BravoSolution announced last week that it is buying Verticalnet. Or, as the relevant headline on finance.yahoo.com puts it: Italcementi unit agrees to acquire Verticalnet in deal worth 15.2 mln usd.
Quite big news in the eSourcing technology space. Bravo is a credible player particularly in mainland Europe, backed by €2.8bn Italcementi, but has no US presence. Verticalnet apparently has some good software and has some US customers but has no real idea of how to sell its software. So on one level the tie-up kind of makes sense. I admit it I was of this opinion when I first read the news.
But look at the stock prices of the two companies:
Irrespective of what pundits and marketers might think, the markets are not amused.
The announcement was made public around the 26th October. Just around the time that Verticalnet’s stock tanked. And it certainly didn’t make a positive impact on Italcementi’s share price.
Assuming people were buying Verticalnet stock on the strength of rumours of the company selling out – these people were mightily disappointed when they learned it was Bravo who was doing the buying. And they stampeded.
Meanwhile in Milan no-one even noticed.
Are the markets trying to tell us something? Like: Software wants to be free. So why should an organisation get involved in costly, complex (and ultimately disappointing) deployments? Especially if they are only going to use a tiny fraction of the system they bought? This e-sourcing software space is so over.
I’ve blogged recently about the missing killer app for procurement.
And here is news of Alibaba’s IPO on the Hong Kong Stock Exchange, raising $1.5bn (apparently the 2nd biggest internet IPO after Google).
Is this it? Or will it be?
Browing Alibaba’s message boards today, the hot topics are pretty basic ones: “how do I know this is a legitimate supplier?”, “how do I know this is a serious buyer?”. Given that the basic point of the site is to put buyers in touch with (Chinese) suppliers, the fact that these questions are such hot topics seems to somewhat undermine the whole point of the site. And having worked with people who have used Alibaba the word is that you get a lot of quantity there, but the quality is more debatable.
Still, with an extra $1.5bn sloshing around, who can say what will happen next.
Very worth watching.
(p.s. following on from my last post, Alibaba.com’s Alexa ranking is 164 which rains all over even Salesforce.com’s parade)
I was commenting on an old blog entry from JP Massin’s blog earlier which got me thinking. He looks at Alexa rankings for various e-sourcing providers to see which are the most popular of the sites. Even the top player (Ariba, no surprises there) languishes at about the 200,000 mark.
I like to keep things simple. And in its simplest terms, a business is about buying something at a low price and selling it a higher price. OK, in reality there’s a bit more to it than that – you usually have to do some magic to your inputs to be able to turn them into something profitable.
Buying + Magic + Selling = A viable business
Now, everyone knows (or thinks they know) about what sales people do. They make people like them, they earn lots of money and immediately piss it up a very high wall. (Check out Boiler Room if you don’t believe me).
Then the workers of the magic are equally more or less understood, or at least respected. The guys who develop the products, who deliver the service, whatever.
But the purchasing guys … they’re just treated as an afterthought.
Have a look at these Alexa rankings:
You can argue about how meaningful/gameable Alexa rankings are anyway, and you can argue about comparing a completely On Demand player with a traditional software provider. But this doesn’t detract from the fact that the broad picture is pretty clear. Lots more people go to Salesforce.com than to the other two companies I’ve picked. The real point is that Ariba - which we tend to consider the 800lb gorilla of procurement software – barely even registers in the grand scheme of things.
A few possible interpretations:
- Procurement is a backwater and always will be
- No-one has yet come up with procurement’s killer app
- Procurement and technology really don’t mix
I’m betting on option 2. Any other ideas?
I’m going to quote from the current issue of CFO Magazine Australia (apparently the article is not available online but it’s called When the price is right if you can get hold of it).
The opening paragraphs go as follows:
It might be thought that buying is the easiest part of a chief financial officer’s job. After all, deciding what to buy and signing a cheque sounds a lot easier than issuing a complex instrument like hybrid notes.
But actually, buying, or procurement, has been elevated to a high art and those who can master it stand to cut [sic] millions from the bottom line.
For many organisations, procurement is a low priority and buying decisisnos and power are spread around the company.
The article then goes on at length to describe how significant gains can be made by consolidating spend across business units, by rationalising specifications and by taking a more co-operative approach that “let’s suppliers shine”.
None of this would come as particularly revelatory to buyers of course but this is a magazine aimed at CFOs. It’s great to see purchasing getting some coverage in the rest of the business. But also, if spend aggregation really is still such a key topic, then it goes to show how much more the profession still has to do.
Since my last post on Coupa I’ve checked the open source version of their software and am mightily impressed.
On the functionality side of things it seems to do 80% of what Ariba used to do when I was familiar with that application (admittedly, some years ago now). And the 80% it does is the important 80%.
And on the technology side of things I am blown away now by Ruby on Rails and Amazon EC2. Both are tremendous technologies to use - I can’t remember the last time I found a programming language (Ruby)/system environment (EC2) so exciting.
Time for a sit down I think before I get too carried away. I suspect Coupa will crop up in a few more upcoming postings here.
Over time the value of software trends towards zero.
In operating systems we’ve already seen mass supplanting of Unix with Microsoft and now with Linux.
In the procurement space SAP to Ariba to Coupa marks a clear trend. OK, so Coupa isn’t completely free but if they really are providing people to support your setup on their system in the quoted prices – then the software element of the deal is pretty close to free. (With thanks to the doctor for the Coupa story).
Then in the sourcing space, Whyabe is already offering software for free.
Of course things are never as simple as they seem:
- Free versions of software tend to have less bells and whistles than the chargeable versions.
- There are always lots of revenue opportunities for software companies outside of selling just the software itself.
But overall the direction of software pricing is only going to go one way.
Before I leave off HBR’s September edition here are two entertaining/instructive anecdotes on how the wrong metrics can dramatically affect your company’s performance. In both these cases there was an apparent seasonality in the company’s sales performance that turned out to be down to the management of the sales force.
End Of Quarter Discounts and Baby Pee
A manufacturer of diapers was experiencing a monthly demand cycle of low, low, high, which would be repeated each quarter. All this despite the fact that babies tend to pee at a roughly constant rate. It turns out that the CEO was driving his workforce hard to hit quarterly sales targets. Retailers soon realised that if the manufacturer was falling short of its quarterly numbers, it would offer deep discounts. So retailers ended up waiting till the quarter end and buying 3 months’ supply of diapers. The following quarter they wouldn’t need to buy anything until month 3 by which time the manufacturer’s sales were struggling and discounts became available again.
Great at Forecasting, but Lousy at Growth
This company was facing a high, high, low cycle in demand.
A CEO wanted to promote “rigour” in his sales force – so their commission was based on forecasting accuracy as well as sales. If a salesperson hit her forecast she would get an extra bonus on top of commission. If she went over her forecast, any subsequent commission would be halved.
The salespeople therefore worked hard to avoid going over their forecasts – in effect holding sales over their forecast into the next quarter. Not only did company growth suffer, but so did customer satisfaction – customers would find it very hard to get hold of product in the 3rd month of the quarter.
HBR September 2007 has a fascinating article on investigative negotiation and is a must read for buyers. Investigative negotiation aims to deliver better results for both parties by “encourag[ing] negotiators to enter talks the same way a detective enters a crime scene: by learning as much as possible about the situation and the people involved.” In simple terms: in a negotiation you are best served by not assuming anything and instead getting the other party to explain their motives and objectives.
Negotiations and reverse auctions are both such pivotal elements of a buyer’s day to day activities, yet sometimes buyers consider the two as antithetical approaches. In this post I’ll summarise the authors’ definition of investigative negotiation and offer some ideas as to how it can dovetail with your reverse auction strategy.
- Don’t just discuss what your counterparts want – find out why they want it. Once you understand “why” you are in a better position to resolve apparant impasses.
- Seek to understand and mitigate the other side’s constraints. Perhaps you are able to obtain better shipping costs than your supplier. If so then you may be better off negotiating prices without shipping costs and arrange shipping yourself.
- Interpret demands as opportunities. If your counterpart is looking for penalties for late completion this means they value on time completion – so you should look to balance penalties for late completion with bonuses for early completion.
- Create common ground with adversaries. Don’t assume other parties are adversaries. If you understand their needs and objectives you may be able to achieve a better deal than otherwise would be the case.
- Continue to investigate even after the deal appears lost. If you can keep talking and understand why you lost the deal you may even be able to make a counter-offer. At the very least you will gain some knowledge you can use in the future.
None of this contradicts reverse auction strategy – in fact reverse auctions can even help. Buyers must address all these 5 aspects during their sourcing exercises. If they do address these 5 aspects then they can leverage even better results with auctions – and without necessarily needing to use particularly complex systems.
Reverse auctions particularly help with points 2 (Seek to understand and mitigate the other side’s constraints) and 5 (Continue to investigate even after the deal appears lost). For example:
- Setting up a reverse with multiple what-if scenarios can allow suppliers to offer pricing against different delivery terms or even different specifications during the reverse auction itself – assuming, of course, that the buyer has looked to understand the supply market’s constraints.
- Reverse auctions also offer instant feedback to suppliers. So a supplier can see instantly if the deal appears to be slipping away … and can modify offer as appropriate. This is beneficial to buyers because any modification a supplier has made to their bid is instantly relayed to other suppliers – so they can then make their own counter-offers if necessary.
In short – professional buyers who are managing robust sourcing processes will find that reverse auctions fit very well into their overall sourcing processes. But a successful reverse auction strategy can only fit within a robust sourcing strategy.
This is a section title in Are You the Weakest Link in Your Company’s Supply Chain? (subscription required), an article in HBR Sept 07. The article attempts to raise the profile of Supply Chain Management amongst CEOs by arguing that, when done right, SCM is a source of competitive advantage.
They give a range of pointers on how to do Supply Chain Management right, for example:
- Ensuring that supply chain leadership has real supply chain expertise,
- Adding supply chain insight into business planning,
- Balancing short term and long term views,
- Taking advantage of modern technology.
On the subject of technology the authors argue that whilst good implementations of technology can make a positive contribution to supply chain management, many companies make unwise investments in technology. Therefore:
A CEO who understands new technologies can play the important devil’s advocate role by challenging the business case for technology adoption. Most firms that have bought leading-edge supply chain systems acknowledge that they use only a fraction of the software’s functionality and an even smaller fraction of the promised capability. An attentive CEO can lend authority to the change-management process, helping to foster user buy-in and making certain that proper vendor support, adequate training, and other resources are in place.
Moreover, CEOs who fully appreciate the challenges of deploying complex and costly systems can help their companies avoid classic missteps. The CEO of an industrial equipment manufacturer admitted that her company into one such classic trap: “we spent $18 million getting an ERP package up and running in our company, and all we did was bring more modern technology to bear on supply chain processes that are 40 years out of date. I expected this technology to bring supply chain costs down dramatically, and nothing has changed. My mistake was expecting technology to solve a process challenge.”
I love this quote and couldn’t agree more with the sentiment. But I suspect that readers might go away underestimating the significance of change management issues when implementing new software. Users are very likely to resist the imposition of new supply chain technologies. Encouraging buy in and user adoption takes a lot of attention from the top. A lot. For your software implementation to succeed, at least with the kinds of software package around today, you will need plenty of leadership attention and energy to overcome user resistance.
It’s often worth having a look at particular cases of reverse auction design and see what was done well and what could have been done to improve the result further. In this post I will look at an auction for a couple million $ of packaging materials.
Some key aspects of the auction design were done exceptionally well, credit to the CPO and the buyer:
- All bidders were credible potential suppliers. They were all known suppliers who the buyer would do business with.
- Switching costs had already been factored in so the suppliers were all bidding on a completely level playing field.
- What if scenarios were used, in other words bidders were able to offer pricing against different specifications.
- The buyer was clear that no post-auction price negotiation would be entered into. In other words, bidders had to put their best price in the e-auction rather than hold back for further haggling after the e-auction.
In summary, the buyer had done all his homework up front and run a well managed process, and so is now well placed to award the contract quickly and start achieving the savings identified in the auction.
However, an even better result could have been achieved if the buyer had managed to address some of the following items:
- Invite more suppliers from low cost countries. In this case there was one Chinese supplier taking part in the auction plus a handful from Eastern Europe. The Chinese supplier was not faced with much competition, even on a TCO basis. This is an important point to remember and is a much more general point than one specifically about Chinese suppliers. While some believe that all you need is 3 or 4 suppliers to get enough competition going, the reality, as I keep repeating, is that you need 3 or 4 suppliers who share a similar cost base in order to stimulate the competition. The challenge, obviously, is to make sure that new suppliers from low cost countries are pre-qualified rigourously.
- Start the auction at a pre determined entry bid level rather than having suppliers offer their own pre bids. Auction professionals are very aware of “killer bids” in which one supplier makes an extremely low bid in order to put the other suppliers off competing. Better to have all bidders make regular, small bids to keep the competition going.
- Show suppliers the current best bid rather than their rank. This is only practical where all suppliers are starting from the same entry bid level, but when it is used, suppliers have something to aim at and encourages more aggressive bidding activity.
- Play a more active role during the auction itself to encourage bidders to bid to the best of their activity during the auction. Some people believe that an auction is a purely technical exercise that magically makes suppliers bid to the best of their abilities. However, the reality is that human interaction is key:
- Bidders are humans too and prefer to deal with a human being rather than with a machine.
- Bidders often make incorrect assumptions in their bidding (e.g. if I am competitive in lots 1 and 2 then I don’t need to be competitive in lot 3 because the buyer is bound to single source). Skilled auction managers can spot trends in bidding behaviour and encourage more aggressive bidding across all items in an auction - just like their counterparts in traditional sales auctions.