Sunday, April 25, 2010

Where are we on the cycle?

The stock market is strong with low volatility as we enter earnings season. The link between weak dollars and higher stock prices seems to have been broken, as the stock market's latest climb has occurred despite a strengthing greenback. Business growth is beginning to show positive developments, and inflation appears to be under control (near term) despite massive state, federal and foreign country budget deficits. Housing markets seem to have hit bottom in most locations and inventories are starting to shrink, albeit at lower prices. The new normal, right? So what's wrong with this picture?

If you're a buyer, not much. Unemployment remains relatively high, and is a lagging indicator. Wage rates are still soft, and services categories which have higher percentages of labor costs in the total cost equation can still be competitively leveraged. However, commodities have really firmed. I always watch the copper market, more so than energy, and use this as a leading indicator of economic activity. My assessment is that it's time to go long in services.

Most companies buy services along an annual cycle based on budgets, and this is a mistake. There can not be a better time for locking in longer term arrangements in services categories where you have already leveraged prices and benchmarked the marketplace. Some do it by adding option years to their contracts, exercisable at the company's option. Others do it by making longer term commitments up front with 3 year contracts plus options to extend. There are plusses and minuses to all of these.

The real secret is to understand your business strategy. If you need the supplier to offer up ideas for competitive advantage and dedicate R&D resources to supplement the supply relationship, are they more likely to do so under a longer term arrangement, or one in which you can cancel with 30 days notice and annual options to renew? Under the long term arrangement, how can you drive toward continuous improvement and create metric-based incentives that counter the potential for complacency, or being assigned the B or C team to your account? How do you create a true strategic relationship whereby both parties put skin in the game, share risk, and have an opportunity for reward as well?

In all of this, the challenges may be more internal in your organization than external - the contracting strategy has to be in sync with the business strategy, and if it is, you can usually overcome the budgetary constraints to contracting. These business cycles are long, and when things firm up, they usually happen in a hurry. Act now, while you still have timing in your favor.

Tuesday, June 16, 2009

Tactical or Strategic – Not Mutually Exclusive

Tactical or Strategic – Not Mutually Exclusive

As I sit on my cross-country commute and read through my files and to-do lists, I am faced again with that age old Procurement question: “Do I pursue short-term tactical gains to make this year’s targets at the expense of pursuing a longer term more profitable category strategy that may cause me to fall short on this year’s numbers?” I think I’ve been down this road too many times to not know the answer, which is simply: “Do both”.

It’s a simplistic solution to a simple problem, but that’s what senior leadership gets paid for, right? Not so much. That’s what senior managers get paid for (the difference between managers and Leaders is HUGE)…senior Leaders get paid to help people see the way toward the solution, understand the priorities of the business, understand that priorities and business conditions change, and facilitate the change that’s needed to do the right thing. Leaders welcome dynamic changing environments, the challenges they face in trying to anticipate them, and the opportunity they present to establish a competitive advantage for the business. Managers hate environments that threaten the status quo and put targets and metrics in jeopardy…make this year’s numbers, negotiate next year’s numbers, and move on.

All strategies are executed by a well-defined series of tactical moves. The difference between tactical and strategic sourcing is knowing the endgame and aligning the business to the vision of what that endgame represents (and generating a desire to get there). The internal negotiations to get disparate functions of the business aligned to category strategies takes Leaders, not managers, to execute, because they are tougher negotiations than those with suppliers (at least suppliers have the same agenda as you – they want to sell stuff, and you need to buy stuff).. A good Procurement Leader will usually need to spend 80% of his/her time on these internal matters to drive success and alignment within the business (hopefully the Sourcing Managers are spending 80% of their time understanding the markets, the supply base, and how to create breakthrough business solutions that meet business needs).

In the end, it’s all about people and talent. There are those that think that the solution is to follow the process, check off the boxes to show that you followed the process, and make the numbers with some extra to spare. These are the managers. The Leaders think differently. They set huge stretch targets, knowing that falling short of them is not failure. They filter information differently, focusing on the dynamics at play in the marketplace and the timing signals that are constantly flashing. Leaders listen to the problems of their stakeholders, not so that they can jump high enough to meet their desires, but to help them shape their supply strategies in an ever-changing world to deliver business value that far exceeds any savings calculation that may be a proxy for Procurement success. Procurement Leaders know when they have leverage, when they don’t, and what to do (and when) to get repositioned for success.

Sometimes a series of tactical moves is necessary to lay the groundwork for that repositioning – strategies get executed through tactics – but tactics without strategy are wasteful, non-sustainable, and non-repeatable. Strategies without tactics are nothing more than dreams. We don’t get paid to dream…we get paid to create and build.

Wednesday, May 20, 2009

Facilities Management...Looking for best practice?

I recently saw a post from someone at a major consultancy, looking for guidance in constructing a Facilities Management RFP. They wanted to understand the major cost drivers so that they could have a successful RFP and negotiation. One comment to this request dealt with location - where would this service be needed - and determined that this was the primary cost driver.

The first thing that struck me was the value being obtained from this seemed like fairly basic stuff. Put that aside for a moment though, and the real issues (according to Howard), in addition to geographic location(s), are: 1) size and scale of account, 2) number of facilities involved, 3) whether you need standard or specialty services, and 4) whether you want to manage the subcontracts yourself or turn it into a managed outsource contract. FM RFP's tend to be very complex and you need to decide whether you want someone who provides it all with internal resources, or acts as a managed service provider of specialty subcontractors. You need to know how well defined are your business requirements and standard operating procedures? Are you looking for a full outsource model that shifts current internal resources outside, a mix of internal and external resources, or just a way to add competition for these services with existing service providers? Do you want to upgrade the technology to perform these services, increase functionality as well as lower costs, or change from your customized processes to standard processes that the outsource provider can define for you (could be a huge value driver)? How long are you willing to commit in a contract, as this provides more time for new suppliers to amortize any up-front investments needed to win the business?

Quite simply, you need to start out with the end in mind (an acknowledgement to Steven Covey's 7 Habits of Highly Successful People). This is pretty basic stuff, and you don't need a Top 5 consultancy with huge overhead structures to tell you how to do this.
Howard Richman

Friday, April 24, 2009

It's where you place the lever that counts!!

I recently commented on a discussion thread in the prestigious LimkedIn Strategic Sourcing and Procurement Group (not as exclusive as Augusta, but definitely friendlier and more affordable). The participants were discussing an article entitled "The Demise of Strategic Sourcing", and focused on topics such as whether we have already leveraged the lowest possible prices, and defining the role of Procurement (or Strategic Sourcing) and "strategic category management".

With one thing I surely agree: Leverage is overplayed...if a hammer is the only tool that you have in your toolbox, then everything begins to look like a nail. But the issue for me is really not in the use of leverage (i.e. "the lever"). There is a time and a place for everything, including the lever, and the ultimate goal is to commoditize what you can and strip it down to its most generic form where possible. However, many buyers/category managers/procurement specialists are not positioned properly within their organizations to effectively influence sourcing strategy and position the value lever at it's most powerful point - at its apex - the beginning of the process.

Unless Procurement/Strategic Sourcing leadership can position the function to be an influencer and involved at the beginning of a product development or service offering cycle (and train people to use a variety of sourcing and business tools), the contributions will always be tactical (and non-sustainable) at best, and never influence the top line as well as the bottom line. Being able to do both is the true measure of "strategic sourcing".

One thing I do know - there is nothing more constant than change! Categories of spend, and how you define them, need to constantly change and evolve with business changes. In IT Procurement, there is rarely a purely hardware, software, telecommunication or service procurement that does not involve at least 3 categories as part of a holistic business solution. Yet few sourcing organizations are organized to attack sourcing issues in this manner. That makes them tactical.

The same goes for understanding whether the best contracting strategy is local, regional or global. Everybody always assumes that Global consolidation is more "strategic" when in fact, in most cases, it is not. How many times have we seen buyers (etc.) negotiate global contracts, and then wonder why nobody in the organization wants to use them because they can buy from a lower priced local source? Too often. That's because the difficulty of coming to global solutions and applying global leverage (there's that word again) and consolidation often requires accepting "lowest common denominator" compromises to get the deal done. They drown in their own complexity.

What is strategic is having the tools to know this, knowing your internal stakeholders and their business issues, and designing sourcing solutions that drive the business to competitive advantage in the marketplace (and sometimes, but not always, it's about achieving the lowest cost). And when you decide that leverage is the right strategy for the situation, you need to place the fulcrum of the lever as close to the beginning of the process as you can. Only then will it become the powerful tool that you need to drive competitive advantage, and only then will you be perceived as "strategic".

Friday, April 10, 2009

Leveling the Playing Field...What's That About?!

For those of you reading this blog for the first time, the first question that probably comes to mind is, What's this "Leveling the playing field" stuff about? After all, in 25+ years of Procurement, the last thing I or my colleagues ever worried about was a sense of fairness...that's the job of free markets to sort out. This blog will not be some Obamarama liberal rag or a home for dogmatic dittohead diatribe, I assure you.

My philosophy has always been a simple one - nobody will sign a contract, no matter how onerous the terms, if it ultimately is not in their best interests to do so. You hear about win-win solutions all the time, and I've always been in favor of them as long as they were really Win-win solutions (and I had the upper case W)! I've been on both sides of the equation, during buyers markets when you could leverage everything under the sun, and during sellers markets where if you didn't buy now, good luck, because the price would be 10% higher tomorrow. This is where I developed my first axiom of business - TIMING ISN'T EVERYTHING, IT'S THE ONLY THING.

So I'll say it now, Leveling the playing field has nothing to do with a sense of fairness, but it has everything to do with finding a sense of BALANCE over time. It's about knowing that all things in life have cycles - whether they are business cycles from growth to recession, El Nino-La Nina ocean water warming and cooling cycles, 22 year sunspot cycles, geopolitical cycles from liberalism to conservatism, or corporate cycles from centralization to decentralization and conglomeration to divestiture. It's about knowing when these cycles converge and that bad things happen when the balance of the two motivators in markets, fear and greed, get out of balance, and you are not prepared for them. There are always consequences:
  • When assets are leveraged 40:1 into derivative instruments that nobody can value on an open market in order to maximize sales and trading profits, there is no balance;
  • When hedge funds and speculators can drive commodity prices and company share prices (in which they have no commercial business interest) to great and sudden extremes disproportionately impacting buyers, sellers, workers and investors alike, there is no balance;
  • When the only solution open to you to improve profit margins is to move jobs thousands of miles away to low cost countries, there is no balance (mind you, outsourcing and offshoring do have their place as part of the solution);
  • When every category of spend is consolidated with large multinational suppliers to maximize "savings" at the total exclusion of small and diverse-owned businesses, many of whom represent your customer base, there is no balance.

Invariably, these forces do come into balance sooner or later, because greater forces are at work (the Adam Smith "invisible hand"?), but not without major dislocations in markets and consequences for all involved. So how do you break these "cycles of violence" and take control of your future - as a buyer entrusted with stewardship of your company's funds, or as an entrepreneur struggling to gain access to financial and human capital and technology to compete in a flat world (I love Tom Friedman, so let's get that on the table)? That's where LF Enterprises comes in, and that's what this blog is all about. I'd love to hear your comments.