Category Archives: Procurement Innovation

Is There an Objective Reality to Procurement?

Recently, the public defender penned a post that asked “should Procurement be more specific?” where he asked if we have an ‘objective reality’ of how procurement works. Are we like scientists; trying to develop more understanding, willing to be challenged, looking for objective ways of proving what works and what doesn’t? Or are we more like the journalists and politicos who express a point of view and get upset if anyone argues strongly and objectively against us?

We think, for the most part, the answer is, unfortunately, a sad no. Why do we think this? Is it because we agree with the public defender in his observations that you never hear “I don’t agree with you” or “I don’t think that’s the best way of doing that” when you go to Procurement event and that you never see an academic paper that objectively measures the success of a particular procurement approach, strategy, or process. No. It’s because, as pointed out in yesterday’s post, there’s still too much magical thinking in Procurement, born in arrogance and self-conceit. Too many people who think that just because they’ve been doing it for 20 years, they’ve been doing it right and all they need is a few more resources and a little more time.

As a result, we wholeheartedly agree with the public defender when he says:

Procurement is THE least scientific of all major business disciplines.

— and that this is the result of —

the lack of clear and objective understanding and
the lack of clear metrics that measure the success of procurement.

As the public defender points out savings are pretty much impossible to measure, and most of the “true” savings is just cost avoidance anyway, and any reduction in cost that was spend above market average can never be counted as savings. If you were paying 10% more than you would in a spot buy, a reduction to market average is not even true cost avoidance that comes from demand management or product redesign, it’s just spending what you should have been in the first place. And other common metrics are equally abhorrent.

And we are still trying to get most organizations from landed cost (which is just one step up from unit cost) to total cost of ownership, which is not the right metric — it should be total value management — the cost relative to the performance (or profit if you want to be so narrow minded) of the buy.

So, no, in the average organization, there is no objective reality to Procurement. And, as it stands now, only the true leaders (the Hackett Group 8%) are even close to getting there (or at least trying). However, like the public defender, we will continue to educate you to the best of our ability so that someday, there may be an objective reality. (But not necessarily the one that will allow a senior buyer to be replaced by a bot. Assisted by, but not replaced.)

Is There Magical Thinking In Your Procurement?

Recently over on the Dilbert Blog, Scott Adams penned a post on “The Magical Thinking Opposition” where he noted that his hypothesis was that the political side that is out of power is the one that hallucinates the most -– and needs to –- in order to keep their worldview intact.

And this got the doctor thinking if there is a corollary that says the Procurement department that is getting the worst deal is the one that hallucinates the most — and needs to — in order to keep their worldview intact.

Why does he posit this? Typically the Procurement departments most against modernizing their processes or platforms are those that are doing the worst and think they are just fine with the processes or platforms they have. These laggards are not only without modern platforms, but resistant to their acquisition and implementation. They are not modern Procurement departments, but traditional Procurement departments that still run on the island of misfit toy principle — staffed with people who are nearing retirement (and being rewarded with a cushy purchasing job), related to the boss (because you can’t fire a relative of the boss), and who have been in the
organization too long to let go (but who are not suited for their current jobs anymore).

But this is not the only way to identify these Procurement organizations. You can also tell them by these telltale arguments against modernization:

  • Our processes are fine, we just need more people to implement them.
    They think that their lack of results is lack of resources, not the processes or the platform.
  • Out platform is just fine, we just need more people to maximize its potential.
    They don’t believe that the throughput is a problem of an outdated platform, just a lack of resources.
  • It’s not worth the cost, and it will slow us down.
    They fight modernization and change, usually based on outdated views, beliefs, or stereotypes.

They feel that all they need is a little more time, a few more resources, and then everything will work out a-ok with the help of a little pixie dust. It’s magical thinking, and there’s no room for it. Just like alchemy needed to be replaced with science, magical thinking needs to be replaced with realist thinking.

The More Things Change … Outsourcing and Procurement Mastery

This week we’re revisiting posts from ten years ago to demonstrate that, to date, the more things change in Procurement, the more they have, unfortunately, stayed essentially the same.

Ten years ago we penned a post on outsourcing and procurement mastery that summarized the results of an Accenture study that found that, on 1B of controlled (normalized) spend, procurement masters achieved 30% higher savings with costs that were 50% lower.

Nothing has changed. If you have been following the Hackett group publications for the past decade, you’ll note that top performers always perform significantly better than average performers. Maybe not 30% cost reductions, but pretty close. For example, in Hackett’s most recent study, World Class Procurement organizations see 35% process cost reduction, which is quite significant. And just about every GPO publishes typical category-based cost reductions in the 10% to 30% range, which is easily achievable through advanced sourcing technologies such as spend analysis (to identify the opportunity) and decision optimization (to capture the opportunities).

The only thing that has changed is how disturbing it is that there is still so much overspend in the average organization — and how easy it is to identify it. By now the majority of organizations should own advanced sourcing and procurement technologies and be identifying the majority of these savings on a regular basis. But it’s still not the case. Over 40% of organizations don’t have a single modern sourcing or procurement solution.

We’re still way behind where we should be. In this regard, unfortunately, nothing significant has changed in a decade.

There are 4 Modes of Innovation, But Only Two Types!

A recent article over on HBR.org on the 4 types of innovation and they problems they solve didn’t really discuss the types of innovation, but rather the modes. The author, who broke innovation down into the age-old 2*2 matrix, with domain definition on one axis and problem definition on the other, indicated that their was basic research — typically carried out by or with academia, breakthrough innovation — typically accomplished by skunk work projects, sustaining innovation — typically done by R&D labs, and disruptive innovation — that often comes out of VC-funded innovation labs.

As you can say, these are not really “types” but methods of innovation which can each lead to innovations that might be classified as basic, sustaining, breakthrough, or even disruptive innovations (so the names are quite confusing), and this leaves the question, what are the real types of innovation and how does innovation happen. (An academic might come up with a disruptive way to create new communications technology and the best-funded VC lab might, after years of research, just come up with a way to make a fabrication process more efficient, saving 20% of time and 10% of cost, and not discover a single revolution.)

So how is innovation accomplished? These days, it’s fundamentally accomplished in one of two ways — either using the tried and true method of good old fashioned human ingenuity or the new method of deep learning that can discover patterns, formulas, or correlations that humans can miss. But is this the kind of innovation we need? Or even want?

As per our last article where we asked if the end of the digital west was in sight, while these deep learning systems can, with enough data, make predictions that are much more accurate than the best human experts, the fact that they cannot explain their reasoning is very disturbing. Very disturbing indeed. Do we really want to trust them with a new drug formula that, while having the potential to save thousands, also has the potential to kill hundreds, with no knowledge of which individuals are at risk of instant death? the doctor hopes not!

While it’s okay to use these systems to identify the most likely directions of success, it’s not okay to use these systems to blindly choose those directions without independent verification and confirmation with rationale, deterministic explanations. In other words, while we should use every tool at our disposal, we should never replace human intelligence and ingenuity with dumb systems. Because, while there are two types of innovation in use these days, there’s only one real type of innovation — human innovation. the doctor hopes that we never forget it and return to the glory days where all innovation was human innovation.

The UX One Should Expect from Best-in-Class Spend Analysis … Part V

In this post we wrap up our deep dive into spend analysis and what is required for a great user experience. We take our vertical torpedo as far as it can go and wrap the series up with insights beyond what you’re likely to find anywhere else. We’ve described necessary capabilities that go well beyond the capabilities of many of the vendors on the market, and more will fall by the wayside today. But that’s okay. The best will get up, brush off the dirt, and keep moving forward. (And the rest will be eaten by the vultures.)

And forward momentum is absolutely necessary. One of the keys to Procurement’s survival (unless it really wants to meet it’s end in the Procurement Wasteland we described in bitter detail last week) is an ability to continually identify value in excess of 10% year-over-year. Regardless of what eventually comes to pass, the individuals who are capable of always identifying value will survive in the organizations of the future.

But if this level of value is to be identified, buyers are going to need powerful, usable, analytics — much more powerful and usable then what the average buyer has today. Much more.

As per our series to date, this requires over a dozen key useablity features, many of which are not found in your average first, and even second generation, “reporting” and “business intelligence” analytics tool. In our brief overview series to date here on SI (on The UX One Should Expect from Best-in-Class Spend Analysis … Part I, Part II, Part III, and Part IV) we’ve covered four key features:

  • real, true dynamic dashboards,
  • simultaneous support for multiple cubes,
  • real-time idiot-proof data categorization, and
  • descriptive, predictive, and prescriptive analytics

And deep details on each were provided in the linked posts. But even prescriptive analytics, which, for many vendors, is really pushing the envelope, is not enough. Great solutions really push the envelope. For example, the most advanced solutions will also offer permissive analytics. As the doctor has recently explained in his two-part series (Are We About to Enter the Age of Permissive Analytics and When Selecting Your Prescriptive, and Future, Permissive, Analytics System), a great spend analysis system goes beyond prescriptive and uses AR and a rules-engine to enable a permissive system that will not only prescribe opportunities to find value but initiate action on those opportunities.

For example, if the opportunity is a tail-spend opportunity that could best be captured by a spot-auction, approved products that meet the bill, and approved suppliers that can automatically be invited to an auction to provide them, the system will automatically set up the auction and invite the suppliers, and if the total spend is within an acceptable amount, automatically offer an award (subject to pre-defined standard terms and conditions).

And that’s just the tip of the iceberg. For more insight onto just how much a permissive analytics platform can offer, check out the doctor and the prophet‘s fifth and final instalment on “What To Expect from Best-in-Class Spend Analysis Technology and User Design” (Part V) over on Spend Matters Pro (membership required). It’s worth it. And maybe, just maybe, when you identify, and adopt, the right solution, you won’t end up wandering the Procurement Wasteland.