Category Archives: Procurement Innovation

Hackett Hacks Away at Recession Declines

Hackett recently published a research piece on how “G&A Spending Cuts Can Offset 21% to 45% of the Anticipated Decline in Pre-Tax Profit During Recession” as part of their Enterprise Strategy Series which noted that their 2008 benchmark data reveals a savings of 184 – 400 Million for a typical global 1000 company that’s worth a re-read. Unlike most of their pieces, this was available to the public (registration required), and, if it’s still available, you should definitely download it – as it is jam-packed with more information than a single blog post can cover.

The piece starts off that by noting that while mandated G&A cuts are the norm in times of recession, arbitrarily cutting costs across the board can lead to serious deterioration in service-delivery capacity. It’s critical that cuts are made in ways that minimize impact on business value delivery, but this requires an understanding of the strategic alternatives, current cost structures (as compared to those of world-class organizations), and clear-eyed risk assessments. Furthermore, Hackett found that average companies can reduce G&A cost between 15% and 41% simply by optimizing process cost. Furthermore, reduced technology spend can take out another 6% to 7%.

The research brief also points out that you should not determine a savings target before understanding what a “normal” spend level is in a world class organization. For example, a typical Global 1000 company (with 23.4B in revenue and 56,100 employees) spends 3.6% of its revenues on four core principle G&A functions (Finance, HR, IT, & Procurement), but world-class companies execute significantly better by combining process excellence with technology leverage. They perform at lower cost levels (22%+) and enable the business to succeed by producing improved financial results and cash-flow; by recruiting, training, and retaining talent; by driving costs out of the supply chain; and by making superior use of technology.

The research brief also identified 10 targets for G&A reduction across the four core functions that, when combined, should allow for a cost reduction of at least $158M in a typical Fortune 1000 company in process costs alone (labor and outsourcing) that can be achieved by way of best practices, simplification, and standardization. Specifically, the 10 functions, and potential cost savings were:

  • Infrastructure Management : 25.1
  • Revenue Cycle : 22.7
  • Application Maintenance : 21.6
  • General Accounting : 17.9
  • Application Development & Implementation : 15.8
  • Compliance Management : 13.4
  • End-User Support : 12.7
  • Transactional HR : 11.7
  • General Disbursement : 10.6
  • Purchase Order Processing : 6.4

The research brief identified a cost difference of 55.6 Million in technology spend between average and world-class organizations.

Hackett also identified another 74.9 Million in cost savings that may be available through globalization (and outsourcing).

So how do you start identifying these cost savings? You start by reading the research brief and focussing on the specifics in the identified areas. You also apply the expertise the doctor and his fellow bloggers have imparted to you over the years while noting that most of the savings opportunities are in technology (75.2), finance (51.2), and procurement (19.8). If you have been paying attention, this should screen one acronym to you: SaaS. If you’re currently using bloated behind-the-firewall software, switching to SaaS will simultaneously reduce your infrastructure (the largest), application maintenance (the third largest), application implementation (the fifth largest), and end-user support (the seventh largest) costs. Plus, if it’s e-Sourcing or e-Procurement, you’ll also reduce your revenue cycle (the second largest), compliance management (sixth largest), general disbursement (ninth largest), and purchase order processing (tenth largest) costs. That’s eight cost reductions with one decision! How can you go wrong?

CVM: Not Just About Supplier Diversity Anymore!

CVM Solutions (acquired by supplier.io), one of Spend Matters’ Nine Vendors to Watch in 2008, appears to be on a quest these days to conquer the sourcing space, with their intent to offer supplier data enrichment, supplier relationship management (SRM), spend analysis, and a soon-to-be-launched procure-to-pay process management solution. According to Jason, CVM is a “best-kept secret” because of their extensive data enrichment services, supplier portal, and their new uber-workflow and process management engine that creates a level of control and visibility that he’s not seen elsewhere.

Now, I don’t know if they’re the “best-kept” secret, but when it comes to their data management capabilities and their new process management engine, they’re certainly a well-kept secret. Their extensive data management solution allows you to track extensible & customizable information on each supplier of a generic, location-based, contact-based, business registration, financial, capability, diversity, contract, sourcing, SRM, administration, and documentary nature – including scanned attachments which can be easily uploaded by specifying meta-data, printing off a cover-page with a system-generated bar-code, and faxing the document (with a cover-page) to a CVM provided fax number. (Reducing the number of steps in the traditional scan, convert, upload, tag, index.) In other words, their data management capabilities are in the same class as Aravo, a vendor I’ve written about before. However, due to their extensive supplier information databases (as the largest provider of diversity information in the US with enrichment data being culled from over 330 external databases and over half of the Fortune 500 as customers), they can also quickly and easily enrich your data, eliminating the need to integrate a third party’s data stream into your supplier data management / supplier information management solution (SIM), which might reduce the Total Cost of Ownership for a company that needs extensive amounts of third party data (as long as their pricing for enrichment services remains competitive with Austin Tetra and D&B.

For an initial release, I was also quite impressed by their new procure-to-pay process management engine. Although it’s not competitive with either your best-of-breed e-Procurement suites or your best-of-breed e-Sourcing suites when it comes to procurement and sourcing capabilities, with proper use, its flexible design allows you to accurately track all of your ongoing projects, and their current status, with respect to each supplier and each category and manage the process which, for most companies, probably involves at least three or four different systems (spend analysis, e-Negotiation, contract management, e-Procurement, e-Payment, order management, etc.). For example, their default assessment / supplier selection / contract draft / contract approval / transition workflow allows a category manager to document where each sourcing project is, and, when a supplier is selected, track where the project is with respect to contract drafting, approvals, and issuance. This information is then integrated with the data repository, where you can define alerts to notify you when certain quotas are reached / not reached in a time period and when a contract is about to expire. Steps can be added to, or removed from, the workflow, as required by your organization, and it allows you to continue using a collection of best-of-breed products from multiple vendors but still track your project status in one-location (which I believe is critical because there isn’t a single suite vendor with more than 3 solutions that is Best of Breed in everything – and when a best-of-breed solution can squeak out even 2% to 3% more on 100M+ spends, in today’s economy, I don’t think you can justify not going with a BoB solution).

I was also impressed by the usability of the application from a buyer’s perspective and a supplier’s perspective – which is important when you want to capture tier 2 diversity information from your suppliers in addition to asking them to use the tool to enter and maintain their basic information. The only thing I didn’t like was the response time – many screens took an average of 3 to 4 seconds to load in the demo (and I’m not willing to blame the internet as I have high speed cable on a 15MB rated network and can sustain 1MB/sec download times on my machine with ease). If you’re going to be maintaining large databases, you’ll need to ask about their SLAs and insure that you have enough processing power and bandwidth dedicated to the application. (Fortunately, with today’s hardware prices, you can do that at very affordable prices!)

I was, as regular readers might guess, not impressed with their “spend analysis”, or, more appropriately, with their classification of their spend reporting program as “spend analysis”. It’s a good reporting package with over 30 pre-configured reports that has all of the day to day reports that managers and accounting and tactical purchasers are going to need … but when it comes to the true analysis capability required by your power buyers, it’s just not there. In other words, like many of the spend analysis applications on the market, it will satisfy all of the requirements of management and your tactical purchasing team, but none of the requirements of your power buyers. However, it is seamlessly integrated with their platform, so if you were willing to augment it with a stand-alone power tool for your power buyers (like BIQ [acquired by Opera Solutions, rebranded ElectrifAI]), it would allow them to focus on true analysis and not have to worry about meeting the reporting requirements of management or the tactical buyers AND allow those individuals to quickly and easily access spending reports augmented with supplier information, diversity data, and standard classification systems such as NAICS and SIC. Plus, if you maintain complete contract pricing information (which is quite easy to do in their solution for commodities), it can automatically generate “offender” reports for accounts payable when you’re over-billed or accounts receivable when you reach the discount volume. So, if you can get a good deal on it, the “spend reporting” solution could be worth the price when you calculate the opportunity cost of a power user of a companion BoB application generating standard reports for management and accounting vs. digging for new opportunities. Plus, and this could be a key selling point for them, they have an add-on Federal Reporting Module that can be configured to automate Federal and State Agency reporting down to the contract level – and anyone who has had to prepare these reports knows how time-consuming they can be.

Finally, they’re also getting into Risk Assessment Reporting, which, after some of the recent supply chain disasters we’ve seen in recent years, is likely soon to be a must for larger corporations. When it comes to talking-the-talk, they’re certainly ahead of much of their competition in understanding “risk” and the importance of measuring it, planning for it, and proactively dealing with it. When it comes to walking-the-walk, their reports appear to be more-or-less comparable to their competition, especially since they can pull in D&B risk scores and supporting data. However, these days, I don’t think a financially based risk-assessment tells the whole story. I think they need to integrate more sources of information, especially for small businesses (like Austin Tetra is doing), to arrive at a more complete risk picture. It’s good for a first offering, but I’d like to see how it improves over the next year before locking in any long-term agreements. This is an emerging market in the sourcing services sector, and I’m not sure if anyone really has a good lock on what the right solution is.

In summary, I think they are a well-kept secret when it comes to supplier data management and, now, sourcing and procurement workflow management, I definitely think they have a lot of potential on the SRM/SPM side and the risk side as well, and even though they don’t have true “spend analysis” (just like the vast majority of vendors who make the claim), I think that their “spend reporting”, and their federal reporting module in particular, is quite good from a usability perspective, especially for non-technical management, accounting, and tactical buyers. They’re definitely a company to look at and keep an eye on, but like other extensive suite providers, they’re not best-of-breed in everything (no matter how good the “eye-candy” UI looks).

It’s Time for Procurement to Take the Helm

The recent issue of CPO Agenda has a few good articles in it, including “At the Helm or All at Sea” by Dick Russill that starts off by noting that to steer into more strategic business waters, CPOs must abandon the cost savings myopia and service mentality that tarnish procurement’s image.

The article has a number of good points, which include the following:

  1. success at managing external costs must be measured relative to the cost and cash-flow forecasts in the financial plan, not by isolated savings
  2. purchasers must change – if they don’t, then emphasis will be shifted to legal (to cut better contracts) and finance (to help the company make better investments)
  3. it’s a self-harming paradox for procurement to define it’s importance by the huge percentage of the budget it consumes and to define its success by how much it can reduce that spend
  4. the businesses that fail are those where the principles of the business are to make money; the businesses that succeed are those where the principles set out to deliver outstanding quality of goods and services to their customers
  5. suppliers need to be regarded as a source of value and goodwill, not as a source of cost and overpriced material goods
  6. ultimately procurement’s business role is to contribute strategy, distill out its supply implications, and then act to make the strategy happen

Why is this important? Let’s take it point by point.

  1. if savings are isolated, then they are the exception and not the rule; furthermore, companies that tout isolated savings are usually those that have just started to implement strategic sourcing and do not realize that negotiated savings are not realized savings (as this requires tactical follow-through to capture the strategically negotiated savings)
  2. Purchasing’s time to shine is now … if you let the opportunity pass you by, then the CEO will look elsewhere
  3. It’s not total savings, or even total cost of ownership, but total value
  4. a business focussed on making money is focused primarily on sales and secondarily on cost cutting – neither is a formula for success
  5. not all innovation comes from within – your suppliers are an excellent source of innovation
  6. again, it’s about total value management, and this starts with a strategy that guides procurement throughout their sourcing and procurement activities

Procurement needs to move up the value chain – and the article has a great table that outlines the evolution of procurement from tactical cost reduction to strategic value creation, that it defines as Route 42, presumably after the M42 Motorway.

The Route 42 roadmap is the following:

Cost Savings
1. Push harder on existing deals
2. Aggregate similar deals
3. Acquire approval for more profound changes
4. Standardize and go after larger deals

Cost Management
5. Improve contract management
6. Evaluate deals against total lifetime cost
7. Develop supply strategies
8. Enhance the view of procurement
9. Improve specifications

Value Creation
10. Create a cross-functional team
11. Develop collaborative supply relationships
12. Increase influence over monopolies
13. Penetrate non-traditional purchasing areas
14. Develop strategies, including ‘forensic’ procurement

Healthcare – Three Way Matching

Today I’d like to thank Vinnie Mirchandani of Deal Architect and New Florence. New Renaissance. for allowing me to re-post his thoughts on Healthcare – Three Way Matching as part of Healthcare Week.

At the HiMSS conference a couple of weeks ago, I had the privilege of having an industry veteran – Dave Watson – as a tour guide through the exhibit hall. He has years of experience at Baxter and Kaiser and is now CTO at MedeFinance, and it was a joy to hear his commentary on the technologies on display.

But at one point, he mentioned “three way matching” and I had to do a double take. Why was he talking about an age-old accounts payable concept of matching invoice with purchase order and receiving report?

The concept has been adapted in healthcare to reduce medication error with some slick new technology. The three-way match is across patient, prescription and care giver (whether certified to administer the medication) information. It involves all kinds of RFID and other sensors, bar codes, software to check on conflicts, and drug dispensers with their own controls built in.

How bad is the medication error problem? A recent study reported “One in every 10 patients admitted to six Massachusetts community hospitals suffered serious and avoidable medication mistakes”

So we saw the Motion C5 tablet.

Look at all the capture and communication technology it integrates:

wireless connectivity: to access patient information and physician’s order.

RFID: to identify patients, medications and assets

integrated bar code reader: to manage medicines or costly supplies

integrated digital camera: to take pictures and capture video for patient education and sealed design: wipeable for quick cleaning and disinfecting

bluetooth: to help capture patient vital signs

security: integrated fingerprint reader, hardware based encryption

Then on to smart pumps like Hospira’s Symbiq which delivers precise amounts of fluids, medications, blood, and blood products.

More safety checks – this time between the patient code, the IV bag bar code and the pump bar code. A wireless link connects both the pump and the bar-code scanner to the main database, which matches patient, order, and pump. If correct, the order is checked against the hospital drug library that contains formulation and dosing guidelines. Once verified, the pump is automatically programmed and the infusion can begin.

For pills, there are other smart dispensers such as this Medicine Cabinet developed by Accenture.

At the show we also saw various voice recognition products from Nuance. Doctors are notoriously poor scribblers so dictating prescriptions can also reduce other medication errors.

Of course, as with accounts payable, you can also have a 4 way match by introducing cross-check with an inspection report. My wife who works part-time at a hospital tells me about the four-way match in health care: The patient who asks “how come my pill today is pink. It was blue yesterday”. Inspection report indeed.

It’s e-Procurement for Health-Care Week!

One of the areas I don’t talk much about is health-care – even though it’s one of the areas that could probably benefit the most from e-Sourcing and e-Procurement? So why don’t I talk about it? Because I don’t do any work in the area. Why don’t I do any work? Because the standard response from your average health-care (service) provider when you try to talk to them about e-Sourcing, e-Procurement, or even e-Commerce is either that (1) it’s not important, (2) it would interfere with the quality of patient care so we won’t consider it, or (3) that’s what the GPO is for.

All of these answer annoy me greatly, but needless to say answer #3 annoys me the most. Think about it – most GPOs in the health-care sector follow the standard “supplier-pays percentage of purchase” model with little oversight. How much incentive does an unmonitored “supplier pays” GPO have to reduce prices? Not much – the more they reduce prices, the less they get paid. So, after getting asked about the sector recently, I thought it would be a good time to do a series on the status of health-care and how e-Procurement could help. Since I’m not a health-care expert, I invited some thought leaders to share their views – which I’ll be posting this week.

With respect to the state of the U.S. health-care system, the McKinsey Quarterly just ran “An Interview with the CEO of the Cleveland Clinic” as their contribution to Innovation in Health Care where Delos “Toby” Cosgrove discusses the state of health care and how top executives can contribute to innovation and reducing the nation’s health care burden.

At a cost of about 2 Trillion annually, or 16% of GDP, it’s clear that costs need to be contained. However, the goal of health-care is to improve quality, and it is going to take real innovation to find ways to reduce costs while improving quality – especially when Toby might be right when he says that the only way to significantly reduce costs and improve quality is to reduce the burden of disease. However, when forty percent of premature deaths in the US are caused by obesity (and Toby states that 2/3s of the country is overweight and 1/3 are obese), inactivity, and smoking – how do you prevent this without changing people’s lifestyles?

However, one thing you can do is measure outcomes and develop quality metrics – then you can put a value on the health care dollar. Unfortunately, there is not a lot of information out there on what quality is or what you should measure – but Toby’s Cleveland Clinic is working on defining outcomes in every department for all common procedures and diagnoses, and is improving both the quality, and quantity, of metrics on an annual basis. Based on these metrics, they can find problems, address them, and improve quality. By improving quality, they eliminate waste, and eliminating waste reduces cost – providing a greater value for each health-care value spent.

Other things you can do will be covered in the forthcoming posts.