Consolidation and the Long Tail

A typical spend reduction initiative starts by convincing your C-Level executives to mandate the consolidation of spend throughout your company. Through such consolidation, you ensure your suppliers can reduce their margins yet still make enough to service the payments on their salespeople’s Beemers.

If you cannot consolidate your spend, you must find other ways to convince suppliers to lower their prices and/or increase their services without reducing their margins to an unsustainable, sub-Beemer, level. One way of doing this is to reduce your supplier’s cost of sales. Doing this, along with reducing your cost of managing your vendors, allows you to punch far above your weight with your suppliers.

Let’s consider two companies, Big Company and Small Company, buying a non-customised widget. If the widget salesperson is willing to set their margin for Big Company so that a sale results in $1 million gross profit, they should, theoretically, be willing to reduce their margin to the same level for a sale to Small Company that nets them $100,000 in gross profit provided that sale takes 1/10 the sales effort to close and execute.

So what does this have to do with the long tail concept? Well, if there is such a thing as the long tail in procurement, the long tail calculation must include both sales cost as well as transaction costs.

Debbie Wilson asks “Why?”

Debbie Wilson, author of Cool Tools for Purchasing, declares 2006 to be the "Year of the Blog". For those of you not familiar with her site, Debbie, amongst other things, publishes periodic commentary on procurement issues. Her opinions are poignant and I read her stuff as soon as it hits my in-box. Jason Busch calls Debbie the first blogger in the [spend management] sector.

In her latest piece, she asks "What are [procurement] bloggers getting out of this?" It's a valid question. Earlier this year Jason wrote a piece on why he blogs. Reading this was instrumental in my decision to start blogging although my reasons for blogging are not nearly as lofty. Jason says that he blogs because he saw "a void in the analysis of the spend management sector" and because he could "make a buck" - both noble sources of inspiration.

Unlike the noble Jason, I blog for myself. I suffer from the unfortunate affliction of regularly mulling over procurement issues regardless of whether clients are paying me to do so. Despite this constant procurement hum, it is not until I've written down my thoughts that I can concisely discuss them. Writing publicly forces me to write well or at least better. My readers are like personal trainers who encourage me to get out of bed on a Saturday morning and organise my thoughts from the previous week.

So, to you, my readers, Thanks! And to you, Debbie, I hope that answers your question.

Buzzword Lifecycle Management (BLM) and Procurement

Here's a little ditty from the e-INSIDER newsletter that brought a wry smile to my face.

BLM—Buzzword Lifecycle Management

The information technology (IT) industry is alive with buzzwords (BW). The management of BW represents a significant area for improvement for both the BW users (BU) (for example, vendors, analysts, and consultants), BW consumers (BC) (mostly end-users), and BW fellow travelers (BFT) (for example, the media). BW lifecycle management (BLM) is a proven discipline being applied to this crying need within the software industry.

Even more so than IT, the language used to describe procurement activities is astonishingly fractured. Some examples:

1) the words purchasing, procurement, strategic sourcing, sourcing, etc can each be paired with word "department" to describe the same function within an organisation.

2) the great spend management / supply management debate of 2006.

3) an organisation I observed recently that, whilst changing the name of its procurement department from "Strategic Sourcing" to "Sourcing", was attempting to convince its employees that they still needed to think strategically.

I suspect we play the game of musical names because procurement is often seen by outsiders as a somewhat dirty concept and once a particular descriptor becomes too closely associated with the act of "buying" then the next generation of terminology springs up.

If this is to change, it is incumbent on us to stand up, be proud of what we do, and claim our ground - regardless of what we call it.

HireVue responds to my Prescriptive RFT post

A few weeks ago, I used HireVue, a software vendor producing a video interviewing system, as an example of an overly-prescriptive vendor/candidate selection mechanism. Because my knowledge of the system comes from Vinnie Mirchandani's blog rather than first-hand use, I lead my post with the following paragraph:

"I'm going to gloss over many of the subtleties of the system [HireVue] and use it, probably unfairly, as a mechanism to discuss the dangers of prescriptive RFT drafting. My apologies to HireVue in advance."

I have since received an email from Mark Newman, VP of Operations for HireVue that, with his permission, I am showing in full. I am impressed with HireVue's response to my post. Blogging is a tremendous challenge to a company's brand management - this blog appears as the 28th result in a Google search for "hirevue" and after this post will appear higher still - and HireVue shows that they're coming to terms with the medium (with the exception, of course, of Mark's use of email rather than the 'comments' feature).

"Doug

We have spent the last year really learning what we do best and that is connect candidates with hiring managers quickly and easily. We are doing it all over the world including many in your neighborhood.

Spreading your wings - What is better for candidates? Going into a room with people they have never met in power suits who start to barrage with questions. 9 times out of 10 a candidate changes who they are to "fit" with the people asking questions. Changing your personality to get a position doesn't make you happy in the long run as what happens if you get hired and realize you don't "fit"? An employer needs to see the real candidate and base a decision on that. Taking an interview from your own home and not having to worry about being anyone but yourself because there is nobody to read off of yields better results. We know from experience that candidates open up, tell stories about themselves and show everything an employer can't see on a resume.

It is not a matter of canned answers or not giving time for candidates to be creative or innovative in their answers. Employers design their own interviews and if candidates want to figure out canned answers for the 100 most popular questions so be it. They would do the same for an in person interview (isn't that what you are taught in college?) and more than likely they would not proceed to the next round. Employers look for creativity and want to know what candidates are about. We help both sides do that and thus yield great results.

Your post was great. You have got a new reader. Would love to show you HireVue sometime if you are interested. Have a great weekend. Thanks

Mark Newman"

Thanks Mark. I'm interested in seeing the system.

Drucker on picking the “nays” out of an opportunity

Peter Drucker on Managerial Courage:

Business enterprise is not a phenomenon of nature but one of society. In a social situation, however, events are not distributed according to the "normal distribution" of a natural universe (that is, they are not distributed according to the U-shaped Gaussian curve). In a social situation a very small number of events—10 percent to 20 percent at most—account for 90 percent of all results, whereas the great majority of events account for 10 percent or less of the results.This is true in the marketplace.

A handful of customers out of many thousands produce the bulk of the orders; a handful of products out of hundreds of items in the line produce the bulk of the volume; and so on. This is true of markets, end uses, and distributive channels. It is equally true of sales efforts: A few salesmen, out of several hundred, always produce two-thirds or more of all new business. It is true in the plant: A handful of production runs account for most of the tonnage. It is true of research: A few men in the laboratory produce all the important innovations, as a rule. . . .

[Managers need] … the courage to go through with logical decisions—despite all pleas to give this or that product another chance, and despite all such specious alibis as the accountant's "it absorbs overhead" or the sale's manager's "we need a full product line."

Dave Stephens’ new venture

Dave Stephens' new venture has been greeted skeptically by Jason Busch.

Jason writes "I wish Dave the best of luck in his new gig, but I have more questions at this point than anything else, as I'm sure anyone would reading their rather spartan landing site and Dave's short announcement at Procurement Central.

…

there's a big difference between embracing Open Source and actually making a lot of money off it. Merely giving away applications with somewhere between 20% and 80% of the functionality of the best of breeds and ERP players and charging maintenance is not enough to ensure success…"

I can understand Jason's skepticism - launching a new application into a maturing software market is a tough way to make money.

I'm stepping outside my area of expertise, but I'd say that Dave's chance of success depends entirely on the shape of his target market. If he goes after the most demanding customers in the spend management market with a version 1.0 system then he will have a long slog in front of him. Dave gives some clues in his blog announcement that going head-to-head with the incumbents may not be his game plan.

Dave writes "On the technology front, the Coupa team knows all too well today's enterprise software is overly complicated, heavyweight, and yawn-inspiring. Our open source alternative aims to be the antithesis - lightweight, easy to deploy, and fun."

To me, this does not sound like a pitch to the most demanding customers. It sounds like a pitch to 'overshot' customers who do not require all of the features of the current suite of products or to non-customers who are excluded from the current suite of products for reasons of price or complexity.

The first diagram below shows how I see the current market for spend management products. The green portion on the left of the circle represents overshot customers while the red portion on the right represents undershot or demanding customers. Making a go of a new software application in this type of market will be tough.

The second diagram shows the market as I think it needs to be for Dave to succeed. His new system needs to appeal to a large, currently untapped, market of purchasers, leaving the top end of the market to the incumbents.

I reckon this will be fascinating to watch unfold. Good luck Dave!

Mundane management advice and clear thinking on economies of scale

Bill Waddell in Evolving Excellence links to a great article out of Stanford titled "Management Advice: Which 90% is crap?". It's well worth a read, as is Bill's blog. His post, A Stake in the Heart of Economies of Scale, is an example of blogging at its best.

Your second most valuable asset … apparently not

My previous post discussed the importance of maintaining your reputation as a credible purchasing organisation. I would also rank highly the importance of maintaining your reputation as a credible contracting organisation, but I would, apparently, be wrong.

The State Government of New South Wales (Australia's most populous state) is currently embroiled in a dispute with its partner in a toll road running underneath Sydney. Last year's opening of the PPP project, called the Cross-City Tunnel, started a running bun fight between the operator of the tunnel and the State government that has consumed hundreds of hours of senior executive and senior politician time and resulted in untold column-inches of press coverage.

The constant coverage has whipped up the fury of Sydney motorists who are refusing to use the Cross-City tunnel and choose instead to run a maze of back streets to avoid it. The source of the discontent is not particularly relevant. Suffice to say, it started as a simple distributive justice issue that should have been easily resolvable - people who travelled a short distance in the tunnel were required to pay nearly as much as those who travelled its full length. But the issues have now, hydra-like, multiplied and neither side can back down without face-egg.

The tunnel operator's position is that they are losing a shedload of cash and need to maintain their contracted unit cost increases. The State Government's position is that, despite the wording of the contract, they want the operator to reduce the unit cost and allow for the re-opening of side streets closed to drive traffic through the tunnel.

This week, after three months of negotiations, both sides have walked away from the table.

Two days ago, the State government handed down its budget. Somehow, despite the warm Australian economic climate, the State government of NSW is in deficit.

And yesterday, this gem appeared in the press. Despite all of the problems with the Cross-City tunnel, the State government intends to rely primarily on PPP projects to build infrastructure over the coming years and doesn't see it's behaviour in the Cross-City tunnel dispute impacting the success of future projects.

Will the private sector come to party and tender for this work? Of course they will. But, after watching the Cross-City tunnel fiasco, I wonder what risk premium PPP bidders will put on their offers.

Your most valuable asset

Your procurement department’s most valuable asset is not its people, technology or processes, but its credibility. You can increase resourcing, upgrade technology and implement new processes by throwing money at the problems, but regaining your lost credibility is far more difficult and potentially far more costly.

Imagine you run a small procurement department managing $200 million in spend. If it is not performing well, you might make substantial improvements by throwing in some extra cash. However, if your department has lost its credibility, you can't just buy it back and, of greater concern, your contract spend will probably increase, perhaps dramatically, because fewer suppliers will tender for your work and those who do will increase their tendered margins in the belief, rightly or wrongly, that they have an advantage over other respondents. This can quickly get very expensive: For your procurement department, a 1/2 percentage point increase in contract prices means an additional $1 million in spend.

Telstra, Australia's largest telecommunications carrier, is currently facing this situation, but on a much larger scale. Unsuccessful respondents are alleging that Telstra is awarding contracts to pals of CEO Sol Trujillo without following a fair competitive-tendering process. Even if not true, these allegations may lead to higher prices through a reduction in the number of suppliers tendering for work and an increase in tendered margins.

As an example of the credibility issues, last year, Telstra retained Accenture to run a tender for a $1/2 billion billing system. The tender resulted in the selection of an Accenture-lead consortium. The other respondents, as you might imagine, are crying foul. Amongst the most vocal is Amdocs. The Australian Financial Review reports that “Amdocs is now bidding on another major contract and insiders say Telstra will be under pressure to deliver a deal.” You can bet that Amdocs will consider this when pricing their offer.

Predicting relationship failure

John Gottman’s research on predicting interpersonal relationship failure should resonate with vendor managers. Gottman’s team, profiled in the Australian Financial Review and Malcolm Gladwell’s Blink, has identified four traits that, if present, indicate that the relationship has an 85% chance of failure. The odds of failure increase to 97.5% if one party's attempts to repair the relationship are not reciprocated. The St Cloud St University website describes the traits as follows:

1. "Criticism: Any statement that implies that there is something globally wrong with one’s partner. Usually starts with “you always” or “you never”
2. Defensiveness: A general stance of warding off a perceived attack. Unfortunately, defensiveness usually includes denying responsibility for the problem, and this fuels the flames of conflict because it says the other person is the guilty party.
3. Contempt: Any statement or nonverbal behavior that puts oneself on a higher plane than one’s partner, i.e. mocking. Another example would be correcting someone’s grammar when he or she is angry with you. (There is a universal facial expression for contempt) …
4. Stonewalling: Occurs when the listener withdraws from the interaction. Stonewallers look away and down, maintain a stiff neck, vocalize hardly at all - in effect, convey the presence of an impassive stonewall."

Gottman describes contempt as the “Sulphuric acid of love” and its presence is the single best predictor of relationship failure.

So, the lesson: If you see these traits, particularly contempt, in one of your vendor relationships, you should start hiding your assets!