Category Archives: Sourcing Innovation

The Sourcing Innovation Series: Part XI

Today I’d like to welcome guest contributor John Martin of Building SaaS to Sourcing Innovation with a guest post on The Future of Sourcing … for Services. If you followed the On-Demand series, you might remember that I discussed his article “How True Software-as-a-service Delivers More Value” extensively in the fourth installment of my On Demand series.

Our focus is on purchased services: consulting services, contingent labor, outsourcing services, field services, legal services, etc. What we’ve found, in providing our Services Procurement solution to dozens of Fortune 500 companies, is that companies gain the best results by managing the entire end-to-end lifecycle of purchased services.

The primary characteristic of service categories is that they are all different. However, I’ll mention a few commonalities about managing purchased services, then suggest a few ways we’re seeing our leading-edge customers manage and optimize services spending.

First, here are some generalized characteristics about purchased services:

Services spending is growing: With the increases in business process outsourcing and focus on core competencies, services spending is increasing twice as fast as that on indirect goods spending, according to CAPS Research. Economically, the prices of services are also inherently inflationary since they are closely tied to labor costs, which increase over time faster than goods costs, on average – the Federal Bank of New York’s analysis shows that services’ inflation rate has stayed consistently 2.6% over that of goods over the last three decades.

Core PCE Goods and Core PCE Services Inflation 1968:1-2002:4

Services spending is often difficult to manage centrally: For some services categories such as marketing services and legal services, functional executives “own” the supplier relationships and spending. For others such as contingent workers and facilities management services, the sourcing and purchasing activities are dispersed throughout the enterprise.

There can be many unknowns at sourcing time: Some services such as contingent workers and print services have unique requisitions every time, so up-front pricing is difficult to establish. In other cases, the needs of the enterprise change more quickly than anticipated at sourcing time, which has led many multi-year outsourcing engagements to fail.

Services spending involves a lot of uniqueness: every contract is unique with terms in the statement of work text, requisitions are often unique, services deliverables are different for every contract, and the quality and acceptance measures differ by category, contract, and deliverable.

“Value delivered” is often a key concept for purchased services: When a services provider touches your customers directly (such as call-center outsourcing or field installation services) or can positively impact your business results (IT application development services, marketing services), the potential value of those services becomes a multi-dimensional concept (including multiple flavors of “quality”) to continuously measure and improve.

Finally, services involve many additional risks: When a supplier’s workers come onsite to deliver the services, now there are risks to manage regarding security, safety, confidentiality, etc. For contingent workers, there are HR-related risks such as co-employment and worker classification, as well as tracking the results of prior work performed by the worker.

As a result of these characteristics of purchased services, sourcing becomes an ongoing process rather than an event. For example, in some categories such as contingent workforce and print, the sourcing event creates the marketplace of preferred suppliers, and each requisition is sent out to the suppliers for bid – sourcing at procurement time. For almost all services categories, the delivery phase produces information that allows better sourcing and contract negotiating in the next sourcing phase.

After managing this iterative process for a few years, it’s almost impossible to continue to improve the cost basis of services through sourcing, at least since wage pricing started firming up a couple of years ago.

So we’re seeing companies turn to other ways to improve services sourcing, as hints to the future of sourcing. Extending Eric Strovink’s compliance comments and Tim Minahan’s “frontline sourcing” concept (explained over on Supply Excellence [WayBackMachine]), here are some trends that we see improving services sourcing going forward:

Link sourcing with procure-to-pay and spend analysis: Some would say that for services, contract execution and compliance are everything. The cost savings and value from contracted deliverables are on paper after sourcing, but are actually captured only through a tightly coupled procure-to-pay program. Then, spend analysis on the detailed requisition, deliverable and invoice activities allows improved re-sourcing the next time, in a cyclical sourcing-improvement process.

Actively use learning strategies throughout the cycle to improve sourcing: Since services have many unknowns at sourcing time, and much of the services value is determined during the delivery phase, companies are engineering their supplier relationships and processes to maximize learning. For example, multi-sourcing sets up a competition among service providers, and spending can be directed to the better-performing suppliers. Companies are starting to track every touch-point with a supplier, gathering qualitative information through surveys to gain much more insight into value and transaction costs. Service-level metrics are becoming much more detailed and continuously monitored (with direct data feeds from the services supplier) to gain insight into the supplier’s processes and capabilities that underlie their delivered quality and value.

Manage and shape demand: The demand drivers for many services are fragmented and hard to pin down – definitely not available in a production forecast. Since service prices tend to rise over time, it pays to focus on controlling costs through internal demand management, rather than just increasing pressure on suppliers each year. Demand for services is also malleable, as which tasks performed internally versus by the supplier can be changed if needed. Investigating internal demand drivers and supplier interaction processes can lead to ways to reduce time and costs by shifting activities to/from the supplier, redrawing the process boundaries, and eliminating non-value-add tasks performed by either party.

Build tighter linkages into suppliers’ systems: In the direct goods world, linking into the suppliers’ inventory, logistics, and production systems is a now-common practice. In services, however, this is much less prevalent. In addition to pulling service-level metrics from the supplier (such as call and incident tracking information for call-center outsourcers), companies are adding system integrations for requisitions, deliverables, and invoices to greatly reduce transaction costs and eliminate the “echo-chamber” interaction costs of haggling over invoices post-delivery. Going forward, there is emerging interest in linking into suppliers’ availability, skill capability, and project tracking systems to better optimize delivery processes, and a desire for better collaboration tools throughout the lifecycle of interactions with the supplier.

Invest more in supplier discovery and development: Most large companies have too many services supplier relationships, so supplier consolidation is the first effort. However, in order to keep up with the state-of-the-art in purchased services, we see a need to provide better tools for finding and starting up relationships with high-quality emerging services suppliers. Along the same lines, companies will need to more proactively develop niche and high-performing services suppliers in the upcoming years.

Thanks again to John Martin for this insightful post on The Future of Sourcing … Services.

The Sourcing Innovation Series: Part X

I know it’s been a few days, but as I said in my last post, it wasn’t over … just delayed a little while my fellow bloggers enjoyed the long weekend and collected their thoughts. Over the last couple of days, Charles Dominick posted “Sourcing Innovation for Enterprise-Wide Contracts” over on the Purchasing Certification Blog (now the NLPA blog), his second post on the future of sourcing, and Jason Busch posted “Evaluating Spend Visibility and Analytics Providers”* over on Spend Matters [WayBackMachine]. Now, I know Jason’s post wasn’t explicitly a post on the future of sourcing, but it is on spend management innovation, and the future of sourcing is all about innovation.

Charles pointed out that the sourcing world is ready to go to another level. In the not too-distant future, we’re going to look back at today’s supplier selection methodology and consider it archaic. Today we use TCO analyses or weighted average supplier scorecards, but these are problematic in that each internal customer or commodity team will not only value different criteria variably but assign different subjective values to the same qualitative criteria.

In the future, Charles expects speculative bickering to be replaced by the widespread watching of simulations of various scenarios associated with the various supplier selection opportunities. The sourcing team will see the risks and the impact on the buying organization if those risks come to fruition. I think Charles in on to something here. While I do not foresee simulation replacing decision optimization for award allocations, for reasons that I will discuss in an upcoming red paper from Iasta that I am co-authoring, it is a great technology for risk evaluation, identification, and mitigation as you can not only simulate the effect of a disruption but the effect of a risk mitigation strategy. This gives you a more comprehensive, tangible understanding of the factors that should influence your decision.

The net effect is that in the future a procurement professional will need to be even more skilled and educated then today as you will have to be smarter than the simulator, and understand what factors the simulation considers and know how to evaluate those factors to arrive at an optimal decision. According to Charles, some of the skills a purchaser will require in addition to their current skill set are:

  • Skills in quantitative analysis, with an understanding of statistical probabilities, decision trees, etc.
  • Knowledge of macro- and micro-economics
  • The analytical ability to quantify the total cost of the supplier relationship, not just the total cost of ownership

In addition, a procurement professional will need a better understanding of decision optimization, the underlying technologies, and where simulation ends and optimization begins. Not an easy task, but this is why procurement is going to become the center of tomorrow’s organization.

Jason focused on spend visibility, noted that your spend management approaches need to become more sophisticated, indicated that your solution providers need to focus on content integration, vision, and integration, and that in a few years time leading procurement organizations will think about spend visibility, supplier performance, and supplier risk management as a single implementation.

With respect to content integration, Jason states that auto-classification and cleansing tools will never be sufficient on their own, since examining the supplier master is just a start. You also need to be concerned with supplier credentialing, supplier financial viability, supplier quality, and operationally related information.

With respect to vision, your solution provider needs to have value beyond just one-time cost reduction category sourcing efforts, otherwise you should be looking at another solution provider because the true value of any spend or supply management solution is long term viability. At the very least, your provider should understand and offer solutions for long term supplier performance management and supply risk management.

The solution should be integrated into, or support strong integration with, a spend management suite and have strong ties into other systems of record and data stores since the notion of periodic batch-based approaches to spend visibility and analytics is no longer sufficient and the future will require near real-time updates to insure your supply chain continually functions like a well-oiled machine.

All-in-all, a great couple of days on sourcing innovation and the future of sourcing.

Can China be Innovative?

Reading the economist last month, I encountered a number of articles related to China, which is not unusual, but one was entitled Something new: Getting Serious About Innovation (membership required for full article). Considering most of us still equate China with the tail-end of Low Cost Country Sourcing, factories, and knock-offs, the two words seem to be a juxtaposition on first read.

According to the article “innovation” has become a national buzzword, and Chinese leaders have been tossing it into their speeches since the beginning of the year when President Hu Jintao started an ambitious campaign to drive China’s economy further up the value chain.

In launching their “National Medium- and Long-Term Programme for Scientific and Technological Development (2006-20)”, Mr Hu, the prime minister, Wen Jiabao, and other top officials have vowed to spend more on science and technology, and to insist on business reforms. Their goal is to move China beyond its dependence on natural resources and cheap labour, and stake its place among the economies that depend on education and information technology.

The following quote is also very interesting. According to Denis Simon of the State University of New York’s Levin Institute, who advises the Chinese government on science policy, this move comes just in time. “If China doesn’t do this right,” he says, “it risks becoming a good 20th-century industrial economy just when it needs to figure out how to be a 21st-century knowledge-based economy.” This sums up where I see China headed – it takes more than funding, stemming the “internal brain drain”, and a protection of intellectual property rights to build a knowledge-based economy. It takes a culture. The culture that North America was built on and a culture that’s been lacking in China for much of its history.

As the article points out, a huge obstacle is the nature of China’s educational system, which stresses conformity and does little to foster independent thinking. Confucian philosophy reveres the teacher above all. More innovative Western economies, according to Ms Fang, operate under Aristotle’s maxim: “I love my teacher Plato greatly, but I love truth more.” In order to be innovative, China has to foster innovation in the next generation. And that is going to mean fostering independent thinking inside and outside the cirriculum. After all, we are talking about a country with a very long history of imperial and communist rule … which has generated a very conformist culture. And it’s hard to innovate when you conform. I think it will be very interesting to see how this plays out over the next few years. I’m also interested in hearing what The Prophet has to say. In the days ahead, hopefully he’ll chime in.

The Sourcing Innovation Series: Part IX

I’ll have to say that when I started this series, I was going to be thrilled with a few posts and a lukewarm response … but WOW! The uptake has been phenomenal, and it’s not over yet … not by a longshot from what I can tell. It looks like you can expect at least one more guest post this week here on Sourcing Innovation, and maybe even a few posts on a couple of non-spend-and-supply-management specific blogs as well! And the benefit to you, the reader, is priceless – with so many great minds tackling the subject and sharing their views, you can’t help but get a better understanding of the space you’re in, where it is going, and where you need to go. Talk about having one heck of an edge over your web 1.0 technophobic friends! (Maybe we should sick Phil with his mighty spoon upon them! (Sorry Mr. Adams, I couldn’t resist!)

Anyway, back to the point. Charles Dominick’s post on “Sourcing Innovation for Single-Customer Contracts” over on the Purchasing Certification Blog (now the NLPA blog) and Kevin Brook’s post on The Future of Sourcing here on Sourcing Innovation were great!

Kevin got straight to the point – that innovation in sourcing will trend toward doing less rather than doing more. Even though future sourcing tools will contain advanced decision optimization, business process management, default sourcing strategies, next-generation templates, and a dozen technologies we haven’t thought of yet … they will be easier to use than the automatic four-wheeled vehicle you use to get to work everyday. A wheel, a shift, a gas, and a brake. They will let you focus on your job, and your customer, because great service is what makes a great company.

Charles doesn’t waste any time either in pointing out that he sees major changes in how non-traditional categories will be handled in the future. Specifically, he sees migration across a sourcing maturity model, meaning that sourcing of the categories will be handled differently and will require different skills. He then walks us through the sourcing maturity model from Totally Decentralized to Totally Centralized to Center Managed to Center Led where each level requires a different skill set and represents a different step in thinking about sourcing. I have to agree with Charles – although I believe that center led procurement is the way of the future (see my 3-part weekend series over at e-sourcing forum last month “An Introduction”, “A Center of Excellence”, and “Best Practices”), I see the need for a company to progress through the stages, since, as Charles states, If progression is done too fast, a company could jeopardize its competitive position for years. Before a center can lead sourcing, it has to be excellent at what it does. Before it can be excellent at what it does, it has to actually do it .. and bring all relevant purchasing functions into itself. Hence the progression. Note that this does not mean that your purchasing organization has to go through this progression globally, just that every category, and your non-traditional ones in particularly, need to go through this progression locally. Thus, while some of your key categories are center-led, some of your non-strategic low-cost categories might still be decentralized as you work your way through the process category-by-category. As Charles points out, organizations need to learn to walk before they learn to run, and a process will help them get there faster and prevent them from stumbling badly and hurting themselves along the way. ( [Shameless Plug Alert!] And if you need some help, in addition to being able to reach out to me, consulting organizations like the NLPA and Azul Partners [former parent company of Spend Matters] are always there to help! )

The Sourcing Innovation Series: Part VIII

Yesterday, Charles Dominick of NextLevelPurchasing (acquired by Certitrek and now the NLPA) jumped in with an initial post on “Sourcing Innovation for Single-Customer Contracts” on his “Purchasing Certification” Blog (now the NLPA blog) where he offered his insights on the affect of the forthcoming innovation on purchasing professionals and the skill sets required for the future. For more details on the post, and my thoughts on it, check back Sunday.

Today I’d like to welcome Kevin Brooks of Apexon (acquired and merged with Infostretch in 2022) who has been kind enough to provide us with his commentary on the Future of Sourcing. Note that Kevin was also kind enough to provide his insight on “Supplier Performance Management” in response to one of my weekend series over on e-Sourcing Forum [WayBackMachine].

My take on the topic is a bit more abstract. In particular, I suspect that innovation in sourcing will trend toward doing less rather than doing more.

When I look at other industries, I notice that innovation seems to move along a path that makes things easier and simpler for end users even if there is tremendous sophistication under the hood. (Microsoft Windows might be an exception to this rule!) I don’t need McKinsey slide decks to convince me that true strategic sourcing is complex, but the same thing could have once been said about any number of things that are now commonplace. Driving across the country. Getting a knee replacement. Online banking.

I suspect that the tools to enable sourcing will move toward simplifying a complex process, and put the capability in the hands of a much wider group. Sourcing will become a standard business skill set you’d expect from any decent business school graduate. At the same time, more of the responsibility for delivering against expectations will fall on the heads of suppliers themselves, or their proxies (as in the case of contract manufacturing or outsourcing).

Obviously, big strides need to be made in sourcing technology and in clearing the pesky master data management briar patch. And I’m sure there are a few innovative strategies yet to be discovered – Jason’s global capacity marketplace, for example — but they don’t affect the ultimate trend line. In the end, I suspect successful companies will tend to prioritize customer sales and service over internal operations or supply sophistication. Yes, the two are connected, but not in the eyes of most CEOs or even the customers themselves. The less time and effort a company puts into sourcing, the more they put into customers. Ergo, sourcing innovation will trend toward doing less, not more.

Thanks Kevin! I look forward to future guest posts from you!