Category Archives: rants

Are You Measuring the Right Stuff?

It’s a simple question. Are you?

I’ll give you 4:1 odds that you’re not. Why? It’s hard to know what the right stuff is, and, these days, there seems to be an overwhelming focus on quantity, and not quality, and savings, and not value.

For example, if we’re talking about e-Procurement, many organizations measure the number or percentage of invoices processed through the system. (As many of the “leading” analyst firms report that as a good measure.) Sounds good, but since the 80/20 rule is just as applicable here as anywhere else, the reality is that 20% of your invoices take up 80% of your time (due to number of line items, number of amounts that need to be checked, number of errors that need to be fixed, etc.) and 20% of your invoices represent 80% of your spend. If those invoices are not being put through the system, then it hasn’t really reduced your processing costs all that much as the most significant cost associated with PO processing is the cost of the personnel doing the processing. What you need to be measuring is the % reduction in human interaction time. If a new system only reduces human involvement by 20%, it’s not working. Sorry.

If you’re measuring year-over-year savings, you’re not measuring the right thing. If your price went down 10%, but the market price of the raw materials dropped 20%, did you do a good job? No. And if your price went up 5% while market indices went up 15%, you did a bang-up job. You have to measure performance against market average, otherwise, you don’t know how good you’re really doing.

It’s like Charles said in his recent post, “you’ll always think you [are] do[ing] a great job (until you benchmark)”. It doesn’t matter if you beat your performance goals by 50% if you’re still coming in 24th (out of 25). If you truly want to win, you have to be leading the pack, not trailing it, and for that you have to be measuring in a manner that will allow you to benchmark against the competition. (And not necessarily what the “analysts” tell you to measure.) So, are you measuring the right stuff?

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Sunk Costs ARE NOT Underwater Treasure

You’d think it would be painfully obvious that dollars sunk into historical IT investments have nothing in common with chests of Spanish Doubloons on lost underwater wrecks, but given the tendency for most organizations to hang onto their archaic IT systems, one has to wonder. Really, really wonder. Especially when many organizations are still drowning in red ink.

It’s not how much you spent on a system, it’s how much value it’s generating now. Maybe it was worth 1M a year and 2M in integration costs five years ago when it enabled you to streamline operations and shave 5M in the first 2 years, but if you’re still spending a million and not saving a single cent, then it doesn’t matter that you spent 7M — what matters is that you are spending 1M a year with nothing to show for it! Enterprise software prices have dropped considerably over the past decade while functionality has increased exponentially. Today, that Million will get you an end to end e-Sourcing AND e-Procurement suite with some professional spend analysis and category services thrown in (and then some) — a solution that could easily save you millions.

When evaluating your technology solutions, past expenditures should never enter the picture. Only current expenditures should be considered, and only in the ROI calculation. That’s all that matters — the expected return on the current solution vs. the expected return on a new solution. If a new solution has an expected ROI that is greater than the current solution (factoring conversion costs into account and amortizing them over the expected utilization period, which should never be more than a few years), you switch. It’s that simple.

And until you realize this, you’re never going to get the true analytics solutions you need to really cut costs. Remember, as I’ve been saying for years, Business Intelligence (BI) is not analytics. As echoed in this recent article on Analytics by Ritu Jain over in the Supply Chain Digest, a lot of users, industry analysts, and consultants have not fully grasped the difference between business intelligence (BI) and analytics. They continue to consider simplistic query and reporting and OLAP drill-down capabilities to be analytics, thus limiting themselves to traditional BI systems that provide simple alert, monitoring, and dashboard capabilities — and then use the erroneous sunk-cost argument to justify sticking with current systems that just don’t do the job.

And without these modern systems, the company will realize the cost savings potential of true analytical capabilities such as forecasting, data mining, predictive modeling and optimization [that] provide businesses with an understanding of why something is happening, when it can occur again, [and ] what will be the future impact of decisions, so that outcomes can be optimized. So bury your sunk costs in the history ledgers. That’s where they belong.

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You Don’t Put Up With This Crap When You’re Making a Major Purchase …

Let’s say you’re out to buy a new car, you know what you want, so you walk into the biggest dealership in the area, walk up to a salesman, point out the vehicle, and say:

“I want that one!”.

At this point the salesperson says:

“Fine Choice: Top of the line. Powerful engine. No Fade Paint Job. Exceptional Performance. I can let you have this beauty for only 40,000”.

At this point you’re a bit taken aback, because you thought the MSRP was 30,000 and you also thought there was a manufacturer’s rebate for 5,000 as part of the year end clear-out. So you go down the street to the next biggest dealership, walk up to a salesman, point out the same vehicle, and say:

“I want that one!”.

The new salesperson says:

“Excellent Choice. Solid vehicle. V6 engine. High quality paint job. Great performance. I can sell it for 35,000 and throw in service for three years.”

So you say to yourself that sounds about right, maybe the first person was confused about what car, model, and features I wanted and you decide to go back to the first dealership because you know they are bigger, move more inventory, and are more likely to be able to offer the best price. You walk up to the salesperson and say

“I just visited the dealership down the street and they said I could have that car for only 35,000.”

At this point, the first salesperson says:

“Oh, that car! Sorry, I misunderstood. I can let you have that car for only 20,000.”

At this point you say to yourself what the heck is going on here? You know that the automotive market is very competitive now. No one quotes a price above MSRP and no one drops the price, even on a luxury car, more than 20% anymore as the fierce competition for limited market share combined with the price transparency of the internet age has taken the vast majority of margin out of car sales. So if the sales person is dropping the price 50%, you know you’re buying a piece of junk that will be back in the shop every other month running up repair bills that will quickly exceed the purchase price of the car. So you get out of there as fast as you can and cut a deal with the second dealership for 27,000 after a fair round of negotiations.

In other words:

You Don’t Put Up With This Crap When You’re Making a Major Purchase …

So Why Do You Put Up With It When You’re Buying Your Enterprise Software?

It seems that not a week goes by where I don’t hear a vendor complaining about how a (certain) other vendor dropped their price by 50% or more at the last minute to steal the deal. You’re probably saying “what’s the problem with that, the customer negotiated a great deal, right”? Wrong! In many of these cases, the (certain) vendor in question literally bends the customer over the table, sticks a vacuum cleaner in their backside, and sucks out every dollar the customer has in one-time “implementation fees”, “support fees”, and “upgrade fees” as the initial quote didn’t include the “enterprise” version, didn’t include “training”, didn’t include (24/7) support, and didn’t include implementation costs, etc. (while the other vendor’s quote included all this at a price that, in the long run, would have been multiples less than the “best price”).

In other words, the next time a vendor suddenly drops their price by a ridiculous amount, tell them to take a hike — before they cut the bottoms out of all of your pockets with the knife they used to “slash” their price.

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I’m Glad I’m Not a Pundit!

It seems that all the pundits in this space are doing these days are bashing other pundits about missing the point while missing the point themselves. Case in point: Jon Hansen’s recent bashing of Jason Busch*5 (of Spend Matters) over on Procurement Insights where he accused him of remodeling the city while Rome burns. (Followed by another bashing on how the industry he represents has lost its objectivity through familiarity.)

According to Jon, Jason should be more focussed on OECM punting Ariba and taking a 20M hit in the process and what the implications therein are, or that Ariba lost 3B on 1B worth of sales between 2001 and 2005 while suffering a number of implementation failures, then on ways to restructure Ariba for better performance*2, and because Jason’s not, according to Jon, Jason’s missing the point. Well, the first story is important, but until we get the full picture, which could take months, as we don’t know how much of the blame rests with Ariba and how much lies with OECM. (Remember the i2-Nike fiasco? While Nike tried to place all the blame on i2, it was as much their fault as i2’s. First of all, if you’re going to buy predictive modeling software, you should understand the limitations of what you are buying and the requirements of proper use!) And, in the internet age, the second story is ancient history … what’s more important is how they have been performing since then.

Don’t get me wrong — I’m not defending Ariba*1, just pointing out that there are three sides to every story and until we get all three sides (OECM’s, Ariba’s, and the truth), I don’t think it makes sense to start conjecturing on whose fault it is or (as Jon seems to imply) what Ariba did wrong. Let’s face it, this isn’t the first big IT failure, and since most organizations don’t really understand IT and won’t pay for that understanding (and, thus, can’t tell the difference between a proposal that illustrates the company knows what it is doing and a proposal that illustrates that the company is run, and staffed, by a bunch of baboons), it won’t be the last.

The real “big picture” is focussing not on the news story of the day (which, according to his post, he apparently does in all six of his blogs), but on educating the public so they don’t make the same mistakes. That’s why I don’t run stories on the latest deal/customer of Company X (irrelevant), the latest prediction of Research Firm Y (which may or may not materialize), or the latest headline in the WSJ (as most print publications are getting more sensationalistic by the day trying to maintain readership and forgetting what true journalism is really about). This blog is, and will stay, about education. That’s the “big picture”. (And that’s also why less is more! I could publish six posts a day if I wanted to, but if I overloaded you with information-free gibberish, what would you learn*4? You can’t drink from the fire-hose!)

Now I’m sure I’ll be the subject of his next rant*3, but I don’t care. I only care about what fellow supply chain bloggers think, not what media-hungry Bill Mahers think (whose rants don’t always make sense to me), focussed on the most sensationalistic stories they can find, have to say.

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*1It’s fairly well known I’m not their biggest fan, but I do try to be fair, and my history of vendor reviews speaks for itself.

*2 Given that Ariba was involved in a major failure, it’s now critically important that the focus is on finding a fix before it happens again as opposed to beating the issue to death.

*3 It wouldn’t be the first time.

*4 And would there be anything new in those? All you can really do at that speed is repackage existing news stories and content as you would be leaving yourself no time to think.

*5 I’m not defending Jason (as he can defend himself), just using his most recent bashing as an example of the absurdity of the situation.

Sometimes the Cantankerous Supplier is Right!

Even if they are too late with respect to demonstrating their correctness.

But let’s back up. Recently, on the Purchasing Certification Blog, Charles penned a great post on “the real reason buyers don’t want to give suppliers feedback”, which, in his words, were

BECAUSE WE DON’T WANT TO PUT UP WITH THIS CRAP!

where the crap in question was the salesperson effectively saying, with their incessant badgering that no other company can produce the same product of the same quality at the same price with the same service, that you are stupid. You don’t know how to make a good decision and you don’t know how to evaluate prospective suppliers.

As Charles’ points out, it happens all too often, and most of the time, the supplier is full of crap. But sometimes the supplier isn’t — and this is often true in custom manufacturing and services. I see it in IT all the time. The buyer doesn’t really understand what’s involved in building or customizing a piece of enterprise software or system and goes with one of the low bids and ends up getting a stinking pile of crap that not only costs 50% more due to project and budget overruns, but is delivered full of bugs, doesn’t include 20% of the originally specified functionality, and takes three times as much manpower to support as it should. In the end, by the time all of the extra service and support costs are factored in, it costs three times as much as the high bid from the one firm that really understood what it was doing. The same is true in custom manufacturing. There are some corners that can’t be cut, and accepting a bid that does so leads to long term cost ramifications.

However, the supplier should still back off once the buyer has made an award decision, even if it is the wrong one. Because it is not the buyer who made the stupid decision, but the supplier. If the supplier truly had a better product of a better quality at a better price and service level, then the supplier should have taken the time to provide the buyer with the education she needed to understand that when the supplier had the opportunity. Instead of chest thumping about how great they are and how they are so much better than the competition, the supplier shouldn’t have even tried to sell at all. They should have said “we know we can meet your needs better than any of our competitors, but that’s not important. What’s important is that you understand why we can do that. For you to truly understand how we are better, you need to understand what the major drivers of cost, quality, and service are around this product. So we’re going to help you with that.” And if they truly were the best solution, then the buyer should be able to see that and choose them. (And if they truly were the best solution and the buyer didn’t see it, is that a buyer the supplier really wants to be working with?)

And regardless of whether or not the supplier has the best solution or not, once the buyer makes her decision, the supplier has to back off, and this is the only appropriate response from the supplier.

“We’re very sorry to hear that you chose someone else. We still believe we could provide you the best overall value with respect to your needs and would appreciate the opportunity to try again at the appropriate time. Could you let us know when you expect to be going out to market again for this product so we can contact you again at the appropriate time to request the RFP? Also, if your chosen supplier proves unable to meet all of your needs, please feel free to reach out to us at any time. Thank you again for the opportunity and we hope to have another opportunity to compete for your business again in the future.”

Anything more and the buyer has every right to blacklist the supplier.

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