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.