IT and Procurement. Can we ditch the stereotypes?

Two things caught my eye this week on the ongoing love/hate relationship between IT and Procurement.

IT doesn’t like Procurement

An article in Computer Weekly, 10 June 2008 print edition under the title: Procurement teams fail to serve IT. It reports on a talk given by Andy Kyte from Gartner. Some quotes from the piece:

Andy Kyte said that some businesses spend as much as 90% of their IT budgets on third-party suppliers but fail to get good value for money. Kyte said that IT procurement teams often act as if the only stakeholder they work for is the finance departments, and this is the reason why many deals do not add value and even lead to projects failing.

And, directly quoting Andy: “There is an obsession with cutting costs in IT procurement, but IT is about ensuring a better quality service to users.”

You’d expect Andy Kyte to know his stuff when it comes to procurement. After all, he’s featured here at AribaLive 2005.

Procurement doesn’t like IT

Which brings me to the this posting on the Ariba blog about Software As A Service vs IT. Here’s one quote: “it seems clear that IT’s tight grip on all things digital is gone and end users are winning the war.”

Which war? Justin goes on to explain:

What business user can survive without access to SaaS applications like WebEx or Salesforce? After a long battle over letting those and other apps through the network gates, the end users have won. IT simply can’t hold their end users back, strangling their productivity as more and more critical applications move online.

So can we ditch the stereotypes?

The stereotypes are there in full effect: From IT’s perspective, procurement is only about cutting costs. From Procurement’s perspective, IT is a gatekeeper which prevents users from doing business effectively. Sure there is some truth to both of those stereotypes. Yet at the same time there are CIOs who are looking at ways to break down information barriers within and between enterprises just as there are CPOs who are looking to generate value beyond unit price savings. From what I’ve seen in my professional life so far – which has touched both IT and Procurement – the similarities between the functions are greater than the differences.

Does Procurement eAuction Design Matter? (part 2)

You’ll be glad to know that this post is shorter than part 1. On this slide of the presentation I broke the 10/20/30 rule by using bullet points and font sizes of 14 – 16. Oh never mind.

Not all eAuction designs are created equal. Choosing the right eAuction type is an important step in maximising the benefits you can achieve from the event. Here are 3 examples I often use:

Hygiene Services

• Saving from RFI only: 17%
• Suppliers did not know there was going to be an auction involved
• Saving from RFI + Auction: 39%

In this case a potential client had already run their own sourcing exercise, achieving a 17% saving for Hygiene Services. TradingPartners was challenged to see if an eAuction would do better. To cut a long story short, the eAuction did much better, increasing the 17% saving to 39%. Now, in theory the buyer may ,have been able to negotiate some slight increase in savings beyond the 17%, but would not have been able to get to the 39% saving level without an eAuction.

We see this time and again with eAuctions: With open competition you get a better result than through doing your sourcing offline.

Consultancy Services

• Saving from a normal Reverse English Auction would have been about 12%
• Run as a Weighted Auction and so delivered saving of 18%

This auction was the first one run in the UK under the 2006 procurement regulations. These regulations state that, if an eAuction is used in the public sector, then the winner of the auction must win the contract (with certain caveats). These regulations have driven increased adoption of weighted auctions. Interestingly enough, weighted auctions often achieve greater savings than would be possible under simple English price-only auctions. This is because they do a very good job of levelling the playing field amongst higher price/quality and lower price/quality suppliers. And is another reason why weighted auctions should be used far more by buyers than what is currently the case.

Levelling the playing field amongst suppliers by using weightings improves the results for both buyers and suppliers

Dairy Products

• Saving from a normal Reverse English Auction would have been at most 5 – 6%
• Run as a Japanese Auction and so delivered saving of 12%

I still remember fondly the first Japanese eAuction we ran in the back end of 2005. The market place for this category at the time was very tight. So an English eAuction wouldn’t have been a great choice. So we ran it as a Japanese eAuction and got a dramatically improved result. Again, you can speculate that with judicious messaging, for example, you might have been able to achieve more than the 5-6% savings we calculated would have been achieved under an English auction. But again, an English eAuction would never have been able to achieve this increased level of saving.

Use particular auction types (e.g. Japanese or Multi Directional) when the market conditions dictate

Less than half of buyers use electronic reverse auctions

According to a survey published this week in Supply Management 60% of respondents do not use reverse e-auctions. Read the article here: http://www.supplymanagement.com/EDIT/Top_stories_item.asp?id=17116

Reasons against electronic reverse auctions include “it will damage supplier relationships” and “in industry X it’s still a problem finding suppliers that use e-mail.”

Reasons for electronic reverse auctions include reductions in administration and preparation time; easier comparison of data.

From my perspective it is puzzling that so many buyers are not even considering e-auctions. While I wouldn’t say that everything can always be auctioned effectively, there are always going to be categories that buyers will be able to achieve more (quality, savings, sustainability – whatever floats your boat) through the considered application of an e-auction.

A decade into the e-auction industry and there is still a whole lot of educating to be done amongst buyers about when and how to take advantage of reverse auctions.

I’ll say one thing (again): e-auctions are a tool. e-auctions do not damage supplier relationships, if you run then well. If you run an e-auction professionally and carefully you can get the best price in the market while still maintaining supplier relationships.

Alibaba – procurement’s killer app?

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)

Optimisation Algorithms

Last week’s Economist (15 September) has a special briefing on algorithms. The 3 page article covers a range of applications for algorithms:

1. Making sense of unstructured data (Autonomy)
2. Routing aircraft in an optimal way (UPS)
3. Routing calls to call centers (Convergys)
4. Making networks more resilient to data disruptions (BT)
5. Calculating optimal location of goods on shelves (Tesco)
6. Looking out for potential fraudulent activity (ClearCommerce)
7. Finding the most relevant results for an internet search (MSN, Yahoo, Google)

Algorithms are also prevalent in optimisation routines which help buyers decide the best way to award contracts to competing suppliers. Yet not only did The Economist fail to quote Michael Lamoureux, they didn’t even mention procurement. To be fair they did mention supply chain, but supply chain attracted dramatically less words than even call centers did.

To me this means one of two things:

1. Procurement is an uninteresting dead end, compared to sales, marketing, finance and technology
2. Procurement is still a nascent, poorly understood discipline that has yet to make its mark on the general consciousness.

Obviously I’m in this game because I believe option 2 is the case ….

Buyers have more fun

Was fortunate enough to be able to go to a dinner hosted by CBR last night, entitled “Spanning the IT/Business Divide”. It was being paid for by an SOA company, so there was a lot of talk about whether SOA does or does not help span the IT/Business Divide (conclusion – the name doesn’t help, because an SOA does not provide a “Service” in the way business people would understand).

More interesting was that the most provocative questions and issues, which provoked a full and frank exchange of views, came from a gentleman who used to be in IT but is now a buyer of software rather than a technologist. Sample question: “why should I invest an unknown $$$ value into an SOA  architecture when I could instead, at a low, known cost hire some bodies to type information from one system to another”.

If your immediate response to that question is to get riled and believe that the questionner is stuck somewhere in the dark ages then you have fallen into the trap of perpetuating the IT/Business divide. Because I bet you, “The Business” is asking the same question. It is a serious question. IT departments need to be able to step this far back from their day to day operations to be able to challenge themselves and their futures with questions like this.

And then I was reminded of this post on Deal Architect I read a while back, in which Vinnie Marchandi intimates that the most important skill needed in IT departments is vendor management. IT directors need to address this challenge and justify why they (assuming they are technologists) are even there in the first place. Only then does the IT/Business divide stand a chance of being spanned.

p.s. Thanks to Jason Stamperer from CBR for running the event. And apologies for not having paid attention to the new layout of CBR magazine. Truth be told I have been a big fan of the magazine for a while now but now I think about it I haven’t seen a copy in a while.

 

Why buyers should run electronic reverse auctions

The technical jargon is asymmetry of information.

In English: You, the buyer, don’t know what price potential suppliers would be prepared to supply to you. Each supplier knows what price he could go to but, cartels aside, each supplier does not know what price other suppliers would be prepared to go to.

In this kind of climate everyone has to assume a market price. Usually they assume this market price based on what was paid last year. If you negotiate a 5% saving based on last year’s prices then you might think you got a good deal. But if all the suppliers would have been willing to give you 15% or even more then you got a bad deal.

You will never know the true market price until you run a reverse auction which contains (and only contains) well-qualified, serious suppliers.

What value can the pointy heads add to procurement?

Effective reverse eAuction design is one area that springs to mind.

I will declare an interest up front – the company I work for runs eAuctions.

But any perceived bias should not detract from the main facts that I have seen time and time again:
1. In the vast majority of cases, running a properly-designed eAuction will deliver lower prices for the buyer than would be achievable through a traditional off-line tender process.
2. Today’s auction technology is powerful enough to model non-price value-add elements, like service, delivery etc. Building these factors into the auction leads to an even better result (in terms of total value for money) than purely auctioning price.

Naysayers complain that auctions can’t work for their category because to run an effective eAuction you have to:
1. Be clear up front about what you want to buy
2. Be clear up front about the process for awarding the contract (e.g. how you value price as against non-price elements of the bid)

But these two factors, I am told, are no more and no less than best practice in procurement. Being vague about requirements or about the contract award process can seem like a quicker way to get things going, but the cloudier they are the more scope there is for individual suppliers to lead the process down a path that is not the best for the buyer.

The best results, for both buyer and the market as a whole, will be obtained when the buyer is open about the requirements and the criteria for being awarded the business, and when both of these are made as simple as possible in order to minimise the risk of misunderstanding.

Naive, perhaps, but then again, as Einstein, the most pointy-headed of all, said, Everything should be made as simple as possible, but not simpler.

What can IT learn from Purchasing

More than they might think.

I am often struck by the similarities between Purchasing and IT functions:

• Both are often considered back-office support functions by “The Business”
• Both are of extremely variable quality – there are some very able and … not so able …. individuals in each. Meaning some of these live down to their stereotype, but many are unfairly hamstrung by the stereotype
• Both spend a lot of energy arguing that they should be represented on the board
• Both often suffer from a lack of professional prestige in their professions (compared to, say, finance people)
• Both often get brought into projects too late to be able to add any real value, so they are left to pick up the pieces, thereby confirming the business’s stereotype that they are purely a back-office support function (see above).

Judging by this the two departments seem to be natural allies. Yet somehow the prevailing mood between the two functions is often one of mutual mistrust.

A large part of the IT budget is spent on suppliers (hardware, services, etc) but the CIO has a couple of concerns:
(a) doesn’t want to lose control of this spend.
(b) is not even sure what value the purchasing guys could add, anyway. After all, how can you buy computers if you don’t know the first thing about them?

Of course, this kind of weak reasoning is exactly the same that “The Business” often applies to the IT department: “What value is IT going to give me in putting together the requirements for this new system we need – they have no idea of the processes we use.” This argument completeley misses the point. The IT department knows how to use technology to solve a whole range of business issues and is best used as an equal partner in the development process for new systems.

A dose of Do unto others seems to be called for here.

The job of the purchasing department is to negotiate with suppliers and secure supply of goods and services. Purchasing knows a thing or two about how to do this well.

Some thoughts:

1. However good a deal you think you have got from your suppliers, the purchasing guys will be able to get you a better one (i.e. more for the same money, or the same for less money).
2. Yes, they will get you a better deal. They won’t take control of the IT hardware themselves. And they will only go out and source what you tell them you want.
3. It isn’t a bad idea to have someone around who can play bad cop to your good cop when it comes to supplier negotiations.
4. Less effort for you if you get someone else involved to do a lot of the legwork in sizing up potential suppliers.

Next time you are thinking of (re-)negotiating a contract for supply of IT goods and services, do yourself a favour and pick up the phone to Purchasing. Who knows, you might be able to save some money to spend instead on all those interesting projects that you haven’t got the budget for right now?