Editors Note: Sometimes it's important to break the rules. Blogs are supposed to be short. But when I interviewed Transpac Access' Sean Harley and Aptium Global's Stuart Burns on the Spend Management needs of the middle market, I got more insight than I bargained for. So here's our discussion, in its slightly-edited entirety. Longer than most blogs, but worth the read! Print it out for the ride home today. - Jason Busch
1) In addressing Spend Management, what are the top needs of middle market companies?
Sean: I think it's first important to define the middle market. Let's say companies that are between $50 and $500 million in sales. In terms of this range, we tend to talk to manufacturing companies, which does not address the entire middle market. But middle market manufacturers have expressed to me that they have a number of Spend Management needs. First, they need information on what other firms are doing. Second, they're interested in learning what techniques and best practices can help them achieve results. Third, they're looking for ways to better manage their spend and source more effectively. In addition, they're interested in learning more about low-cost country sourcing (LCCS) as well.
Stuart: I would agree that middle market companies are looking to benchmark themselves against an industry standard. But as important, they're looking to implement Spend Management initiatives which are not negative to cash flow. For middle market companies, managing cash flow is the most important issue; larger companies can hire expertise and wait for results, but with the middle market, return on investment needs to be immediate. They can-t wait for 12-18 months.
2) Who should be the champion of Spend Management inside a middle-market company?
Stuart: In our experience, it has to be the CFO or an equivalent executive. At the end of the day, it has to be driven by the CFO/CEO because it's a financial consideration. But it's also critical to have buy-in with the key individuals (e.g. plant managers) for direct materials. Without buy-in, executives are going to struggle to implement any type of policies.
Sean: Absolutely, it's going to be at the C-Level. We typically are talking to owners, CEOs, and COOs. Certainly these are large decisions. What's interesting is that it's never the director of procurement within the middle market who makes the final decision.
3) How can middle market organizations best use technology and third parties to drive their spend management initiatives? What makes them different in this regard from larger organizations?
Sean: Middle market companies are unlikely to pay for installed or hosted solutions that require large cash outlays (e.g., $100K per year indefinitely). Where they get the best use of technology and the best learnings are in working with providers who can bring a hosted tool to the table when they need it and for a specific duration of time and also bring the services to the table in one solution in a streamlined way. Personally, I don't find that middle market companies have a lot of interest in software packages that they won't use day in and day out. What they do care about are tips, techniques, and processes. They also care about learning how best to organize and manage their spend. The middle market also requires a different business model. Traditionally, many firms have worked with traders or manufacturers representatives. But increasingly, they're looking to enhance their capabilities through their own “agents” or consultants. But cash flow remains king for the middle market, and very few companies will spend in a traditional fee-per-service structure for advice. That's why the middle market is a small consumer of consulting services in general. On the tool side, there is spotty adoption of Spend Management applications. Many are years behind larger companies from an ERP / MRP perspective. I doubt we will see broad adoption of Spend Management tools across middle market companies. How many reverse auctions will a middle-market manufacturer run? Probably not enough to justify a software license … instead, they will do things like aggregating spend data manually or work with a third party who has the tools and deploys them on an as needed basis.
Stuart: Well put. I think because middle market companies do not have the complexity of larger organizations technology plays less of a role. But this, of course, depends on the complexity of the business. If the firm is buying many different line items, Spend Management technology can help clarify the situation. But regardless of tool, they need a more flexible, transactional approach from providers. Hosted software packages are so much better for this reason – firms don't need access to them regularly, but require occasional use as demand dictates. They might use a specific tool for a particular project, based on function need, but they don't need an enterprise license. Where they will spend money on software licenses is on packages that take headcount out of the business (e.g. payroll). Regardless, software companies and third parties need new revenue models to work with the middle market that will not generate negative cash flow, even in the early ongoing, for their customers.
4) How do middle market organizations think about LCCS?
Stuart: Inevitably, there's a shortage of skills within smaller and medium sized organizations when it comes to global sourcing. There's also a more intrinsic need to turn to external advice, as their internal knowledge is limited by their size. What's interesting is that there's often a considerable gulf between what executives read [in trade magazine and such] and what is actually achievable in the middle market. They recognize what LCCS can bring, but many do not have ready tools and advice to try to achieve it on their own. In addition, we've found increasingly that when re-sourcing a middle market companies' spend that it's important to take a global view while also realizing that the best results can often be achieved domestically, given smaller volumes, import costs, etc. Hence, the number of occasions when LCCS is actually employed is less than is first imagined. In practice, the risks and implications are more serious than many organizations initially consider.
Sean: What's most important to middle market companies is that they approach low cost country sourcing initiatives in a way that delivers improved cash flow. While this might not be immediate, it must be there eventually. Hence, the cost of such initiatives must also be tied to cash flow. Traditionally, where they have done LCCS, middle market companies have worked with brokers and manufacturers representatives, but as they expand and attempt to make their efforts more effective, they are looking more to work with third parties who can act as an outsourced international procurement team. In addition, there must be a contingency fee structure which aligns the incentives of both parties.
5) Are there any sources on the web which you go to learn about Spend Management (including outsourcing, procurement, supply chain, sourcing, etc.) and the middle market?
Stuart: I often look at trade organization and non-profit web sites. Some of the non-profit sites I like are the CMC [and its parent organization, Manufacturing Extension Partnership]. Both have information for middle market companies. Also, the <
a href="http://www.oesa.org"> OESA site has some material as well.
About the interviewee's organizations (provided by each firm, not Spend Matters):
"Transpac Access helps firms buy, sell, and invest in low-cost, high-growth countries. With a network of 70 professionals worldwide and over $2 Billion in transaction volume, we have the experience, infrastructure, and knowledge to deliver bottom-line impact for your business."
"Aptium Global works with small and medium sized manufacturing companies to save money on direct material purchases. Aptium Global works with organizations on a pay-as-you-save basis, minimizing impact on cash flow and maximizing impact on the bottom line."