My previous blog entry about procurement commandments in a down economy also made me think about whether there are different priorities for the chief procurement officer (CPO) during prosperous economic times. Or, how different are (or should be) the CPO’s strategies in good versus bad times?
Well, the CPO’s fundamental objectives do not change: procure the physical goods and services needed by the company at the best possible mix of price and performance (non-price features). The focus can shift at times from operational streamlining to new product introduction (NPI) to supplier rationalization.
In lean times, however, there will be pressure to do even more with less, postpone large expenditures, and get additional concessions from suppliers (e.g., better shipping rates, rebates, discounts, or better payment terms, etc.). Amid all of this, the CPOs must provide high-quality service guidelines to their employees to encourage the proper use of systems and policies, and to reduce maverick purchasing practices.
Universal Supply (Chain) Issues
I could think of at least the following five key issues and challenges that in turn lead to tremendous opportunities to save money, time, and bolster the bottom line of companies of all size.
Issue #1 is excessive spending for direct and indirect goods and service
—i.e., more than a company should for it needs. The opportunity here is to reduce the company’s spending by minimizing maverick purchasing practices, reducing transaction costs, and leveraging the aggregated (collective) purchasing power of the enterprise to negotiate more favorable pricing, service, and contractual terms and conditions.
Issue #2 is a lack of visibility and accountability. Many companies are not exactly sure what they are currently spending their money on. The pertinent historical and snapshot data is lacking and is likely inaccessible. Questions like, “How much are we spending? With what suppliers? On what categories? Who is spending it? How long does the approval take? Are we within the budget? What suppliers are (or are not) fulfilling orders on time? Should we rationalize our supplier base? Are there spikes or trends in our spending patterns that require action?” and so on require constantly changing answers.
The opportunity here is for all managers and executives to monitor spending (via personalized interactive analytics and alert messages) by category, location, cost center, department, project, you name it. These metrics should be known/viewed as transactions are happening, instead of only after they are booked to the general ledger (GL).
One way to solve this conundrum could be via procurement data marts that provide prepackaged spend analysis over a few dozens metrics and dimensions for fast answers to the above questions. These answers should be based on fresh (real-time, or close to real-time) data rather than on “rearview mirror.” This hindsight speed-of-thought spend analysis should measure and optimize savings via packaged buyer analytics, key performance indicators (KPIs), and proactive control and supplier collaboration.
Issue #3 is that most companies have a legacy of too many vendors that supply disparate operations and manual approval processes that make it impossible to exercise reasonable control. The opportunity here is to have an overarching system that enforces controls, drives requisitioning and purchasing clerks to preferred suppliers and items, and makes an approval workflow a snap. Essentially, the idea is to make it patently easy for everyone to do the right thing consistently time and again.
Issue #4 is that many existing procurement and payment processes are labor-intensive and fraught with errors and rework. As a result, too many people are spending too much time on clerical tasks. The opportunity here is to lift that burden and focus the company’s human resources (i.e., requisitioners, managers, and purchasing professionals) on more strategic activities.
Finally, Issue #5 is fragmented enterprise systems (and islands of information), which are difficult to navigate and almost always require duplicate data entry. Astute integration technologies should solve this problem without costly IT input, even if the enterprise is integrating diverse solutions (i.e., procurement and sourcing with different front-office and back-office solutions). There is often a need to integrate procurement to accounts payable (A/P), GL, and inventory management systems, whereas both procurement and sourcing systems often have to be linked to supplier catalogs, Web sites, and sales order management systems.
SRM or Spend Management?
As said even back in 2003 in a TEC article, “The Hidden Gems of the Enterprise Application Space,” the supplier relationship management (SRM) software category has been important and valuable for companies of all sizes. The SRM market is evolving due to related emerging areas such as e-procurement, strategic sourcing, spend analysis, etc.
For example, the payback and value of running a sourcing event before awarding a contract is a given, and we can see companies like Ariba and Emptoris doing that well these days. However, they are selling to the high-end market, against SAP and Oracle enterprise resource planning (ERP) installations. It is interesting that the SRM moniker, which really revolved around the supplier collaboration theme, has lately lost some of its popularity (possibly after SAP and Oracle commandeered the term within their respective SAP SRM and Oracle PeopleSoft SRM suites).
Ariba came out in the early 2000s with the “spend management” moniker based on how procurement always talks about spend. It was a whole “find it, get it, keep it” campaign. In addition to procurement and sourcing, a full-fledged spend management or SRM suite typically includes contract (lifecycle) management software and business performance management (BPM) analytic capabilities (e.g., dashboards, scorecards, etc.).
Ariba and some procurement-oriented ERP vendors argue that spend management means transactions too, such as electronic invoice presentment and payment (EIPP). Supply chain management (SCM)-oriented vendors might also argue that it touches on supplier connectivity and supply chain visibility (SCV) or supply chain event management (SCEM) as well.
For example, ERP providers are seeing a strong push to consolidate and streamline A/P as the tail end of the transactional process. Thus, some vendors offer automated A/P matching (“hands-free A/P”) as a way to accomplish consolidation by matching electronic invoices to electronic receipts and generating payments for matches within preset tolerance limits.
I feel strongly, though, that effective spend management must also cover spending that occurs outside of e-procurement. Face it, no company has ever (or will ever) put all of its spend under management. That’s why it is critical to gather those expenditures that occur outside of procurement (including even financial books showing expenses transferred from one account to another), and to show them to requisitioners and approvers during the requisition process.
Some ERP vendors call that capability “budget and commitment checking” and do it very well because they have comprehensive integration to the back-office applications, including A/P, purchasing, and GL. Without that, users, vendors, and pundits just keep harping on getting 100 percent of spend under total control, without ever getting there in real life.
What About Small to Medium Enterprises (SMEs)?
A smart person once said that a major difference between large companies and SMEs is that in a small company a single person has to wear several hats (and perform a number of tasks). Otherwise, large and small companies undergo many similar business processes.
To that end, there are extremely few mid-market companies that have a CPO per se. More likely, one will run into vice presidents (VPs) of purchasing, or sometimes just directors. Some mid-market companies don’t even have a full-time buying staff and clerks; there, purchasing is managed within departments like IT and facilities.
Regarding “spend management” versus “SRM”–it’s as much about marketing as it is about solutions per se. As said earlier on, Ariba (and some bloggers and pundits like Jason Busch) started chanting the “spend management” mantra around 2002 or 2003 to try to establish a footprint that justified a best-of-breed versus enterprise suite investment.
But “SRM” and “spend management” are pretty generic phrases that practitioners toss around in various forms veritably interchangeably. Truth be told, the mid-market never really caught on to the term SRM, and some incumbent vendors have responded by simply talking about their individual SRM solutions (for procurement, sourcing, and spend analysis).
Even the terms “sourcing” and “strategic sourcing”
—like “SRM” or “spend management”
—fail to resonate with the majority of mid-market companies. For sure, they have buyers and they source stuff, but as a software application, it’s a term that just doesn’t seem to gel.
Now, if Tier One SRM vendors like Ariba, Emptoris, SAP, or Oracle choose to dumb-down and reprice their SRM offerings for the mid-market, they are going to have to do something extra to reduce the operational costs of the model too. Namely, having a stable of savvy category buyers and sourcing experts (consultants) available at all times for all customers is not cheap (and Ariba might heavy-heartedly admit that).
As pointed out earlier, in the mid-market there are many companies that don’t have full-time buyers at all; they get along fine without them and don’t see much benefit in paying for them as contractors. That will be a hard mentality to get over.
Software as a Service (SaaS) and business process outsourcing (BPO) arrangements might be attractive for some SMEs, but certainly not for all (and maybe not even for most). Some of them will not go for such offerings at any price, at least not in the near future. Namely, there are still too many risks (whether real or perceived) for them to wrap their heads around.
What of This Do SMEs Really Need?
I personally don’t think there are any rules that define “spend management” as a functional superset and “SRM” as a subset, or vice versa. The real question is, “Do you manage spending and, if so, what solutions do you use to do it?” To my mind, sourcing, procurement, and the above-mentioned spend analysis capabilities (to help with Issue #2) cover most of the spend control needs for mid-sized enterprises.
Part 2 of this blog series will drill down into typical sourcing and procurement capabilities. Until then, what are your views, comments, opinions, etc. about the current economic climate in your region/industry and about your approach to curbing spend? What are your best sourcing and procurement practices, as well as your experiences with particular SRM or spend management applications?
Excellent post! I believe one of the reasons SMEs have not embraced spend management applications en masse is that, until recently, they simply have not been available, or accessible. Most of the well-known vendors play nearly exclusively at the high end, and require a fair bit of technical expertise to implement and maintain.
SaaS is a great equalizer though. With companies like Coupa and others, SMEs can get enterprise-grade spend management functionality at a fraction of the price. Plus, these solutions tend to be much easier to use, perfect for SME procurement professionals who operate as an ‘island unto themselves’ within the enterprise. No software to buy or hardware to maintain, and deployments that can be measured in hours instead of months.
And though I agree that some SMEs “will not go for such offerings at any price,” I’ll bet they might change their tune if they realized that for just 1/10 of a penny for every dollar in spend under management, they can subscribe to a spend management solution that will help them address all five of the issues you list above.