Mars might be the god of war and mighty in its own right – ready to battle any time with a combative supplier or recalcitrant internal stakeholder. But Jupiter is the king of gods: large, distant, cold, foreboding.
(There is no Venus here...that's a Plus brief — nay, multipart series — for another day on working with Marketing).
These gods might seem similar, and in the business world, Procurement and Finance should in theory be highly aligned and focused on cost management, risk mitigation, quantitative analysis, and other areas. For example:
Enterprise risk management requirements (e.g., fraud, regulatory compliance, etc.) should extend seamlessly into the supply base.
Working capital should be optimized alongside cost reduction and compliance.
The Source-to-Settle process should have an embedded P2P process that aligns purchasing and AP to each other and to broader spend category requirements.
There are many things that keep the two groups from singing Kumbaya.
In this Spend Matters Plus brief, we list five important ones and give practitioners some suggestions on how to align and conquer (no lightning bolts or Holst necessary).
Did you know that according to the Bureau of Labor Statistics, millennials will comprise nearly 75% of the U.S. workforce by the year 2030? Yes, I’m talking about those tech-savvy, feedback-craving 20-somethings that have recently entered the workforce — myself being one of them! Even if the demographic shift hasn’t yet affected your company, I’m sure this doesn’t come as a surprise, considering how infatuated the media has been since the turn of the decade with millennials. The million-dollar question, however, is this: What are corporations doing to adapt to this change in workforce?
Spend Matters welcomes this guest post from Conrad Smith, senior director of global procurement at Adobe.
A few years ago, a consultant introduced me to a strategy tool that changed the way I do business. The strategy we developed became the “business hierarchy of procurement needs." You may already be familiar with psychologist Abraham Maslow’s traditional hierarchy of needs. In Maslow’s model, basic health and physical safety comprise the essential day-to-day building blocks at the base of the pyramid — and the fulfillment of those needs creates the stability necessary for the understanding and fulfillment of “higher” needs, such as belonging and self-esteem, all the way up to self-actualization at the pyramid’s peak.
Many organizations are beginning to adopt new contingent workforce/services (CW/S) procurement solutions. Why now? In short, it’s because new underlying technologies are available to enable new solution approaches and organizations are compelled to make use of these technologies to address changes in talent supply, whether it’s skill shortages, generational shifts or changes in attitudes and behaviors.
In Part 1 of this series on Procurement as a Service (PRaaS), we outlined numerous reasons why procurement organizations should consider adopting a service-oriented operating model. In this next installment, we'll explore how procurement organizations are learning from other industries and other world-class services organizations.
Many procurement organizations may wince at the idea of being called a "service provider.” The term seems very transactional and low impact. Most procurement organizations are striving for much deeper spend influence and usually prefer a term like "business partner." Yet the world is moving to a service orientation, not just in the consumer world but also in the business world, which in turn is becoming a digital world. Whether procurement groups choose to use the “service provider” terminology or not (e.g., the principles can be adopted without using the explicit terminology with stakeholder), they will need to consider a services-oriented operating model, or “service delivery model,” if they want to improve their delivered value. Here’s why.
In our previous piece looking at Daniel Kahneman's brilliant book, Thinking Fast and Slow, and its implications for procurement thinking and practice, we looked at the concept of Priming.
Granted, Kahneman published the book in late 2011, but is still immensely valuable for procurement practitioners to keep on their bedside tables today — and here's why.
One of the central premises of Kahneman's book is how our brains look for the easy route at all times, what he calls "System 1" thinking. If we can draw a conclusion, make a decision, or find a belief without actually going through a time-consuming and exhausting process of really thinking, we will. That is not our conscious decision — our brains are wired that way. "System 2" thinking, which is more logical, analytical and difficult, is something our brains avoid if they can.
So Priming is the phenomenon whereby something we've seen or heard recently influences our next thoughts. If I ask you to name an animal, and you've just walked past an advert for the zoo illustrated with an elephant, you are more likely to say "elephant." And remarkably, this is true even if you don't recall seeing the advert. Our sub-conscious is quite capable of priming our future thoughts.
In this Plus brief, we will consider what is in effect a particular sort of priming, with an obvious implication for procurement and negotiation behaviour specifically. Anchoring is the tendency for us to fix our thoughts around a particular number, point, or fact rather than thinking logically and independently about a decision.
In Kahnemann's words, "it occurs when people consider a particular value for an unknown quantity before estimating that quantity." The estimates then stay close to the number considered. And this is one of the most tested and robust results in experimental psychology; it is an absolutely proven phenomenon.
In a somewhat frightening example quoted in his book, German judges were asked to throw a dice before being asked what sentence they would give for a particular crime. The dice came up with either the number 3 or 9. When the dice said 9, the average "sentence" was 8 months. When it said 3, the average was 5 months!
Anchoring and Procurement Negotiation
The implication for procurement is very clear in the negotiation arena. Whatever number gets anchored in your brain is in danger of becoming the starting point and indeed the expectation for the negotiation. You may work up or down from there, but it is difficult not to mentally accept that as an anchor for the discussion.
The idea of “tail spend” doesn’t seem very complicated at first.
Run a Pareto analysis on your spend categories and suppliers to make a cutoff at, say, the 80% that represent only 20% of your spend. Your numbers will, of course, vary, but the idea is to find a way to better manage such “nuisance” low-dollar spend that doesn’t detract from your efficiency, or worse yet, from spending time managing the truly strategic spend categories more deeply.
You might think of this as the spend in the lower-left quadrant of the famous Kraljic 2x2 matrix, which describes a strategy of “purchasing management” to manage non-critical, abundant supply that can be sourced locally in a de-centralized manner for maximum efficiency. And, maybe, if you manage this nuisance spend properly, you can even extract some value from it (e.g., a “quick source” process to gain some speedy spend savings).
Sounds straightforward, right?
Well, it’s not, and I have purposefully led you astray to prove a point.
The problem is that I never really defined tail spend in the first place – and if you can’t define it or see/measure it, you can’t manage it. And herein lies the rub (and the opportunity):
Tail spend could better be described as “nuisance spend” or “tactical spend,” and is comprised of many sub-segments — not just one or two.
Let’s return to our examples above. Segmenting on a spend-per-supplier basis, like in our Pareto diagram, is by no means perfect. What about low-spend, sole-source suppliers tied to large revenue or profit? OK, well, you might then refer to the Krajlic matrix as the solution. It’s better, because it helps profile the categories into complexity vs. impact (or risk vs. reward if you view it as such), but again, these are only two variables, and do not factor in any others.
Which ones? Let’s list six of them and ask whether you’d consider the resulting spend segments as ‘tail spend,’ or at least ‘nuisance spend.'
In the never-ending quest to deliver more value, procurement organizations are trying to squeeze more savings and innovation out of spend categories. But, eventually the well starts to run dry, and when that happens, you need to either get more out of that well (fracking for spend savings, perhaps?), dig a deeper well, find another place to dig, or find another way to get the water.
My point? To improve category management, which we sometimes affectionately refer to as CatMan, you sometimes have to expand it or blow it up completely. Here are some ideas that I’ve seen work elsewhere that can hopefully give you some inspiration and raise your category management game.
In our opening salvo on the latest and greatest edition of the “ERP vs. Best-of-Breed?” issue, I mentioned that baseline definitions are critical to understanding the deeper problems inherent in the debate. Defining “best-of-breed” (What does best mean? What breed are we talking about? Must the breed be apps-only?) and “app suites” (Single app? Or a ‘sweet suite’?) is the first step of the process. That’s because there are multiple options between these two ends of the spectrum. And, it’s really important to understand that a single ERP provider (or even BoB suite provider) doesn’t equate to an integrated solution set, a single architecture or a common support model, among other things. So let’s start with how to optimally source this technology (and/or broader XaaS services) — by looking to strategic sourcing.
New Year’s resolutions are a fun, time-honored practice that are often made with the best of intentions – yet, quite often, they melt away like the the gray-brown remnants of snow by the time February and March roll around. However, we’ve resolved to help contingent workforce and services procurement professionals stay on top of their game as we head into 2017. Last week, Spend Matters’ Research Director of Services and Labor Procurement, Andrew Karpie, gave his look ahead on platform-intermediated work trends in the coming year, including possible scenarios stemming from how digital platform intermediation for work and services will increasingly become “a mainstream sourcing mechanism in the enterprise.” So how exactly can procurement practitioners in this space stay ahead?
I will be hosting GE Digital and Catalant on Tuesday, October 18 — tomorrow! — to talk about the future of work and how enterprises can leverage online platform intermediaries to achieve expertise-based outcomes with unprecedented specificity, efficiency and the new working capital of businesses — velocity.
As someone who has been following the rise of online work intermediation platforms and the new modalities of work they enable, the “future of work” has always seemed like a curious expression. It always seemed to me that the future of work was something right at our doorstep, if not already here.