Part 2: Reflections on Spend Management's Decade

Back in 1998, I was a starry-eyed consultant working for a small firm in Boston that gave me the freedom -- at least when client needs were not pressing -- to explore and research areas that I thought might prove fruitful to the firm's body of knowledge and position in the market. One of the areas that captured my attention was the intersection of dynamic pricing mechanisms and strategic sourcing. Up until that point in the decade, consultancies like AT Kearney and Mitchell Madison had made a bundle through rationalizing indirect spend at companies, bidding out contracts in a manual fashion after weeks or months of crunching numbers. But few consultants or vendors had ever tried to create an environment where true market transparency would rule the day in the negotiation process. This, specifically, is what captured my imagination. For why devote thousands of man hours to a sourcing process to sacrifice 10, 100, or even 1000 basis points on the back-end because of an inefficient negotiation model?

My belief in the power of open markets to create a theoretical optimal clearing price for buying organizations led me to explore a handful of small technology and services providers. After some research into the subject, I eventually wrote a guest column early the following year in Information Week on the subject. Within weeks of publication, one of the co-founders of a nascent vendor in the sector, FreeMarkets, had emailed me to say that I should dig into them a bit more. I agreed, and had the good fortune of routing myself through Pittsburgh en route to see a client in Ohio later in the month. About 3 hours on the ground in the old steel city would change my life. When I arrived at FreeMarkets that day, I saw a place abuzz with youthful energy -- and perhaps a bit of arrogance as well, though I was too young and naïve to see it at the time. I stood memorized as I watched a live "bidding event" take place in a make-shift market operations center -- which predated the now infamous massive flat screen, wood-paneled MOC, courtesy of millions of dollars from FMKT's IPO proceeds.

Watching the progress of an event and talking auction theory with some of the early folks at the vendor got me thinking: what am I doing in consulting? Why not get involved in this great experiment? Evidently, some of the folks at FreeMarkets were thinking the same thing, as Sam Kinney, my original contact at the place, reached out to me by email after I returned to Boston and suggested that I actually do something with my life -- just as he had done -- and kiss consulting away for good. I took the bait, and shortly thereafter I was living in an unfurnished apartment in Pittsburgh, sleeping on a hardwood floor until my furniture arrived. The next six months were a whirlwind of ideas, caffeine, and all-nighters at the office (with a few six packs of Yuengling and nasty Primanti brothers sandwiches tossed in for good measure).

In retrospect, FreeMarkets was an amazing place to be at the time. We played a crucial role in shaping the history of sourcing. I have no doubt about that. But our hubris and ego limited what we could have been. For instance, we were obsessed with volume and identified savings numbers for our customers. But we rarely considered until much later why such a substantial percentage of savings, on average, would go unimplemented -- at least 30%, some said well over 50% -- after a competitive bidding event. In addition, we believed that the market-making aspect of what we did -- essentially RFQ writing, supplier identification / management, and bid strategy development -- could never be replicated in self-service software and that our customers would never hire MBAs to do it internally. On this count, we were dead wrong, and it cost us severely in the end, as we showed up about two years late to the self-service sourcing market with a product that was already outdated when it was eventually released. If you're SAP or Oracle, this is the type of thing you can get away with. But if you're an upstart from Pittsburgh, it's not.

Ultimately, the most frustrating aspect of FreeMarkets for me was what it could have been if personal egos, near unlimited capital -- at least for a short period of time -- and an inability to deliver market-leading enterprise software, had not gotten in the way. If we would have toned down the arrogance, been forced to do more than less and had taken the self-service software threat seriously in the early going and reacted accordingly, I have no doubt that the FreeMarkets name would still be shining above the city skyline in Pittsburgh today.

Jason Busch

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