Business & Technology Nexus

Many of my friends and colleagues are regulars at PriceWatch.com and Streetprices.com. I’ve always like Streetprices, but it may just be because I found it and used it first, who knows.

Websites like these are sometimes even more telling than electronic component commodity indexes. Because in this fast moving Procurement category, being ill-informed about pricing trends can spell disaster. And although consumer prices tend to lag producer price changes, even a small drop in demand can trigger discounting in the retail and wholesale channel and indicate a future downward pressure on component prices.

I have a lot of fun tracking pricing in particular subsegments of consumer electronics such as digital cameras and digital video recorders. It all started when my wife and I had our first child. Like the rest of you with kids, that trigger got us into the market & buying stuff – it didn’t matter that devices would be tons cheaper – we needed the equipment asap. Then, like everyone else, we watched as our new gear was mercilessly devalued by the market as the pace of technology marched on.

Computers were one of the first super-rapid continuously commoditizing markets. But now the entire array of consumer electronics seems to succumb to a continual surge in downward pricing pressure. It’s a sympton of a hyper-efficient market – efficient because its product segments offer insatiable appeal to customers. It’s a nearly irresitible market to pursue – because suppliers and startups know a better, faster, and cheaper play will allow them to mint money.. but only for a short time.

For us consumers, and for that matter us professional buyers, this begs an important question: how do you decide when the right time to buy or to refresh is? When is the time to lock in a corporate contract & what is the right pricing and volume guarantees? It’s a difficult, complex question with so many variables most people just give up and go with their gut.

I just bought a MacBook for $999. ($100 amazon rebate on $1099 apple store price). I know Apple is on the verge of refreshing the CPU’s, among other things. I postponed the purchase for months, but finally broke down. And a new OS is on the way so I’ll need to pay for that upgrade by next March. (because I do want that new Time Machine feature)

If someone can figure out an algorithm to help companies determine the sweet spot for buying in the electronic component and consumer electronic marketplace, and patent it, that would sure be a nice business. To me, this sounds like Doug Hudgeon’s sweet spot – he’s the equation guy – so I’ll issue a challenge to him to outline the factors that one should evaluate to try and make the decision on whether to “buy now” or “hold out” quantitative. Michael Lamoreaux might have some innovative ideas too – after all, if memory serves he’s the phD guy.

In addition, it seems to me a closed service like PurchasingData.com should consider opening up & collaborating with a multitude of sources (preferably viral) for pricing – with an aim to build a transparent open B2B version of streetprices.com. If any of you are interested in exploring this idea further, email me.

In the meantime, I’m still on the sidelines for a LCD or gas plasma refresh for my Rear Projection widescreen. Prices are just dropping too fast to jump into the market. Does anyone have any advice on when to replace my 65″ Mitsubishi widescreen? I’m guessing if you knew when the last big additional factory was coming online that could precede a temporary plateau in the downward movement of prices.

-Dave

I had several great conversations with partners and prospects today.. A standout was a call with a higher education institution that has downloaded a copy of Coupa eProcurement to play around with & pilot. It was one of those nice open source moments where you know that making the product truly accessible had a hand in gaining the customer conversation. Good stuff.

I’ve always liked higher ed. It’s a tough nut to crack since the people that work in higher ed are so darned independent. Yet it’s great to see management soldier on in pursuit of the increased efficiency procurement provides. And let me “give a nod” to SciQuest as they’ve done some good work with major universities and their implementations seem pretty well regarded. Oracle is no slouch in the higher ed market either, selling a bunch of my old eProcurement stuff into that market.

Both firms (SciQuest and Oracle) were involved at the University of Pennsylvania for instance. UPenn went on record with a $64MM savings number for the first 5 years of operations on the combined platform. If memory serves Procuri may have been in there for reverse auctions.. But I digress..

What I’ve always loved and hated at the same time w/in public sector and private non-profits is the appraoch to budget-based buying. In concept, it’s fantastic and should be applied to many other industries – a cost center decides (or is told) how much they are authorized to spend over a given time period. It may be broken down by procurement category. Then, POs and Invoices are tracked against that spend – and it’s a hard cap.. Try and spend past your budget and you’re blocked.

This all sounds simple enough but take my word for it the requirements tended to go way overboard, including modeling spending, live feeds and interaction with GL, and overzealous ledger entries for step-by-step activities in the procure to pay flow. As a result, solutions, admittedly including Oracle’s, were terrible. Peanut brittle, so to speak. Encumbrance and budgetaey accounting bugs in Oracle’s solution typically could only be fixed by a few extremely knowledge people (you guys know who you are) and usually involved data corruption scripts and chanting Hopi prayers (okay, you get the point).

So I was encouraged, delighted, overjoyed (dancing in the streets) to see there may be a middle ground, even for some public sector organizations and non-profits where a common sense approach to budget-based procurement can win out.

My thoughts turned to other service industries that don’t typically operate on budgets – and what it would mean for them to consider adopting budget-based procurement as an approach. It’s attractive as it puts the budget holders squarely in charge of their ongoing expenses. Even large organizations like GE could benefit – as the solution they employ today is to simply “turn off” discretionary spend if the quarter’s revenue looks a little light.

So who knows, maybe budgetary control and encumbrance accounting don’t have to be all evil. It’s going to be a blast to explore this in more detail and see what a fresh sheet of paper can do for the problem.

Stay tuned…

We’ve had 460 Downloads of Coupa eProcurement from 7/27 through 8/26. Good start- but lots of work to do. The closest apples to apples comparison I could find is to TenderSystem, even though that’s in the Sourcing space. They did around 200 a month for the 1st 3 months on Sourceforge. Sugar did around 400 month 1 but over 5,000 in month 2. Though we’re just starting month 2 there’s no way we’ll match Sugar’s month 2 volume. After all, this is Procurement…

We’ll have a corporate blog up shortly – and updates like these will be posted there once we do..

Some things we hope to introduce very soon include an online demo system for our Enterprise Edition (followed by Open Source Edition). We’ll have a lot better demo data in there then the skinny’d down database embedded in the Sourceforge downloads.

Also, we are prepping for another drop of the Open Source Edition on sourceforge. Probably time for a light refresh. We’ve responded to suggestions we’ve received to date & also re-packaged the application as a rails engine plug-in. Part of the reason is partner-friendly – this should make it easier to embed our stuff in a broader platform. The other part is efficiency – it helps us manage our SVN repositories easier.

August 27th will be +1 month from our initial and pretty quiet Preview Release launch. Thanks to everyone who’s provided feedback.

As you all know I live in Half Moon Bay. It’s a weird place. First of all, who heard of a city without an elected Mayor? Instead, some yahoo years ago thought it would be a good idea to “share” the mayorship and designed it as a rotating seat – everyone in the city council gets a turn. Whee! So you’ve got this eunuch of a mayor for a year – and just when they figure out what the heck is going on – boom, they’re out. And who really pays attention to city council seats – it’s some strange high school throwback popularity contest.

Why the venom? Well, it all started long, long ago…

The city of Half Moon Bay decided they wanted a park. So they bought some land. If memory serves they spent a few million for some pretty good acreage in an awful spot – right off a highway with no clear access without screwing up traffic. Which doesn’t necessarily make the whole idea bad – just a challenge & possibly a pretty good land deal.

Then they sat on the land while signing up a design firm. Half Moon Bay sent out an RFP for design services back in late 2004. But like most cities, they obviously weren’t schooled in Procurement 101. Out of 13 bids they picked a group called MIG (Moore Iacofano Goltsman). According to the Half Moon Bay Review, these guys had an impressive track record of prior park work in the San Francisco Bay Area.

The original authorization was for $250,000 worth of design services. And for a park, that sure seems like enough (estimated land size, my best recollection, <20 acres). It’s supposed to include basic stuff such as- a basketball court, an amphitheatre, a baseball diamond, a “meadow”, etc. Well, through the magic of T&M, change orders, etc, the payout so far for the designers has been rumored to be $345,000.

The Half Moon Bay city council is now upset. But what they deserve is a good long look in the mirror. It’s their fault – structuring a contract that sets appropriate incentives and penalties, and most importantly, caps costs, is essential in effectively managing services spend. The slippery slope of “wandering requirements” can lead to these horrifically bad outcomes.

By the way, the story gets far worse. The budget estimate for construction of the park was around 6MM. The estimate provided by the high-priced designers, without any cost breakdown or apologies, stands between 12.1 and 14.5MM. So now the city of Half Moon Bay has spent through the nose to design a park that doesn’t fit their budget.

In the meantime, our “mayor” has another 4 months in office. What a mess!

If you guys haven’t noticed Ford Bold Moves by all means check it out. A professional vblog on Ford’s struggles to turn around the business. Refreshingly candid and hip in a “watch the disaster in action” weird kind of way.

Who knew a guy who threw together a Bingo Card Creator could expound such clear views on software development and open source! Read what Patrick McKenzie has to say. Also, check out the stats and analysis on open source communities by Sandeep Krishnamurthy. Good reality check on the OSS movement.

Hrrumf. Michael Lamoureaux (of Sourcing Innovation fame) asked Tim Minahan, Jason Busch, and yours truly to post some thoughts on what our beliefs were.. I told him I believed in beer, and could post extensively on the subject. Then he clarified – he wanted to know how we saw the future of Sourcing & Sourcing tools. Not nearly as tasty – but true soldier that I am, I gave it a go.

Tim Minahan fired the first shot, and as usual, his stuff was sound and strong. To be honest, I avoided reading Tim’s post until after I was done with mine.. Too much temptation for a little innocent plagiarism. And I have to say he and I have talked previously about taking commodity pricing from external markets and blending with your internal view of corporate contracts, essentially triggering alerts and activity based on the way the market is moving. And that’s cool stuff.

The prism I see Sourcing through dates back to the 1999 NCAA Basketball Tournament. You see, I was working on html mockups for a sourcing platform proposal all during the tourney. At the time I was living in Merced, which is neither here nor there but it was nice. And I remember as if it were yesterday sitting in front of the TV for hours watching hoops and hand-crafting html to showcase how electronic tools could help professional buyers evaluate bids not only on price but on quality, lead time, and more subjective measures.

That initial proposal and html concept car were pretty much immediately derailed, at least in part, by the .com boom and the B2B Exchange craze. But the seeds of Oracle Sourcing were planted, albeit in Marketplace form – and to this day I remain proud of the platform my team built. Eventually we ported the software back into Oracle’s ERP suite & built what I had first envisioned. And my team’s last release, Oracle Sourcing minipack J on 11i10, incorporated iLog for optimization and handled so many other high-end features it still makes me smile. The team did a wonderful job.

Of course a lot happened from 1999 to 2005, not the least of which was the collapse of the standalone Sourcing market as it commoditized & was merged with Contract Management (or at least that’s how I see it – Procuri, with their very public 71% revenue growth in 2005 might have quite a different view). I thought Emptoris’ purchase of DiCarta was smart & telling about where the Sourcing solution boundaries had evolved to.

By now you’re probably on to me – I’m trying to predict the future by looking backward. So now that we have that straight, let’s go ahead and do it. I certainly have come to believe one of the reasons Sourcing became such a hot, hot, hot area had to do with the economic climate the US, UK, and much of Europe found themselves in from early 2001 onwards. With oversupply in many areas, and with power firmly in buyer’s hands, prices came crashing down in many different areas. And once you’d saved 40% in one area, you might as well have been a “reverse auction drug addict” – you couldn’t get enough of it. Sure, the first movers were going in 1999 and 2000, but the economy made a mass move possible and more likely to be sustained. What was a supplier to do?

I remember and have shared many of the Ford successes. Ironically, and tellingly, one of the biggest savings areas were tires. Ford buyers, for years, thought 4 tires cost around $100. Nope. Try $40. (Naturally, as luck would have it, I told this story as a dig on Ford while trying to close a big Financial Services deal at Oracle.. Turned out the decision maker was an ex-Ford buyer and, yep, had been responsible for tires. He didn’t think my story was funny, and we didn’t get the deal.)

The net of the Sourcing craze was there was this big one-time fat stripping across many categories of goods and services. It worked in direct materials, it worked for indirect, why it even worked for services.

Lost in all the hoopla behind the one-time megasavings was the process discipline these tools enabled. Suddenly there was a kind of transparency to the sourcing process that the CPO had always wanted but never had. And certainly this made the tools super attractive to public sector.

I remember numerous meetings where I would drill the VP of Procurement and ask what the policy was for competitive bidding. “3 bids and a buy if the value of the purchase is above $25k” was a typical response. Occassionally one of the leader’s key resources would pipe up: “No one does that.” Then silence. Paper processes are fine, but online processes give managers much better auditing and policy compliance tools. And when buyers know their work is online, they act differently.

Of course, dropping public sector into the mix changed what it meant to be transparent. Strange requirements like “adjectival ratings” added complexity and confusion to what should have been a straightforward process. I won’t go deeper here as I’ve found it’s better not to dwell on government practices.. It’s almost guaranteed to lead to high blood pressure, especially if you take the time to remember your tax dollars are funding their big mess.

So what does the future hold for Sourcing? The secret to knowing this, I believe, has to do with understanding how global economic trends will play out over the coming decade. And oh by the way, it doesn’t hurt to realize that all the complexity in Sourcing really isn’t useful for a large segment of companies. Woops, there I’ve done it. Blasphemy! :)

First, as I’ve posted on again and again, I believe global natural resources will face steady upward pricing pressure for the foreseeable future – which then, whether pure economists like to view it as such or not – will likely translate into inflation (or decreased buying power if you like that better).

Now I’ll be the first to admit there are a very large segment of people who see just the opposite. They believe downward pricing pressure due to the unrelenting decrease of trade barriers and progression of global markets will contain prices for the foreseeable future. If you buy into this view count yourself in the “it’s all about me the buyer” camp & please continue building ever larger matrix algebra optimization equations to optimize your optimizations :)

But if you think power is likely to be shifting more towards suppliers for large segments of categories, perhaps it’s time to hit the pause button on over-zealous “let’s beat up the suppliers continually” approaches. Maybe it would be better to leave some bridges un-burned. Ask Ford and GM how much they wish their supply base loved them as much as their share-winning Japanese cousins.

When it comes to the future of Sourcing, I think you’ll see a recession of Sourcing functionality back into transactional systems. That will certainly bode well for SAP and Oracle. Essentially, the mass market will look at “3 bids and a buy” as the process they want to move online & make transparent. And those capabilities will likely be bundled with Contract Management and transactional buying. I think 5 years from now customers will have a really tough time distinguishing Sourcing as separate from Procurement. (Except in niche areas)

I also hold the view that Strategic Buyers and Transactional Buyers will blur together as well – as transactional buying becomes more about value-add and less about paper-pushing. You’ll just have a different type of professional in the role & they’ll be able to cross-over from contract negotiation to business unit assisted buying more easily.

Now I’d expect my fellow Procurement bloggers to talk about the emergence of canned, templatized sourcing processes by UNSPSC categories, an increase in group-based scoring, and other efficiency gains plausible within the Sourcing process over the coming years.

The only problem on going ever deeper in Sourcing functionality is that it continues to dehumanize negotiations. Which wouldn’t be a disaster if there weren’t so much darn information gained by direct human interaction – let’s face it, relationships are valuable. In the PLM space we always discussed the balance between getting suppliers to open up and provide cost breakdowns for component designs and reverse auction approaches. Get in suppliers’ faces too early on price & their feedback on which design is the best will never be yours..

So to summarize I believe sourcing for the mass market will seem a lot more transactional and mundane in the future. And that a lot of the advanced capabilities we see in RFP’s today will fall by the wayside. A few, like scoring models that accommodate more than price alone, will stay and become absolutely mainstream.

What I’ll add is that in specific verticals and for specialty buys the functionality and capabilities will continue to evolve and deepen, perhaps morphing into specialty services. I’ve always loved Transportation Sourcing as an example. There’s no reason a compelling service couldn’t exist that would make freight lane capacity far more transparent & find a way to fill up more of the trucks driving around our highways and freeways. It’s stunning once you study the free capacity statistics on freight and transport – the waste is truly staggering. Beyond transportation I think you could see specialty sourcing in faster-moving category segments, like electronics. And to some extent the better vendors (Iasta, Procuri, Ariba, etc) do a good job with that now.

My beliefs probably lead you to a better understanding of why Coupa didn’t start in the Sourcing space. There’s a lot of good software out there today. And I certainly wish my Sourcing friends the best of luck as they pursue new releases, new frontiers, and new customer segments in this important area.

What should you do when a key supplier you use is acquired?

First off, know that time is on your side. You should expect the acquiring party to do everything they can to continue to earn your business. After all, most acquisitions have more to do with customers than technology.

You should be inquisitive about changes likely to affect new product introduction, timely product delivery, and product support practices. Major cuts in staff or losses in talent are likely to affect the new management team’s ability to perform.

Look for early warning signs such as product delays, supply shortages, and lower satisfaction with customer support as telltale signs that the new team is not performing on par with the old team.

Of course, it’s just as likely the new management team improves on problem areas and increases your satisfaction. The important thing is to measure the metrics of the supplier relationship more closely post-acquisition. Ideally, if you’ve been good about your supplier scorecarding program you can compare the new values to a baseline.

From a systems standpoint, there are a lot of choices about how to reflect the acquisition. Most systems support a “supplier merge” capability – but be careful as this can distort the historical record going back decades – suddenly it looks like you were buying notebooks from HP all along when really, back in 1996, it was Compaq. As an alternative, you can revise corporate buying contracts to reflect new ownership and leave the old records alone. There’s no right answer here.

The good news is, in most markets you can at least entertain switching should the new management bungle the takeover. Sure, switching costs won’t be zero, but the leverage alone should give you enough clout to encourage the new team to fix whatever glitches arise.

Here’s a few more observations about eProcurement.. It’s a service.. And the better the service, the higher the degree of compliance. After all, preventing fraud and other forms of corporate abuse is certainly job 1 these days.

So as Procurement leaders, it’s your duty to push tools and content that satisfy your business units. The days of force-feeding a reluctant enterprise low quality Toshiba laptops for $300/per unit savings are over. And just in case you didn’t realize it already, the pens that costs 5 cents but gets thrown away by the dozen don’t save you or the environment anything.

Especially in service industries, today’s workers are knowledge workers. Buying better goods and services help make them more productive, and that’s the competitive edge most businesses are looking for.

Plus, with an employee population truly satisfied with a highly efficient tool for requisitioning filled with smart options for goods and services, you have the political power to move mountains. You are far more likely to get involved in the type of make vs. buy decisions that have real impact on the profitability and competitiveness of your company.

So look at eProcurement as a service your employees need – make it easy, make it fun, and they’ll support you. You’ll get compliance to your corporate policies, save a little money, and be in a position to move your organization forward…

eProcurement – the better the service, the higher the degree of compliance…