Making Sourcing Savings Stick

As a sourcing professional, my most difficult negotiations aren’t with suppliers but rather with internal customers. Based on conversations with my colleagues, that experience is not unusual. One measure of this challenge is “savings leakage” (savings negotiated but not realized). Aberdeen Group reports average leakage rates of 21% as Purchasing strives to implement its sourcing decisions. Best In Class companies experience about 14% leakage whereas All Others see 24% leakage ⁽¹⁾. Small companies experience up to 40% savings leakage ⁽²⁾. Net, there is a huge payout for improvement.

There can be several reasons for leakage:

1. Communication. The using organization is unaware of the award and continues buying from the incumbent.
2. Inconvenience. The new supplier’s process is inefficient providing a negative incentive to change (e.g. a travel reservation website which is difficult to use).
3. Fear of the unknown. There may be a long-standing, positive relationship between the supplier and the user. Alternately, the internal customer may not be thrilled with their current supplier, but at least the incumbent is “the devil they know”.
4. Lack of trust. The internal customer organization doesn’t trust the buyer to properly address non-price criteria when making sourcing decisions.

Regardless of the reason, leakage represents innumerable hours of wasted effort and, more importantly, millions of dollars in missed bottom line profit improvements.

Communication breakdown is relatively easy to address, particularly with the use of eSourcing, eProcurement, Spend Analysis and on-line contract management systems. The other three reasons require a deliberate process and up-front planning. It’s all about effective change management! Successful sourcing managers don’t wait until after the award to sell their internal customers. This is particularly critical in companies where business units are relatively autonomous, and not subject to corporate edicts.

Effective sourcing professionals follow Stephen Covey’s advice: “Begin with the end in mind”. What does that mean? It means involving key stakeholders throughout the entire sourcing process so they will support implementation of the ultimate award decision

Specifically, what does this entail?

1. Ensure upper management support for sourcing initiatives and savings goals.
2. Initiate a comprehensive and methodical change management process early on.
3. Work with stakeholders to clearly define decision criteria with appropriate measures.
4. Conduct the RFP/RFQ with stakeholder input and involvement.
5. Gain stakeholder support for a comprehensive implementation plan and enforce accountability.
6. Monitor expenditures over time to identify any leakage.

Sound like a lot of work? It is. However, it often eliminates months of wasted effort on sourcing decisions that don’t stick. Why is it that we never have time to do it right, but we always have time to do it over? Is this formal process necessary for all savings initiatives? No, but the thought process should be applied to all situations. Thinking through this process allows you to determine the extent of the effort required. One size does not fit all.

Addressing stakeholder fear, lack of trust and potential inconvenience through a comprehensive change management effort and improved communication will have a tremendous impact on savings leakage.

Click here to access a more detailed write up or here for a podcast on the topic.

⁽¹⁾ Aberdeen Group. “The Advanced Sourcing & Negotiation Benchmark Report. January, 2007. http://aberdeen.com/aberdeen-library/3857/RA_AdvancedSourcing_3857.aspx

⁽²⁾ Aberdeen Group. “Sourcing Challenges for SMB”. August, 2007. http://aberdeen.com/aberdeen-library/4420/SI-smb-sourcing-challenges.aspx

This article was originally published on E-Sourcing Forum:

http://www.esourcingforum.com/archives/2010/04/13/making-sourcing-savings-stick/

Strategizing for Successful eSourcing Implementations

Your company has wisely contracted for an eSourcing solution. You are relying on it to deliver process improvements and sorely needed cost savings. You’ve trained your people, but you recognize that the challenge has just begun. Internal adoption is key to your success.

The challenge you face is culture change. It is the biggest obstacle in any software deployment. Less than 15% of your user base will be “early adopters”. The majority will take a “wait & see” approach, and 10% or so will be “foot draggers”. There will be resistance because the implementation requires behavior changes for all involved.

Experience across numerous customers representing a variety of industries has identified some levers which can help to accelerate user adoption. These are:

• Goals and Measures – Creating a “pull” enviornment
• Organization – the right structure, roles and responsibilities
• Processes – documented best practices

Leadership creates a “pull” environment by establishing Goals & Measures and holding people accountable. Since everyone has more to do than they can possibly get done, they must set priorities. So how do they decide what gets done and what gets left undone? It is human nature to seek pleasure and avoid pain. Therefore, what gets measured by leadership gets done! That’s why goals and measures are critical for internal adoption.

While goals and measures are important they must be supported by the proper Organization. This is not merely about structure – the boxes on the organization chart. You must also have clearly defined roles and responsibilities with the positions staffed appropriately. Key roles include:

Champion – He/she establishes and communicates goals and measures, provides necessary resources, breaks down barriers and holds people accountable.

Master User – This individual “puts the feet” on the implementation. Required skills include: Leadership, Change Management, Project Management, Sourcing & Communications. He/she is the liaison with the Champion and becomes the on-going center of eSourcing expertise. A strong Master User is a key indicator of success.

Super User – In larger organizations, the Master User can’t do it all. The Super User is typically an on-site resource who teaches tools and tactics, models best practices, coaches other sourcing professionals, shares learnings within and across the organization, and identifies barriers and improvement opportunities.

Sourcing Professionals – The sourcing professionals do what they’ve always done – apply sourcing expertise to deliver cost savings, cycle time reductions and process improvements. However, they perform these tasks with the assistance of an eSourcing solution supported by new processes and best practices under the tutelage of the Master and Super Users.

The third lever for internal adoption is Processes. A quality tool called the P-D-C-A cycle (Plan-Do-Check-Act/Adjust) is useful for this purpose.

Plan includes: creating an implementation project plan, user training and spend analysis which enables sourcing pipeline development. There is a tendency to shortcut planning and jump to action. This typically results in significant frustration and rework.

Do refers to the actual implementation. This involves the application of processes, best practices, templates and checklists to conduct successful eSourcing events. Most eSourcing solutions provide templates and allow you to embed processes and best practices into the project management feature of the solution.

Check relates to tracking your progress. Are you achieving the goals established on both a program and project basis? Your goals must be supported by specific measures against which you track.

Act/Adjust focuses on continuous improvement. This includes periodic reviews where individuals share learnings with each other, identify improvement opportunities, and develop an action plan. The cycle then repeats.

Using the three levers: Goals & Measures, Organization and Processes, helps to embed eSourcing into your organization’s culture. Ignoring these important considerations will impede your efforts thereby delaying the efficiencies and savings that are critical for survival in today’s economic climate.

Barbara Ardell - Vice President - Paladin Associates

This post was originally published on E-Sourcing Forum at: http://www.esourcingforum.com/archives/2010/04/01/strategizing-for-successful-esourcing-implementations/

Stopping Contract Leakage

You've invested countless hours and completed your strategic sourcing process. The resulting award will deliver significant and important savings to your company's bottom line. You're a hero, at least for now. But how do you ensure that the award is implemented as contracted so that the savings, in fact, accrue? And how will you know?

Contract leakage is your enemy. It includes things like:

• Buying from a non-contract source.
• Buying non-contracted items.
• Buying through the wrong channel (in store purchase or retail website versus "punch out" catalog)
• Paying a total delivered price different from the contract (including payment terms, freight, duty, etc.),
• Incorrect or missing contract reference which results in non-contract billing.
• Not getting rebates or other volume price reductions.

Most sourcing professionals face these challenges and have a difficult time plugging all the holes. This is particularly true for today's awards which often span vast geographical regions and numerous business units. Aberdeen Group reports average leakage rates of 21% as Purchasing strives to implement its sourcing decisions. Best In Class companies experience about 14% leakage whereas All Others see 24% leakage ⁽¹⁾. Small companies experience up to 40% savings leakage ⁽²⁾. The risk and the opportunity are huge!

To address this challenge, one needs to do the following for each potential leakage point:

1. Measure the leakage rate.
2. Understand the root cause.
3. Fix the problem – either the user behavior, vendor behavior or change the definition of "right".
   Most people don't even try to do #1, don't understand #2 and, therefore, are in no position to fix the problem. Let's examine each point in a bit more detail.

1. Measure The Leakage Rate
There is an axiom among business gurus that states: "What gets measured, gets done." So if it's important that our award gets implemented correctly, then we first need a way to track actual purchases and get visibility into all of the potential leakage points listed above. Also, measurement must occur on a timely basis so that any required corrections can be made before additional savings are lost, perhaps forever. You wouldn't drive your car by looking in the rear view mirror. You can't effectively manage your expenditures that way either. Fortunately, today's spend analysis solutions provide the functionality we need to efficiently monitor the various components of our business awards so that we can take the necessary action to forestall contract leakage.

For this purpose, it is critical that data be refreshed very frequently – at least monthly. A quarterly data extract leaves erroneous spend unchecked for 3 months draining savings that may never be recovered. Monthly extracts are actually more efficient. Once the queries are defined, they get put into a monthly schedule and can happen automatically. They become part of the routine. A monthly review becomes part of the sourcing manager's routine as well. With an effective spend analysis solution, he/she can quickly review contract performance. Some tools (such as BIQ) provide an interactive tool that facilitates period-to-period comparisons and highlights outages by magnitude. This makes it easy for the buyer to prioritize efforts to reign in maverick spend.

2. Understand The Root Cause
Now that you've identified the outages, what do you do? First, you need to understand the root cause(s). As stated in the article above "Making Sourcing Savings Stick", there can be several reasons including: communication, inconvenience, fear of the unknown, lack of trust and others. Quality tools such as "5 Whys" or a Fishbone Diagram can help you get to the root. Fixing symptoms alone results in unnecessary rework.

3. Fix The Problem
After identifying the root cause(s) you want to develop a correction plan. The plan should address management support and must involve stakeholders. It should include detailed actions with names and dates and, importantly, a means of accountability.

Accountability is key but can be tricky, particularly in situations where purchasing is seen as more of a support organization rather than a leader on the path to improved profitability. You must re-double your effort to sell your sourcing plan to corporate management as well as to internal customers. To do that effectively you must:

• Understand and explain the link to business objectives. How will contract adherence help stakeholders achieve their goals?
• Refine business processes to make doing the right thing easiest. Human nature follows the path of least resistance. How can you make it easy to comply?
• Speak like a CEO. The language of management is numbers. What is the impact of leakage on profitability and other financial goals?
• Be opportunistic. Look for "pain" you can relieve. What short or long term pain can be alleviated through compliance?

The preferred approach is the "carrot". Convince your constituency that compliance is in their best interest. Reward positive behavior. Publicize successes and share the glory! However, you must also be prepared to escalate if necessary. As Teddy Roosevelt advised: "Speak softly and carry a big stick". Most importantly, don't get discouraged. You must continually monitor the situation through your monthly reviews, and seek continuous improvement over time.

As sourcing professionals, our job is not done when the contract is signed. We must continually monitor and measure actual spend, identify root causes of leakage and implement effective fixes so that we don't leak 15% to 40% or our hard-earned savings. Spend Analysis solutions provide an effective and efficient means to achieve this.

¹ Aberdeen Group. "The Advanced Sourcing & Negotiation Benchmark Report. January, 2007.
² Aberdeen Group. "Sourcing Challenges for SMB". August, 2007.

Making Sourcing Savings Stick

Click here to listen to the podcast on this topic.

As a sourcing professional, my most difficult negotiations aren't with suppliers but rather with internal customers. Based on conversations with my colleagues, this experience is not unusual. One measure of this challenge is "savings leakage" (savings negotiated but not realized). Aberdeen Group reports average leakage rates of 21% as Purchasing strives to implement its sourcing decisions. Best In Class companies experience about 14% leakage whereas All Others see 24% leakage¹. Small companies experience up to 40% savings leakage ². Net, there is a huge payout for improvement.

There can be many reasons for leakage:

1. Communication. The using organization is unaware of the award and continues buying from the incumbent.
2. Inconvenience. The new supplier's process is inefficient providing a negative incentive to change (e.g. a travel reservation website which is difficult to use).
3. Fear of the unknown. There may be a long-standing, positive relationship between the supplier and the user. Alternately, the internal customer may not be thrilled with their current supplier.
4. Lack of trust. The internal customer organization doesn't trust the buyer to properly address non-price criteria when making sourcing decisions.

Regardless of the reason, this leakage represents innumerable hours of wasted effort and, more importantly, millions of dollars in missed bottom line profit improvements.

Communication breakdown is relatively easy to address, particularly with the use of eSourcing, eProcurement, Spend Analysis and on-line contract management systems. See article below for tips on "Stopping Contract Leakage". The other three reasons require a deliberate process and up-front planning. It's all about effective change management! Successful sourcing managers don't wait until after the award to sell their internal customers. This is particularly critical in companies where business units are relatively autonomous, and not subject to corporate edicts.

Effective sourcing professionals follow Stephen Covey's advice: "Begin with the end in mind". What does that mean? It means involving key stakeholders throughout the entire sourcing process so they will support implementation of the ultimate award decision.

Specifically, what does this entail?

1. Ensure upper management support for sourcing initiatives and savings goals.

• Review your corporate and/or business unit objectives, and be sure your sourcing initiatives support them.
• Communicate to leadership how your savings priorities support business objectives. Be sure to quantify and communicate specific goals and results. Enlist your management sponsor. Partner with Finance. Learn to talk like a CFO.

2. Initiate a comprehensive and methodical change management process early on.

• Identify Key Stakeholders. If the number is very large, look for the "thought leaders". These are the people who influence the rest of the pack.
• Identify potential areas of resistance and develop a plan to address. People resist change for a variety of reasons. Therefore, it is necessary to identify the issues and address them.
• Research customer business objectives and pinpoint those that can be fulfilled through your sourcing initiative.
• Have your project sponsor pre-sell the initiative to his/her peers, being conscious to link to customer business objectives.
• Develop a project plan that incorporates specific actions to ensure customer influence in the decision process. Communicate your objectives and project plan to internal customers highlighting their involvement.

3. Work with stakeholders to clearly define decision criteria with appropriate measures.

• Survey stakeholders to identify concerns, and to begin defining savings goals, award strategy (e.g. single source, co-source, etc.) and decision criteria. Decision criteria should include things like projected switching costs and non-price criteria (e.g. quality, service, etc.). Be sure to get agreement on the weighting of the various criteria.
• Summarize measurable decision criteria, and seek feedback from key stakeholders. If working with a subset of stakeholders, broaden the group for this step. Also, have your sponsor communicate this information to his/her cross-functional peers.

4. Conduct the RFP/RFQ with stakeholder input and involvement.

• Develop the RFP including survey questions which address the "must have" decision criteria. Identify survey evaluators. Validate the survey with key stakeholders. Listen to and incorporate feedback.
• Have evaluators score the surveys. Meet with stakeholders to discuss and resolve discrepancies, to identify the bidder "short list" and to determine how the RFP responses will be incorporated into the RFQ.
• Create the RFQ incorporating the RFP data and appropriate non-price decision criteria. Validate the RFQ with stakeholders. Confirm decision criteria and savings goals.
• Collect supplier responses and bids. If you're conducting an auction, invite stakeholders to participate in a practice auction and/or observe the live event. There is nothing like the excitement of a live auction to build enthusiasm and buy-in.
• Develop award recommendation consistent with pre-agreed decision criteria. Review with key stakeholders.
• Management sponsor should share the approved award decision, projected savings and implementation timing with his/her peers.

5. Gain stakeholder support for a comprehensive implementation plan
and enforce accountability.

• The plan should include actions, names and dates. Manage the plan holding people accountable for meeting commitments. Escalate outages through the project sponsor, if necessary.
• When the implementation is complete, CELEBRATE and share the glory! Acknowledge, publicize and recognize the cross-functional success.

6. Monitor expenditures over time to identify any leakage.

• You can't improve what you don't measure.
• Ideally, use a spend analysis solution to facilitate this process.
• Look for "root causes" of any leakage.

Sound like a lot of work? It is. However, it often eliminates months of wasted effort on sourcing decisions that don't stick. We recently followed this process at a client where there was great reluctance to formally source a spend category. The business owner valued their "partnership" with the incumbent and projected huge switching costs and disruption in order to move business. Why bother!?! By following this process, we identified important decision criteria and enlisted support of the business. They were 100% behind the ultimate award that delivered almost 25% savings with virtually no switching costs!

Is this formal process necessary for all savings initiatives? No, but the thought process should be applied to all situations. Thinking through this process allows you to determine the extent of the effort required. One size does not fit all.

Addressing stakeholder fear, lack of trust and potential inconvenience through a comprehensive change management effort and improved communication will have a tremendous impact on savings leakage. Yes, it requires an upfront time investment, but it also delivers a huge back-end payout!

Click here to read a more comprehensive article on this topic.

¹ Aberdeen Group. "The Advanced Sourcing & Negotiation Benchmark Report. January, 2007. http://aberdeen.com/aberdeen-library/3857/RA_AdvancedSourcing_3857.aspx
² Aberdeen Group. "Sourcing Challenges for SMB". August, 2007. http://aberdeen.com/aberdeen-library/4420/SI-smb-sourcing-challenges.aspx

The Rest of the Story

In my April post entitled “Take A Long Term View”, I described a client facing a sourcing dilemma. They were purchasing materials from a distributor who had installed “free” equipment in exchange for a commitment to buy the related supplies. They had previously solicited bids every two years and believed their “supplier partner” was competitive. They couldn’t imagine a way to save money given the high switching costs, so they were unwilling to diligently source this requirement.

This sole source situation raised a number of red flags so we continued our examination. We realized that prices for a third of the buy should track a feedstock index. Using this index, we demonstrated to the client that they had been paying a 10%-15% premium for these materials, versus what the index would have predicted, over the 2 year life of the contract! This finally convinced them to take action!

With the contract expiration and the holidays quickly approaching we needed to take quick but diligent action. We engaged the client by taking a tour of their facility. We interviewed them to fully understand their CTQs (Critical to Quality requirements). We requested detailed material specifications, as the existing specs were often the incumbent’s unusable short-hand descriptions.

Before reaching out to potential bidders, we obtained the client’s agreement on several important points:

• They would move business if best value was available from a non-incumbent supplier,
• They would consider alternatives to the “free” equipment and related supplies if the alternative was comparable and the switching costs were covered, and
• They would allow a multi-source award if the savings warranted.

An important first step was a pre-bid meeting with the incumbent supplier and prior unsuccessful bidders. We felt it was critical to signal a change in the sourcing process. Prior bidders responded favorably to this. They acknowledged that the routine RFQs were not taken very seriously. They perceived the specs as biased and/or incomplete, and they knew the incumbent always won. Therefore, they had not bid aggressively in the past.

After the pre-bid meetings, we used a two step sourcing process. First we issued an electronic RFI using Iasta’s SmartSource solution. The purpose was to determine potential suppliers’ capabilities, to gather information on various alternatives, and to collect feasibility level pricing. We cast a wide net to over 20 potential suppliers, and through this process eliminated all but six. We then issued an electronic RFQ with final lots and detailed, accurate item descriptions. Responses allowed us to evaluate bidders against non-price criteria and to determine total best value.

Interestingly, the incumbent “partner” dropped their pricing by almost 20%! We had a 20% savings “in the bag” with no change. We seriously considered an alternative to the “free” equipment which offered a huge additional savings. However, upon investigation we determined the solution was not really comparable and we also had concerns about the service level of this bidder. After abandoning this alternative, we were still able to award over half the business to a non-incumbent supplier who could use the equipment that was already in place. (It turned out that the equipment was owned by the manufacturer, not the distributor!)

At the end of the day, this sourcing initiative delivered a 24% savings with future price movement for many items tied to an index. We included contract language that gives our client the ability to easily monitor suppliers’ performance. Contracts also provide for quarterly reviews including discussions about potential non-price cost savings. The new agreements clearly define the Scope of Services, and determine how cost increases for both indexed and non-indexed products are justified and approved. Additionally, the award entails minimal disruption since the existing equipment will be utilized. Of paramount importance, this award signals to all involved that the client will move business when warranted. We anticipate competitive proposals when these new contracts expire.

The lessons: In the absence of competition, our supplier “partners” become complacent and margins creep upwards. A perfunctory RFQ will likely not deliver best value. Our client did not have the staffing to conduct this rigorous sourcing project. By engaging consultants on a gain-share basis, our client was able to achieve a significant savings with no up-front cost or risk and a minimum of employee time.

This post was originally published on E-Sourcing Forum:

http://www.esourcingforum.com/archives/2010/02/02/take-a-long-term-view-cont/

Reverse Auction Abuses

In a recent Friday Rant entitled “Reverse Auctions Have Become the Aero-Bars of Sourcing”, SpendMatters’ Jason Busch describes the all too frequent abuse of Reverse Auctions. He quotes David Clevenger, formerly of FreeMarkets, who notes that “the problem with reverse auctions may be the same as with any powerful weapon in the wrong hands”. A knife can be used for murder or for life-saving surgery.

I believe there are at least two factors that contribute to abuse. I recall Stephen Covey’s leadership example which describes the importance of both skill and integrity. A skilled surgeon lacking integrity might perform an unnecessary operation. (Think Michael Jackson’s repeated cosmetic surgeries.) An unskilled surgeon with integrity would botch the job. You need both skill and integrity!

Clevenger describes abuses such as pre and post bid negotiations and the inclusion of unqualified competitors to drive market behavior. I would add to the list Phantom Bids (i.e. no intention of moving business but merely driving the incumbent’s pricing down via a competitive exercise). Note that none of these tactics rely on Reverse Auctions. They can all be wielded with equal abuse using a paper sealed bid. These are issues of integrity that soil Sourcing’s reputation regardless of the medium. In this instance, Reverse Auctions merely automate an unethical practice.

Skill is a different issue. As a former eSourcing trainer, I was often frustrated at companies’ unwillingness to provide adequate training. There are a number of important differences with the eSourcing process and tactics. Our company always recommended both training and mentoring as buyers geared up. I must respectfully disagree with Jason regarding software vendor responsibility. We didn’t tell unskilled buyers to “go tear it up”! Conversely, we often argued strongly in favor of a thorough implementation process. Unfortunately there were far too many shortcuts with the ultimate outcome being, among other things, unintended supplier abuses.

Anyone employing Reverse Auctions must have both skill and integrity or there will be abuse. However, we shouldn’t blame the tool. Neither we nor suppliers should generalize that reverse auctions are bad. It is correct that Reverse Auctions in the hands of buyers who are unskilled or who lack integrity are bad.

However, not all sourcing professionals lack skill and/or integrity. I am not denying abuse. But I’m concerned that suppliers’ claims become another excuse to resist a legitimate tool that, when used properly, helps buyers achieve best value. Let’s not abandon a fair and effective tool because of the abuse of some.

This post was originally published on E-Sourcing Forum:

http://www.esourcingforum.com/archives/2009/09/02/reverse-auction-abuses/