Category Archives: Sourcing Innovation

A Quick Start to e-Sourcing

Having trouble getting approval for that brand new e-Sourcing system you want to buy? Even though you know the return is there, if your CFO has not yet seen the light, then you’ll need to start small and get some quick wins. How do you do that? Eric Strovink of BIQ has an answer.

The one eternal constant in the world is that nothing stays the same. That’s true of e-Sourcing as well. If you’re innovative, significant progress can often be made without much support at all. Sometimes all it takes is a few successes to get the attention of senior management.

What budget do I need?

It used to be the case that a huge budget was required to start using an e-sourcing solution. With modern, on-demand and desktop e-sourcing software, this is no longer the case. Spend analysis software can be leased inexpensively by the month, with no up-front commitment. e-RFx and e-Auction software can be purchased on a per-event basis, if you run the event yourself — and basic software is even free from WhyAbe, if your needs are (quite) modest. You can live without contract management software early on; and if you aren’t running a lot of projects, then project management isn’t an issue either.

Optimization software is typically expensive, but Excel-based model solvers are relatively inexpensive when purchased for single users. Although constraint support is extremely limited, you can partially work around this limitation by creating multiple “scenarios” with different subsets of suppliers and products. You might not get the best solution, but with some ingenuity, you can get a better solution than what you would produce otherwise.

You should be able to short term lease an analytics tool to build and analyze a spend cube for under $10K, run several one-off e-RFX or e-Auction events for about $10K as well, and, with a lot of elbow-grease, analyze the results with Excel and an Excel solver for under $5K. In other words, for less than $25K, you should be able to run a few small, primitive, e-Sourcing projects.

What resources do I need?

You will probably only need one dedicated resource to learn the above software well enough to use it. Both modern Spend Analysis and e-RFX/e-Auction software packages are very easy to learn and use. If you want to jump-start the process, vendors and/or third-party services organizations can step in to offer walk-along training. There’s no need to commit to huge blocks of time and money against a promise of amorphous results; instead, ask your services provider to train your resources in a phased manner, such that their resources disengage frequently and allow your team to do the time-intensive work (of which there will be a lot if you’re using e-Sourcing tools with limited functionality). The price tag can be under $10K for a jump-start on spend analysis, the e-RFX/e-Auction process, or model building and solution.

What should I do first?

Spend analysis, if it hasn’t already been done, is a real eye-opener for the rest of the company. Once you’ve built the first A/P level cube, you’ll find opportunities everywhere. Sometimes this is enough, alone, to get a commitment from senior management for the e-Sourcing software you so desire and more resources. (And sometimes you’ll have to do a few more analyses and sourcing projects to prove it’s not a one-time fluke.)

Another way to gain management’s attention is to load invoice level data (price/quantity data, or PxQ data) into the spend analysis system, instead of A/P transactions. For commodities like PC purchases, office supplies, and contingent labor, it’s almost always the case that there are peculiar outliers and charges that shouldn’t have been assessed. One consultancy estimates that 3-5% is there for the taking. The good news about invoice analysis is that the result isn’t some “promise” of future savings based on radical behavior change, but instead a refund check or credits. It’s awfully hard to ignore someone walking down the hall waving a check.

Furthermore, once you get that check, you’ll be able to use it to pay for that new system that will greatly increase your efficiency, and savings, and allow you to go from running a few projects (that could require an almost painful amount of time and effort because – where e-RFX, e-Auction, and optimization are concerned – you get what you pay for) to running a few dozen or more! And that’s when the real savings will begin.

The 10 Worst Innovation Mistakes In A Recession

Are we in a recession? Unknown. However, you do know whether or not you believe we are in one, and if you do believe we are in one, you’re likely to go overboard on belt-tightening and cost-cutting. That’s why I want to point out a great article that appeared on Business Week last month on the “10 Worst Innovation Mistakes In A Recession” because, if you make these mistakes, you will be creating a self-fulfilling prophecy.

  1. Fire Talent
    Talent is the single most important variable in innovation. And innovation is the single largest lever you have to increase productivity and decrease costs.
  2. Cut Back on Technology
    The rise of social networking and consumer power means that companies have to be part of a larger conversation with their customers. This requires technology. Furthermore, the best way to insure you are getting the best price is to tackle the right categories, as identified by spend analysis, with strategic sourcing decision optimization to make sure you are making the award with the lowest total cost of ownership. It’s also important to make sure that all of your invoices are submitted in an electronic format that can be automatically matched against contracted rates to make sure you are being overcharged. This requires leading-edge technology.
  3. Reduce Risk
    Innovation requires taking chances and dealing with failure. Although it’s important to control risk, trying to eliminate it entirely will just end up eliminating any chance for innovation at your company.
  4. Stop New Product Development
    This hurts companies when growth returns and they have fewer offerings in the marketplace to attract consumers. And with today’s rapid pace of technological change, you could even lose customers in a recession to a competitor who keeps innovating while you stand still.
  5. Replace a Growth-Oriented CEO with a Cost-Cutting CEO
    Most recessions only last two or three quarters and, these days, are relatively shallow. Penny-pinching CEOs don’t have the skills to grow when growth returns. Plus, a penny-pinching CEO is the most likely individual to fire your top talent.
  6. Retreat from Globalization
    Emerging markets are sources of new revenue, business models, and talent. And, like it or not, emerging economies like India and China are soon going to have more buyers for your product than the countries you’re currently selling to.
  7. Replace Innovation as Key Strategy
    … With Systems Management and Cost-Cutting. Once focus shifts away from innovation, it can be very hard to get the focus shifted back.
  8. Change Performance Metrics
    Shifting employee evaluations away from rewarding riskier new projects toward sustaining safer, older goals. This leads to risk-averse behavior and stifles innovation.
  9. Re-inforce Hierarchy over Collaboration
    A return to command-and-control management. This alienates creative-class employees, young Gen Y and X-ers, and stops the evolution of the corporation. In today’s world, companies that don’t evolve die – and they do it quickly. The average life-span of a Fortune 500 company is shrinking every year.
  10. Retreat into Moated Castles
    Cutting back on outside consultancies is seen as a quick way to save money. Yet, one of the key ways of introducing change into business culture is to bring in outside innovation and design consultants.

Remember that winners always emerge out of recessions and they always win on the basis of something new. If you don’t always have something new in your pocket, you’re not going to win. And if it is a recession, and you don’t have something brand spanking new to pull out of your pocket when the recession is over, you could literally be toast. Furthermore, even a recession provides growth opportunities. People still spend money. They still need to eat, maintain their homes, and their life-styles. The difference is that they don’t spend as much money and look considerably harder for the best deal. This means that they’re much more likely to waver on brand loyalty if you can provide them a better product on a better price – and this means that you can still grow by taking market share away from your competition.

So don’t make the innovation mistakes. If it is a recession, then whether you come out of it a winner or a loser is up to you.

Furthermore, if it is a recession, and your company supplies sourcing and procurement technology and services, then this should be a major growth period for you! After all, how else is your average blind-in-one-eye company going to save money? This means that not only do you have to make sure that you don’t make any of the top 10 innovation mistakes, but that you invest for a growth period because, if you play your cards right, it will be. (And if you need a little help, remember what the doctor does.)

the doctor Wants to Remind You It’s Sourcing AND Procurement

I’m reminding you of this because it appears that there are still some vendors out there that would have you believe it’s e-Sourcing or e-Procurement, or some fractured combination of both – because that’s what they have and they want all of your business.

e-Procurement and e-Sourcing are not the same thing. They’re too halves of a whole, one tactical and one strategic. Alone they bring value, but combined they bring much greater value. The best way to see this is with a picture. (Click on the image below to enlarge it.)

As you can see from the image, sourcing leads into procurement, usually off of a contract, and procurement leads into sourcing, through the analysis step. Without procurement, the organization wouldn’t have a large transaction database and extensive visibility into spend, the key to a successful spend analysis effort, which is the first phase of e-Sourcing. And without sourcing, there would be no strategically negotiated contracts to buy against, and procurement managers would be spending willy nilly, making the current level of maverick spending that you have to deal with pale in comparison.

Furthermore, as you can see from the picture, e-Sourcing is more than just e-Auction and Contract Management (even though they are the solutions offered by the largest number of providers), and e-Procurement is more than just order management, invoice management, and e-Payment. Each step is important, and the most important steps, particularly from a savings perspective, are the steps that most solution providers don’t have solutions for – true spend analysis (not static reporting on a data warehouse), decision optimization (not monte-carlo simulation – leave that to the casinos), reconciliation (since the only way you realize the negotiated savings is to make sure you’re paying what you’re supposed to, and not paying for anything you didn’t actually receive), and, in global trade, tax reclamation (Global Data Mining hasn’t found billions of dollars in savings for their customers because they got lucky).

After all, even though these are crude, inefficient, poor man’s solutions, you could, if you were brave (or is that masochistic) enough, you could use office documents and e-mail to achieve core RFX functionality, you could do basic contract management with an open source content management system (or an Access data base and a college programmer if you were really daring), hold your auctions using a conference call service, manage your purchase orders and invoices with a basic accounting system, and pay with P-cards.

Now, as I pointed out last week in the doctor would like to remind you the one system solution is still a pipe dream, you’re not going to get all of this from one vendor, and that’s okay. The key is to assemble a complete solution that meets your needs, subject to your process and goals. And, as I have previously pointed out, as long as you adopt platforms that use common architectures and standard protocols for data interchange, it’s not too hard to build a complete end-to-end solution that will generate the value you want – as it’s there for the taking.

Innovation Metrics for the Chief Executive, Part II

Yesterday’s post discussed “Measuring the Black Box”, a recent article in Chief Executive that made some very good points about innovation metrics. In particular, we discussed the major measurement traps that a company needs to watch out for and indicated that many of the metrics suggested by the author in the input, process, and output categories were quite good. Today we’re going to review and discuss each the suggestions, the good and not-so-good alike.

Input Related Metrics

  • Financial Resources Dedicated to Innovation
    Good. Innovation requires a constant, moderate, financial commitment.
  • Resources Focused on Innovation
    Good. Innovation requires dedicated staffing commitments. It doesn’t happen without people, and expecting them to be innovative in that five minutes of unscheduled time they have a day isn’t going to cut it.
  • Ring-fenced resources for non-core innovation
    Really Good. Establish a small, core group whose sole focus is on long-term innovation and who are constantly evaluating new technologies, markets, and ways the company can bring significant game changing innovations to existing markets. Make sure this group never gets cut, even in bad times – when you need them most.
  • Senior Management Time Invested in New Growth Innovation
    OK. What’s really important is senior management support. Sometimes a manager just needs to stay out of the way, and, more importantly, keep the other managers out of the way of the innovators so that they can be free to innovate. After all, even if you’re smart enough to get it, when you consider that there are still those that will promote someone to his or her level of incompetence, sometimes the best thing you can do is run interference.
  • Number of Patents Filed
    Neutral, at best. Patents are useless unless you can afford to legally defend them, and if we’re talking a software or business process patent, just because some dumb clerk accepted the application, doesn’t mean the fundamentals of what was in the patent was actually patentable. After all, mathematics is not patentable, algorithms are fundamentally mathematical and logical operations, almost all software is built using languages and data structures that have been in the public domain since the beginning, and just about every process you can think of has been used by business for a long time. (Auctions go back 2000 years, for example.) Furthermore, it takes a lot of time, money, and resources to file and get a patent – resources which could be better spent on innovation. And, more importantly, if you don’t make the details public – it’s trade secret, and you can still sue for IP theft if you really want to be litigious.

Process and Oversight Related Metrics

  • Process speed
    OK. Although an ideal innovation process moves quickly from conception to critical decision points (which could be a decision to kill it), not all do.
  • Breadth of idea-generation process
    Good. A good innovation generation process seeks ideas far and wide. It requires the meeting of the minds that can think broad and deep.
  • Innovation portfolio balances
    Good. Projects should range in length from short to long term, be at various development stages, vary in risk, target different domains, and so on. That way, you don’t have all your eggs in one basket and your chances of success are magnified.
  • Growth Gap
    Really Good. A company should understand the gaps between their strategic objectives and current innovation activities, because, if there is one, someone needs to get on the right track.
  • Distinct processes, tools, and metrics for different types of opportunities
    Really Good. There is no one-size fits all when it comes to innovation.

Output Related Metrics

  • Number of new products or services launched
    Good. This is a clear indication of success, but remember it’s not always the number of successes, but the magnitude. One single invention, the iPod, put Apple back on the map. A few big successes can be just as good as a dozen little ones.
  • Percent of revenues in core categories from new products
    OK. It’s nice when innovation helps the core business, but, as pointed out above, sometimes you need to change the core business.
  • Percent of profits from new customers
    Good. A decent percentage indicates that innovation is helping the business expand.
  • Percent of profits from new categories
    Really Good. A decent percentage indicates that innovation is working at your company.
  • Return on Innovation Investment
    Good. Demonstrates that innovation dollars are worthwhile!

The author concluded with a process for implementation, that made some good points. They were:

  1. Focus, Focus, Focus
    Figure out the metrics that are right for you.
  2. Remember Relativity
    It’s not how well you do on each metric, but how well you are doing overall, and in relation to your competition in particular. (Don’t forget the benchmarks!)
  3. Innovate the Metrics
    Understand that you might not get the metrics right the first time. Be prepared to adjust them as needed.
  4. Align up and down the chain
    The metrics should be aligned with the corporate metrics if at all possible. This paints a picture everyone can understand.

Again, not a bad article, especially considering the target audience.

Innovation Metrics for the Chief Executive

Chief Executive recently posted an article on “Measuring the Black Box” that had some decent advice on the design and implementation of innovation metrics, especially considering the intended audience. In the article, the author noted that the challenge for companies seeking to improve their ability to create growth through innovation is that the metrics they use to measure innovation come with a high risk of actually leading them down the wrong path.

The author noted that managers hoping to unleash the innovative potential of the firm need to be mindful of the critical measurement traps, and that if they really need metrics, that they should think about creating a widespread set of metrics. (It also said they should ensure their executive dashboard constantly matters the innovation metrics that matter most – but I have to take serious exception about the use of dysfunctional dashboards. It’s true that executives should monitor the metrics regularly, but I think a better idea would be to, I don’t know, actually talk to the underlings.) The author then outlined three of the major measurement traps, and this was the part of the article that the doctor liked.

Measurement Traps

  • Too short a list of metrics
    The nature of innovation is that there isn’t one – or even one hundred – metrics that can capture is. (After all, if you knew how to measure it, you’d already know what it was.) Many companies often focus on a single innovation metric – such as the annual rate of return on their innovation activities. Although this is a useful historic metric, it can lead companies to inadvertently prioritize easily measurable markets over difficult-to-measure ones or short-term projects over longer term ones, when, in fact, the difficult-to-measure market, emerging market, or the idea that’s five years ahead of its time could be the one that really skyrockets the company from obscurity to the top of the Fortune 500.
  • Encouraging sustaining behavior
    Many metrics implicitly – or explicitly – encourage companies to focus on close-to-the-core sustaining innovations that promise incremental returns at best. Although they might be good, they will prevent substantial growth. And considering that Bain & Co. have found that the average business life-span is now a mere 14 years and that only one third of the Fortune 500 will get through the next decade unscathed, sustaining behavior is just not sustainable any more.
  • Focussing on inputs over outputs
    A company that tracks only input related metrics runs the risk of having resources (and scientific ones in particular) working on interesting but, ultimately, low impact projects.
    Consider the 2006 study referenced by the author that highlighted companies with the largest R&D budgets, where the leader was Ford. I’m sorry, but if they were truly innovative, they would be doing a heck of a lot better than they are. Innovation isn’t about how much money you throw at the problem, it’s about what you get in return. And that, I’m afraid, requires not only giving your people the time and resources they need to be innovative, but the freedom to be innovative.

The author then presents a balanced set of input-related, process-related, and output-related metrics for those that feel the need to constantly measure the company’s innovation-related activities, inspired by the Boston Consulting Group’s suggestion that the metrics must be balanced. Some of the metrics presented are good, some of them, not so good. Thus, in our next post, we will review each of the metrics suggested and briefly discuss their relative worth.