-invoice in the system on behalf of a vendor and print, and fax, an e-PO on behalf of the public sector organization.

And so on.

So what’s the difference?

Come back tomorrow for Part II!