‘I Think Demand Management Is the Bigger Play,’ Roy Anderson Touts Visibility into Spend, Risks of Not Buying In (Part 2)

“I saved you all $5 million,” procurement veteran Roy Anderson tried to tell one CFO he worked for. “To this day, he’s never totally believed that.”

In Part 2 of Anderson’s conversation about his career and digital changes in the industry, he talks about change management, demand management and how he did convince another CFO that Anderson’s team had saved him $150 million.

Anderson, who became Tradeshift’s CPO and digital transformation officer in September, sat down with another procurement veteran, Pierre Mitchell of Spend Matters, to share some laughs and lessons about how the industry has adapted to technology over the last 40 years.

The following is the second of three-part series of their conversation, which has been edited for clarity. Part 1 ran Monday, and Part 3 will run Friday.

Roy Anderson: Change management is crucial now. When you do change management, you have to look at all the participants in that process.

Participant No. 1 is actually the supplier. Because if you recall, most of the suppliers would get hit at the time and go, “Oh, we’re going to automate this or automate that.” “We’re going to do sourcing and you’re now going to get 80 percent of the spend.” They offered them the pricing, send a bunch of salespeople in to help with it and nothing happens because the CPO at the time couldn’t actually move demand.

The suppliers are upset: “You know, this is the second time, we’re offering pricing concessions and actually making less money as we are not getting the volume you promised. You don’t have the ability, you don’t have the fortitude or the push to be able to make that happen.”

You had to get the suppliers sold on the fact that you either follow me or not. If you don’t follow me, you’re not going to be a part of this future play. I had a lot of suppliers that said, “Roy, I hate to tell you. I’ve got 20 years of experience where procurement couldn’t get out of their own way, so I’m going to stay with my one-on-one relationships with my internal customers.”

I knew I needed to sell suppliers on the concept so that they could actually offer it. I needed to have technology in place that was going to be easy to use, that allowed the user to get excited. Once they got into the tool, I could track their spending, and this is one of the things that I told the auditors, compliance and finance people, I said, “Risk is anyone outside the tool.”

If you’re in the tool, you’re using my contracts, using my suppliers, getting this pre-approved. If you’re outside the tool, that’s where the risk is. That’s where the fraudulent activity is. That’s where the bad decisions are being made.

Pierre Mitchell: There were some other companies in financial services that used that approach, which was really binding the process to the technology and saying the to-be process is enabled by the to-be system. That is the compliant system. When it’s not flowing through there, now you can have internal audit on your team saying that it’s a “material finding” if it’s not flowing through the system.

Roy Anderson: Absolutely.

Pierre Mitchell: That’s a powerful enabler for change, right?

Roy Anderson: Absolutely. I needed to get other players on my team. Who are my other players?

Let’s do, simplistically, accounts payable. I’m going to go and change how they handled invoices and the suppliers they’re dealing with. I wanted them to be fully versed with how we’re going to make the changes to make it digital.

The second is the auditor because I felt I was a front line of the audit team. As I did strategic sourcing, I found problems. I have plenty of stories around problems you find, because once you go out to the marketplace, and your current suppliers know bad things have occurred, but they always want to stay quiet. Once you go out to do a bid, all of the sudden you start hearing about all the bad things that have occurred.

The auditors start to come in and say, “Hey, Roy, what’s this issue that we’ve had? Where are these flow of funds happening?” So, the sourcing activity tends to raise a lot of concern among people that may or may not have been doing good business practices.

The auditors and I get really close together. They find things I can fix. I find things that they can support. We work together.

The third player is the CFO. The CFO, I have to say, “Listen, I am going to give you transparency. I’m going to give you accurate pricing. I’m going to give you accuracy in your income statement, because now you’re going to know exactly where you spent this money and how much you’re spending. I’m going to be able to lower your cost through both cost savings,” meaning auditable reduction in unit price, “but more importantly,” and, unfortunately, way too many people discount this, “through demand management, meaning I actually have it so you don’t spend the money.”

Can I tell you a quick story, Pierre? I went to the CFO and they were going out to go into a new country. Of course, legal says, “I’m going to hire a consultant to tell me about the legal rules.” The real estate people go, “I’m going to hire a consultant to me what’s in the marketplace.” HR consultant to talk to me about the people and staffing in those areas.

I said, “You know, I’ve got suppliers that already do business there. Why don’t I get their real estate, legal, HR, IT people to talk to you about all those issues and you don’t need the consultant.”

I went to the CFO. They were about to spend $5 million on consultants. We got it to the point where they didn’t have to spend any money. I said to the CFO, “I saved you $5 million.”

He goes, “Roy, how do you save me money? We didn’t spend anything.”

I said, “Right. You didn’t spend it.” [laughter]

Pierre Mitchell: Exactly.  [Editor’s note: For a fun “fireside chat” between a CFO and a CPO, see here.]

Roy Anderson: Exactly. I could have let you spend the $5 million and negotiate it down to $4 million. You would have accepted the million-dollar savings, but I saved you all $5 million. To this day, he’s never totally believed that.

Understand, I think demand management is the bigger play. It gets significantly less credit.

Pierre Mitchell: Indeed. It is funny because that ties back, going back in your history, to standard cost accounting. It ties back to PPV and posting variances to the GL. The kind of “green-visor” view of finance.

It’s funny because we conducted a procurement finance alignment study and found that, basically, 15 percent of indirect spend is really spent just because there is a use-it-or-lose-it budgeting policy.

Think about that as a spend management process. Spend all your money so you so you earn the right to be able to spend that — and more money next year — even though you may not necessarily really need to spend that money.

That’s why you get the end-of-the-year hockey stick. Right?

Roy Anderson: Yeah. That’s it. On that same discussion, you’re right on the target on this one about the price variance obsession. My CFO goes, “Roy, you say you’ve saved me $150 million. I don’t see it.”

I said, “Really? Let me show you your invoices, payments at the end of October, November and December (calendar year-end), and $150 million of additional spending happening in those last 10 weeks of the year.” I said, “There’s all the savings. They were left in the cost center. The cost center managers spent your savings.”

All you have to do is have better cost-center control and be able to find a way of pulling those dollars out rather than letting them re-spend it.

When he saw the number and $150 million of additional invoice activity at the end of the year, he looked at me and goes, “OK. I’m in agreement. You saved me $150 million. My finance people have to do a better job of working with these budget managers.”

Pierre Mitchell: As you moved on to State Street for your last gig in financial services, what were some lessons learned about bringing in a change mindset and approach that maybe was more aggressive than the “host organism” was willing to accommodate?

Any general lessons that you would find from companies that are operating in an older kind of industry that is maybe a little more averse to change?

Roy Anderson: We’ve stated that change management is everything. What does change management require? It means the internal customer understands what it means for them, because everyone is very egocentric when it comes down to this.

If you’re going to come in and change either my supplier or the product or service I’m buying or how I buy it, this all impacts me, the employee, the cost-center manager, the VP of the area. They have to understand that it is valuable to them. They’ve got to be bought into the fact that this was something they want to do together.

This is not something that procurement can do to them, because that immediately creates resistance and pain. It is about partnership. It’s about selling the concept and understanding that we want to give you better results at a lower total cost.

I tell new graduates that were thinking of getting into the supply-chain area, I go, “Understand it from the user’s point of view.” If I do this strategic sourcing thing and I save them 40 percent, the user has to go back to their manager and say, “Yeah, you know I’ve been telling you I’ve done a great job for the past five years? It seems that I’ve been overcharged by 40 percent.”

That is not an easy conversation for a user. You’re hugely successful and the internal customer goes, “How do I tell my boss this?”

Now, let’s say you do it the other way. You go through this big sourcing thing. You do it too fast. You beat the crap out of a supplier.

The supplier says, “If that’s how you’re going to do it, I don’t want to do business with you.” Now your internal customer is left holding the bag, saying, “Wait a minute. I had a great relationship with this person and you ruined it. Now I’m going to have to do huge amounts of extra effort to get back up to even.”  If you do a bad job, the internal customer doesn’t like you.

If, in fact, you go through that sourcing process and all that effort, the internal customer is working with you and you don’t get any result, they don’t like you because you wasted their time. All three scenarios, the internal customer is like, “Hey, this didn’t really work for me.”

You may have to lay out the potential that this could be big savings. This could be something that your internal customers and your suppliers have to work with. It may not always be where the supplier wants to be.

You have to understand the pluses and minuses and be able to work with them to create a value. That takes time. You have to create a relationship with that internal customer. You must understand the suppliers and the uniqueness.

Unfortunately, when you get into some companies, they say, “Here’s a bulldozer. Run through that crowd of people and I want $50 million in savings before the end of the year.” Unfortunately, that’s what we did.

Pierre Mitchell: “Turn the crank”, right? We just had a big strategic consultant come in. They said, based on their magical diagnostic, you’re going to save this amount. Go turn the crank on the sourcing factory and go make it happen, but you forget about the stakeholders and what it’s going to mean to their operations.

Roy Anderson: Yeah, I tell you, the consulting firms that understand bringing it to fruition and getting transition and change management done, is 90 percent of the effort, the sourcing part is simple. They come in, they source it and go, “Good luck taking this off because all your internal customers are against this.”

Well, it doesn’t work. That was the scenario at State Street. Great company, saved $50 million, but we created such pain in the process, because we didn’t have the time to do it right. That was difficult.

In any case, I decided that I’d been 30 years inside F100 companies with half as the chief procurement officer. I thought it was time to create a new model as a procurement services company. Note this started way back at Fidelity, when I wanted to run a procurement company out of Fidelity because they had so much spend. We had the technology. Unfortunately, they didn’t elect to do that.

I tried the same thing at Hancock. Their priority was to sell the company and starting a procurement company was not in the plan. I had to wait another 10-15 years before I could go and work it with a company called MetaProcure.

Pierre Mitchell: Tell me a little bit about that shift. It sounds like one is you wanted that notion of actually running this as a services business, which is funny because the modern trend in “global business services” and all that is actually running it like a commercial business.

Tell me a little bit about what appealed to you about it. Was it the recognition of services as a poorly managed area, tail spend as a poorly managed area, or as the ability to influence end outcomes and not be just “here’s the technology, good luck!”  What was it that drew you to this MSP-type model? Obviously, there’s technology even there that they were using.

Roy Anderson: Absolutely. The idea is that I believe in good procurement practices, the whole supply chain model, it works. The results are good. We actually should put our money where our mouth is.

The MSP model of procurement and the managed-service provider in the contingent worker area, is that you bring technology and services and get paid based upon the results of lowering the total cost structure and providing transparency and good sourcing practices.  Simplify the process, deliver accuracy, eliminate errors, and automate the manual interventions in the process.

That MSP model worked for me at Fidelity, Hancock, MetLife and at State Street. When I went to work with Metasys, we were able to drive a solution set and present this MSP type of model with a company down in Atlanta. We implemented a full P2P system and strategic sourcing at no cost to them.

It was 100 percent gain-share model, which is radical. Nobody does that. We did it because we knew we could find enough savings to be able to cover our cost structure with a reasonable profit. The client, they received good procurement, good technology and they received auditable cash savings, that covered all of their cost.

Their ROI was through the roof. It was “infinity” because there was no actual cost to them. As I said at an ISM session that Spend Matters did a year-and-a-half or two years ago, “Buyers have plenty of money — they’re just giving it all to their suppliers right now!”

You can streamline that process. Everyone wins. The suppliers get more business at a lower cost of sale. The buyers see a lower cost of doing business. The technology drives it, effectively. Now you have a better ecosystem where the procurement organization has created that environment.

I was a big believer that procurement can make that happen a significant amount. That’s what we did. I’ll tell you, the MetaProcure and GoProcure team absolutely, positively nailed it. They were ahead of their time in being able to drive that activity.