Category Archives: rants

What Does Free Really Cost? Part II

In our last post we discussed how we can’t go a day without another FREE software solution being offered to our business and that we don’t believe these offers because everything has a price, even if it’s not immediately obvious or we are not the ones to (initially) pay it. Referencing a recent piece on “From Free to Fee” from ChainLink research which discussed how the definition of value has been redefined in the digital age, we discussed what people now expect for Free and why these expectations are not always in line with reality because someone has to code the app, someone has to maintain the app, and someone has to support and train the users on the app, and that someone will expect to be paid to do these tasks. Also, the app has to run on hardware, which takes power, and be available over the internet, which takes connectivity, and all this takes money. We concluded that using a Free app has a number of costs, and that they warranted a discussion.

So what costs is an organization accepting when it chooses a Free app?

  • Platform Limitations
    All free(mium) platforms have limitations. The best things in life may be free, but the best things in enterprise platforms are not. You’ll be paying for all the inefficiency in your organization.
  • Data Loss Risk
    No money, no guarantees. If your files are lost, and you’re not paying for backup, they’re lost forever. And even if you’re paying, and you’re not using a quality service with off-site backup, you could be in the same boat as the MegaUpload users. You’ll pay dearly when your data goes up in smoke.
  • Service Loss Risk
    Again, no money, no guarantees. The service could be here today, gone tomorrow, and with no escrow, you’re out of service. You’ll pay dearly when you have to scramble for a new service provider.
  • Supplementary Platform Limitations
    The free service may only work will files in a certain format, may only work in IE on Windows, etc. You could be locking in your platform requirements to those that are not the best for your organization. And then when the number of vendors who can provide that platform diminish to few, or one, you’ll be reaped over the coals at upgrade time.
  • Vendor Lock Ins
    Let’s say you managed to negotiate a FREE license to a piece of enterprise software to support your organization in exchange for a big services spend or marketing consideration. This may save millions of dollars in licensing costs, but if that software only works on top of a certain ERP system also provided by the vendor, the vendor has you over a barrel and will more than make up the loss on the Free license to the specialty module with the premium you’ll be forced to pay on the base ERP. And this is true across IT systems. The not-so-bright negotiators at a big University who recently negotiated Free Cloud-based Microsoft Exchange mail didn’t save 2 Million over X years, they locked in probably 10 Million of spend on Microsoft Operating Systems, Office Packages, and Back Office Suites over the next X years as Exchange only integrates fully with other Microsoft products. And how much of a break are they going to get on these products when Microsoft just gave them mail for Free which is, sadly, a service that is already almost Free if you decide to go with something like Pronto on Linux (as your only cost is the cloud computing platform and internet connectivity).

And these are just the obvious costs. There’s no Free lunch in enterprise software or supply management. You always pay in the end. And, if you’re not careful, you’ll pay much more than you save by choosing a Free platform. Remember that, and pay up front, and you’ll avoid rude, costly, awakenings when something goes terribly wrong.

What Does Free Really Cost? Part I

It seems we can’t go a day today without another FREE software solution being offered up for your business. But is it really free? What does it really cost your business to use it? The reality is that everything has a price, and the price for a business is typically a lot higher than the price for an individual. So what is the price? Good question. Let’s start with a recent research brief from ChainLink Research on “From Free to Fee”.

First of all, the move to ‘Free’ has redefined the definition of value in the digital age, which includes:

  • the value of audience
    visitors, opt-in subscribers, and the ability to mine consumer information
  • the value of the network
    a bigger, better network that matches yours
  • the value of the platform
    that is interoperable, and integrates, with yours
  • the value of human interactivity
    social and collaborative connections

Value that we expect to access for free through free conference services, file transfer, file storage, social networking, and even free ERP systems. Even in the enterprise world where we want to be using apps that millions of people use.

But nothing is free. Everything costs. Someone has to code the app. Someone has to maintain the app. Someone has to support the app and train the users. And that app has to run on hardware, which takes power, and be available over the internet, which takes connectivity. And people, power, and technology take money. And, for some apps, lots of it.

That’s why the big free apps, with enterprise uses, need conversions from free(mium) to paying subscribers. Hence the segmentation of features, basic access for free, more advanced features, like back-up, for money. Free may be a great way to enter the SMB marketplace, but it’s not a long-term strategy to stay there.

And it’s not just because it’s costly for the providers of the free solution, which have to pay their bills, but because it’s costly for the organization — something the article misses.

When an organization accepts Free, it accepts a number of costs that will be discussed in tomorrow’s post.

Could the U.S. Be A Next Generation Manufacturing Economy?

It’s an interesting question, especially when the U.S. doesn’t have the capacity to support global operations like Apple with their manufacturing needs. There’s only 83 U.S. cities with enough population to support a Foxconn-size manufacturing plant, and for the vast majority of these, only if a significant amount of the population could staff the factory. Even in New York, some estimates state that 7% of the working population would have to work in the same factory to support iPhone production. That’s seven percent! Chances are that not even 0.7% of the population would be qualified without extensive training.

Based on this, despite what some articles might suggest, current generation manufacturing can not return to the US. However, that doesn’t mean that next generation manufacturing, focused primarily on producing specialized high-end technology products for the medical and engineering professions, couldn’t be the backbone of the US economy in the decade ahead.

Consider this recent item in Industry Week on “Arrow Gear — A Case Study in How to Improve the U.S. Economy”. According to the article, Arrow Gear increased its workforce by 35% in the face of the worst recession since the Great Depression by creating products used in high-end, high-priced systems that were being exported. A manufacturer of high precision gears for a wide range of commercial and aerospace applications, it accomplished this feat by investing millions of dollars into its state-of-the-art facility.

This would suggest that a focus on specialty products for the aerospace, health, and (green) energy sectors, in particular, could allow manufacturing to return, in at least a limited extent, to the U.
S. But only if the U.S. takes a lead before another country steps up to the challenge.

Any differing thoughts?

Reverse Auctions: Old Is New, But One-Time is Still Just One-Time!

The IBM Center for The Business of Government’s recent report by David C. Wyld (the Director of the Strategic e-Commerce/e-Government Initiative at Southeastern Louisiana University) on “Reverse Auctioning: Saving Money and Increasing Transparency” is a great read for government organizations and a good read for Supply Management organizations that are on the back-end of the supply management innovation curve, as long as these organizations don’t fall for some of the claims that are hyped beyond reality (with respect to the private sector). While a private sector organization will generally see all of the following benefits the first time they use reverse auctions:

  • downward prices
  • increased competition
  • real-time market pricing
  • process efficiencies
  • time savings
  • increased number of suppliers
  • sustainable cost savings

These are the benefits a private-sector organization will generally see the second time it runs a reverse auction:

  • real-time market pricing

That’s right. The only additional benefit an average private-sector organization will see continue to see the second time it runs a reverse auction on a category is real-time market pricing. Why? Let’s take the suggested benefits one-by-one.

  • downward prices
    Generally speaking, the first time suppliers are invited to take part in a transparent winner-takes-the-contract auction in a market that favours the buyer, the suppliers will compete so aggressively that they will even jeopardize profit margins. As a result, the prices they offer will generally be unsustainable in the long term. That is why auctions started to fall out of favour with market leaders in the mid-noughts. While the first auctions returned amazing results, the subsequent increase in raw material costs as demand rose resulted in their initial bids being unsustainable. Thus, the suppliers had to raise prices just to stay in business (and as soon as the power shifted back to them, the suppliers increased their prices substantially to make up for the loss).
  • increased competition
    Generally speaking, suppliers get so competitive the first time with their pricing that there is little, if any room, left to increase competitiveness the second time around.
  • process efficiencies
    Once you have shifted to the reverse auction model, you have already gained the process efficiencies you’re going to gain. Reverse auctions don’t get more efficient over time.
  • time savings
    Since reverse auctions don’t really get more efficient over time, once you have switched to the model, there are no more time savings to be gained.
  • Increased number of suppliers
    While electronic reverse auctions do allow more suppliers to be invited to the table without too much extra work, if the auction is opened up, all suppliers that want your business are going to jump in. And, when they fail to win your business, some of them will even back out the next time around.
  • Sustainable Cost Savings
    Simply ensuring that the organization gets real-time market pricing does not lead to savings. In fact, if raw material prices or demand is going up, it can lead to significant losses. The way to sustained savings in the private sector is through negotiating long term cost-reductions, process-improvements, and innovation commitments that will find additional ways to drive down costs once the fat is taken out of the supplier margin. This often requires a decision optimization, PLM, or SPM solution to find these new savings opportunities.

In short, properly used, auctions can be good for the private sector, but the greatness will only bee seen in the public sector where, on the other hand, organizations will generally continue to see the significant benefits each time a reverse auction is run on a category. Our next post will address why.

Key Takeaways from the UL Product MindSet Study, Part II

A couple of posts ago, we discussed some Interesting Facts and Figures from the UL Product MindSet, a recently released study that quantitatively surveyed 1,195 manufacturers and 1,235 consumers across a range of export and import markets in high-tech, building materials, food, and household chemicals. Then, in our last post, we reviewed four key takeaways from the UL Product MindSet Study. Today we are going to discuss our fifth, and final, takeaway from the study.

MANUFACTURERS NEED TO GET A GRIP ON REALITY!

They need to take off those rose-coloured glasses, put them on the floor, and stomp them to bits. And then they need to take the bits and grind them into dust. The findings illustrate that manufacturers are so far out of touch with reality that it’s downright scary.

First of all, let’s review the standard Gaussian curve. In a standard curve, only 31.8% of the population is one standard deviation from the norm. If we accept that only one standard deviation from the norm is enough to be “ahead of the curve”, then, at most 15.9% of the population can be ahead of the curve (and, similarly, 15.9% of the manufacturers will be behind the curve). However, the report found that an extreme majority of manufacturers believed they were ahead of the curve in safety, reliability, sustainability, and innovation. In short, this means that:

  • 81.1% of manufacturers are out-to-lunch when it comes to product safety
  • 81.1% of manufacturers are day-dreaming when it comes to product reliability
  • 78.1% of manufacturers are high-on-fumes when it comes to sustainability
  • 73.1% of manufacturers don’t-have-a-clue when it comes to innovation

The reality for the majority of manufacturers (68.2%) is that, they are, at best, on the curve. But since the reality is that, if they don’t continue to progress as their supply chains evolve around them, it won’t be long before them are behind the curve, they should just assume they are behind the curve, because 15.9% of them are and 68.2% of them aren’t far from being among that 15.9% without continued improvement efforts. So when they are done grinding those rose-colored, haze-inducing, glasses into dust, they need to get to work!

Furthermore, I see no evidence that the majority of manufacturers understand sustainability. I know it’s hard with all the greenwashing out there, but if one just ignores the hype and uses a little common sense, one can define sustainability as that which sustains operations and the environment at the same time. With this definition, it is easy to see that if an organization is not reducing its environmental footprint and at least maintaining, if not increasing, profitability at the same time, it is not sustainable. So 69% of manufacturers are wrong when they say that environmental products aren’t profitable — because, defined (and designed) right, they are.

And those manufacturers who do understand some of the basics of sustainability obviously don’t understand it’s importance. First of all, it’s not just about sustaining the environment, its about sustaining operations for generations to come. If the resources available are depleted before they can be replenished, there’ll be no materials to make new products. No products, no profit. No profit, no business. It really is that simple. As a result, sustainability should be as important as safety and reliability, not only one-fifth as important. Secondly, with even the majority of consumers in developing countries (such as China where four-fifths of the population would buy a truly green product over a non-green product if proof of claims could be provided), an organization is leaving what is potentially the biggest gold-vein available to it untapped. And finally, if manufacturers as a whole don’t change their understanding and their views, then the lot of them are are being hypocritical! (It is impossible to be ahead of the curve in sustainability, as 94% of manufacturers ridiculously claim to be, while not placing the same importance on sustainability as is placed on safety and reliability.)

Yes this is harsh, but face it, manufacturers are not going to move forward if they continue to believe the all-rainbows-and-roses picture that some other misguided (or is that money-grubbing?) analysts are painting for them. But there is a bright side. Whereas a typical organization would probably pay five, or six, figures for that rainbows-and-roses report, this post is 100% free.
(So, to any manufacturer reading this, stop calling me a downer and get to work! If you do, maybe you’ll be one of the 15.9% that is truly ahead of the curve and reap the rewards that come from earning that status.)