For your convenience, here are links to the complete series, classic and modern:
There are Perks and Pitfalls of Friend-Shoring — But The Answer is Near-shoring!
On Tuesday, when we told you the tariff tax is coming and there’s nothing you can do about it, we told you the long-term solution is near-shoring, and while others will tell you that the short-term answer is friend-shoring, we want to make it clear that it is NOT.
As a result of recent logistics disruptions, geopolitics, and global disasters, and all of the supply disruptions that have resulted, a lot of global companies are starting to pull back on global outsourcing and extended supply chains, at least where they seem to have options.
Apparently a number of these organizations are considering Friendshoring, as per yet another article on the subject, with a recent example being the perks and pitfalls of friendshoring in EP&T.
According to this article this strategic shift is buzzing among industry leaders and policymakers. Why, I’m not sure.
The article has the following benefits right:
- enhanced security and trust as partners tend to trust each other and keep each other safe
- improved compliance and standards as friends generally work to serve the same markets and are more aware of the standards and regulatory requirements that need to be met for all to benefit
And has the following challenge mostly right:
- increased costs as most “friends” are in first world countries with higher labour costs, higher utility and operating costs, stricter environmental regulations, etc. etc. etc. so costs are generally a bit higher up front (at first)
But here’s what the article overlooks:
- better quality since these friends usually operate at higher standards with better tech which typically translates into
- more reliability and longevity which generally translates into
- reduced returns and warranty costs as customers will generally discard or move on from the product before it breaks
- higher sales prices as customers will pay more for quality
And here’s what the article really overlooks.
It’s NOT friendshoring, it’s nearshoring!
Preferably somewhere you can get to on land, or from a nearby port. For North America, that means we should primarily be outsourcing from Central America (since we can get our stuff on trucks if ocean freighter availability is low) and, if we can’t get it there, from South America — since we can get it from a ship that sails up and down the coast (and doesn’t have to pass through a canal that has limited capacity due to drought or is unsafe due to terrorist presence). NOT from China, unless it is a raw material we can’t get elsewhere.
The nearer the source, and the less countries and distance the materials or products have to pass through, the less chance for disruption.
Moreover, it’s NOT the friends you have, it’s the friends you need, which may not be one in the same.
For example, a company in the UK might be your “friend”, but the UK is expensive, crossing the Atlantic is expensive and risky at certain times of the year, and you might be able to invest in a supplier in Mexico to get the same product! Moreover, if you invest in a company to help them grow, they are much more likely to stay your friend than a company who is only your friend because they think you are locked in to them.
Plus, if you choose, and invest in, up and coming / new suppliers, you can help them with their processes, new technology selections and plant upgrades, and even sub-tier supplier and material selection. This can be more helpful to you than an established supplier locked into their ways and last-generation technology and production lines they paid too much for.
Some of your “friends” will be the right “friends”, some won’t. Analyze them all and make sure they fit all of your requirements: near, quality, reliability, and potential for future value creation. (Not just future cost reduction after you help them get efficient, but potential sales price increase, value added services, and other factors that might increase the overall profit equation. After all, Procurement is about increasing business value, not just about securing supply and controlling costs.)
Stay close to home, and even home-shore when you can, and you will see fewer disruptions, which should be your goal as supply disruption has been the biggest risk for at least the last 15 years.
Failures Are Starting. How Much do the “Great And Reputable Technological Network Engagement Review” Firms Have to Do With it?
As SI recently posted on LinkedIn, corporate failures are already starting! Two notable companies in the UK with great solutions and decent customer bases have filed for insolvency in a little over a month. We think they will both be rescued (this time), but if good companies with good solutions (where current / former leaders made just a few of the critical mistakes I chronicled in my dumb and dead series — which every company’s leadership SHOULD read, but none actually do as no one will admit they aren’t perfect anymore) are at risk of going out of business, what does this say for startups who raised too much money, created too little in terms of solution value, and have no significant customer revenue to get them through tough times?
(As you may recall, even though you were blinded by the hype, we tried to give you a distant early warning that there are too many tech failures and you need to do something about it before you end up the next casualty.)
Having talked to almost a hundred small companies over the past year, that group has included dozens which are struggling financially and over a half a dozen that spent large six figure amounts (which might be a small amount compared to the seven figures an enterprise client will spend, but which consists of the entire Marketing and Analyst Relations budget for sometimes two years for these companies), and most of those have admitted they have yet to see, or saw, ZERO return.
Imagine spending 100K to 200K, when that is your entire marketing budget, on a promises of leads over a one to two year period only to see ZERO when all is said and done, and, even worse, to have no reprint rights to the work you paid for when the contract ended, no access to the database of “registrants”, and no unique insights that your sales team can use. (Or, engage one of the Great And Reputable Technological Network Engagement Review firms and you won’t have to imagine!) Now imagine being almost out of money, struggling to make payroll, and not having enough in annual recurring revenues to maintain minimal staffing levels. Unfortunately, this is becoming too common (and we know one of the companies that filed for insolvency made a significant investment in one of these Great And Reputable Technological Network Engagement Review firms and saw little return).
Th reality is that unless you are a reasonably large vendor, offering an enterprise suite, with high six to seven figures available to spend with these firms to achieve preferred customer status, and guarantee a position in one of their maps, there is little value from just sponsoring some research, getting a write-up, and hoping for some leads from the very limited reprint rights you get. It’s typically not a good investment for a small company, especially one that doesn’t have the budget to lose.
Now, at the end of the day it is the company that chose to sign the contract, and the company that made the mistake, but if they entered the contract under false promises, should not some blame rest with these Great And Reputable Technological Network Engagement Review firms?
The Tariff Tax Is Coming – And There Ain’t Much You Can Do About It!
Since you have been ignoring the home-shoring/near-shoring that a few of us experts tried to warn you about almost a decade before the first of the predictable tragedies happened (with articles appearing in the late 2000s on the dangers of outsourcing and the advantages of near-shoring — here are 3 SI articles from 2009, 2011, and 2013), you will now have to pay the tariff tax.
(Note that we are now on the fourth predictable tragedy. The first was the COVID pandemic, which the WHO and WEF were warning us about for a good decade [even though they didn’t know what the pandemic would be, they knew a pandemic was inevitable]. The second was geo-political conflicts and sanctions that cut off entire markets. The third was the double whammy of Panamanian droughts and Houthis in the Red Sea, cutting off the fast shipping lanes and forcing a return to routes around the Capes. Now we have tariffs, a predictable result of home-first economic policies that always return in times of tense geo-political climates … and especially in countries run by leaders who believe they have autocratic power, even if they aren’t supposed to.)
So now you will get hit by tariffs. No ands, ifs, or buts about it. And there is nothing you can do to prevent it. Why?
- Tariffs are going to be applied across the board. Thus, changing locations isn’t going to prevent them, just minimize them.
- In most countries, tariffs on products don’t change weekly. But sales can based on the perceived economic situation, so stocking up on inventory can increase inventory costs beyond expectations as well as logistics costs if you have to expedite shipping.
- Locations with cheaper tariffs without supporting supply chain networks will actually cost more, especially if the average competency of the workforce is lower than other locations.
- Proclamations are not actualizations. Actual tariffs could be more or less. You could switch from a location expected to see tariff increases to one that sees even more tariff increases.
If you want to protect from tariffs, which are likely only going to get worse as time goes on, there is only one option — re-shore as close as you can! You want to be as close to home as you can to not only protect against tariffs, but to minimize other costs and risks. Logistics risks, and costs, are less. Re-supply times are less. Risk response is faster. And new development and innovation is easier.
So even though costs will increase in the short-term — as you build/upgrade/refine factories and production lines, retrain workforces, build new supply lines, design new distribution chains, and so on. Especially when you re-shore to a location with higher energy or workforce costs. However, over time, the workforce will become more skilled and productive, automation will improve, and supply and distribution lines will optimize. Costs will go down, and they will be more stable than costs half a world away you have no control over.
The key is figuring out what you should re-shore and what you shouldn’t. You should only re-shore what you can do cost-competitively unless you are certain you would lose access to supply otherwise. While the end goal should be that you only outsource for what you can’t get near, or at, home, the reality is that you have to stay in business, and that means staying competitive. So, at least in the short-term, you have to pick-and-choose. So how do you do that?
What-if cost modelling, optimization, and predictive analytics. You need to accurately model the costs associated with pulling acquisition and production back over time. First production batch, 6 months, 1 year, 2 years, etc. Plot the costs over time and if the trend indicates the costs will match the outsourcing/offshoring costs within a few years, you go for it. These costs will require predicting all the component costs with predictive trend analytics, building detailed cost models, and optimizing them against all the different options. A lot of modelling, calculation, and what-if. But if you have the right advanced sourcing platform it can be done. (Although you will need to reach out to platform and modelling experts to figure out how.)
In the interim, for those of you panicking in the USA, just remember that some of the proposed tariffs is just posturing to force American allies to give into other US demands (more defence/border spending, less tariffs for US products). Others are promises to take revenge on countries that didn’t play nice or line certain pockets the last time the administration was in charge, unless those countries do exactly what is asked this time around. Thus, you don’t know exactly what will happen, all you know is that, since not everyone will meet the demands, more tariffs are coming. (And even if the worst don’t come now, who knows what the administration in four years will bring. Tariffs are coming!) That means you can’t select alternative locations ahead of time, or predict when to pre-buy. Moreover, you can only hold so much inventory, and can only get so much here so fast, so pre-buying wouldn’t help much anyway, if it helped at all.
The only sure fire way to minimize tariffs over time is to start re-shoring what you can relatively cost-effectively, as that will protect you no matter what, and even though it will take time, it will payoff in the long run. (And again, to be blunt, you should have started this fifteen years ago when Sourcing Innovation first started echoing the warnings of the inevitable disruptions that were going to come from too much off-shoring if a significant event happened, and now that we have had multiple — COVID, “special military operations” and sanctions, logistics challenges in Panama and the Red Sea, and now anti-trade policies in many countries — it’s time to act before even more disruptive events happen).
We Want to Be a Smart Company — Is That It? Part II
We’ve read the dumb company: avoiding the fork in the road articles, dead company walking: avoiding the graveyard articles, the two installments of “we want to be a smart company”, and we truly want to be a smart company, and we are taking the mistakes, and advice, to heart. Is there anything else we can do?
As per Part I, there’s always more you can do! However, there’s not much left to talk about that’s true across the board for all software companies. That being said, we are giving you ten final pieces of advice that just may help if money is tight, leads are few, and sales are hard. Yesterday, we gave you the first five. Today, give you the final five.
06. Stagger the Billing on Suites and Seats
If it will take 9 months for the multi-module suite, don’t charge the annual license fee for the whole suite until all of the modules are fully implemented and in use. Stagger the fee based on the functional modules the user will have each month. The same goes if you are selling on seats. If there is an additional fee per seat, or the pricing is based on blocks, don’t charge for all the users up front who will eventually use it when most won’t until month 7.
Remember that your solution is going to cost the company mid to high six or seven figures once all of the direct and indirect costs are factored in, a cost that won’t be returned right away, especially if you are selling a (mini)suite. This means that even though your price tag might be worth it, it’s a hard price tag to swallow for a customer who won’t get the full use out of it for almost a year, and, thus, a hard sell.
However, if they only pay for functionality as they get it, and will start to see value before the next fee hike, that bitter pill is a lot easier to swallow, and while it might mean less money up front for you, a happy customer always means more money on the back end, especially at renewal time — which will always happen as long as they remain happy.
07. Ditch the Office & WeWork … Get Creative
If you have an expensive office, can you ditch it? Covid proved that you don’t need to work 9-5 in the same space everyday to be productive. As long as people have a space they can come together to meet when they need to, or want to, that’s more than enough.
Also, if you have a dedicated WeWork-like space, that’s not getting used daily, do you need it? If you only have it so your employees can meet one day a week, and that’s all they use it, why do you need a high cost space? (And while these spaces are cheaper than dedicated offices, they are still pricey, especially if they are not used daily.)
Local hotels with empty meeting rooms during the week will give you a good deal if you buy food. If you’re bringing people in quarterly for a meeting, they’ll give you the meeting room for free if you fill a room block, and give you a good price on that block if you have breakfast and lunch at the hotel.
And if you’re small, get more creative. Some restaurants and pubs have private function rooms that sit empty most of the day, or all day if there are no private after work functions on a weekday. They are super cheap, especially if you eat there. Some will give you a contract for, say, every Thursday for a quarter or year! the doctor knows a company in London that has no dedicated space except for a room in a pub connected to a tube station that they use weekly. Costs them next to nothing (as they’d buy their employees food anyway when they are asked to come into London) and the location ensures that if the employees stay for a few drinks, they can safely tube home. (Now, this won’t work for every company if they are in “dry counties” or have a lot of employees that don’t drink, but you get the point that creativity can save a lot of money.)
08. Compete on Service
This is not said enough. Customers don’t want software. No one every wants software. Absolutely positively f6ck1ng no one wants software! They want solutions, and, more specifically, solutions that help them do their jobs more efficiently and effectively and come with the support they need to learn the solutions and learn them to the best of their ability.
And before you say “but everybody in business buys software”, let the doctor stop you right there. They buy it because they need it. They don’t buy it because they want it. Have you ever heard your buddy Joe say “hey, I can’t wait for the new version of AccAtack25 so I can get started on my taxes for next year“. Or hear Jesse say “I really need a new glitzy word processor to accompany the 6 others I don’t use for the screenplay that I’m thinking about but not actually writing“. Or Carl say “I want the new version of Excel so I can write even more convoluted, and pointless, macros for my financial analysis to appease my boss“. You haven’t. Because no one wants business software. They want tools to do their jobs, which is why you can’t sell software like consumer entertainment apps (video games). Business software is not fun, and, thus, no one wants it.
So once you’ve made the solution as usable as it is, compete on service. That will make a huge difference.
09. Think Sponsorships — Esp. Educational Ones
As per our last instalment, customers need education and want vendors who educate them. Those vendors always win in the end. If you don’t have the time, experience, or in-depth knowledge to do so, sponsor independent authorities (blogs that aren’t going anywhere*, educationally oriented consultancies, independent analysts and/or small firms) and associations that do and they will focus on educating your audience on what your audience needs to know to understand what your solution does and why your audience needs your solution when they talk to you.
Don’t underestimate the value that a potential customer places on education. The only thing that can come close to equalling that value is the right service level, which will be dependent on, and deliver, education.
10. Get Help Where You’re Lacking
We can’t say this enough. Stop pretending you can do it all, that you can figure it out once the mistake is pointed out to you, or that you can find a new full time resource (when you look at the cost of the part time consultant) that can wear six different hats and accomplish the same goals in a short amount of time. You can’t. Focus on the niche consultancies and the true experts and you will find that consultants are cheap relative to the value they bring.
11. Bonus: Fire the MBAs!
If the only degree they have is an MBA, show them the door as fast as possible. MBAs are Masters of Business Annihilation and have done more damage to modern corporations than even the most visionary of us could have predicted (with some of the utter ineptitude covered in Jason Premo’s LinkedIn article). Real companies, like real structures, have always been built by real engineers, not spreadsheet pushing financial analysts who don’t have a clue what the company actually does.
The point of an MBA should be to teach engineers the basics of good business and financial management, and how to operate in different regulatory and reporting contexts, so they can make the right trade-off decisions to grow their company and improve their offering in step-wise fashion, not to arm nitwits with spreadsheets to make ridiculously unsound decisions that could ruin the corporation in the pursuit of near-term profits!
* Specifically, look for blogs that have survived at least 3 years. In the mid 2000s, shortly after THE PROPHET, the doctor, and THE REVELATOR started, we went from less than two dozen in the mid 2000s to almost 160 across Source to Pay and Supply Chain around 2008/2009. By 2011, dozens disappeared. By 2016, dozens more. By/during COVID, the majority of those that remained left us. Of the 160 blogs SI once chronicled on the now defunct resource site, less than two dozen remain. You can count them on your fingers and toes even if you are missing a few digits.