The year ahead in government contracting . . .

In the meantime, Government Contractors know full well the game has changed (at least for the short to medium-term).  To use a football analogy, Government Contractor executives will need to decide whether they are trying to make a playoff run on their own or whether they should be looking for a winning team to join for their “post-season” strategy.   The larger industry firms have already begun and will continue to prepare for their post-season by aggressively looking to add superstar free agents (i.e., via expensive acquisitions) and jettisoning underperforming divisions.

from the WashingtonExec December 5th, 2011 post “Bob Kipps 2012 Outlook: GovCon Game Is A Lot Like Football” by Brynn Koeppen

Which direction will government contracting take in 2012?

As the classic song goes . . . this is the most wonderful time of the year, in that between eggnog and Christmas trees, turkey and warm feelings around the fireplace, it is also the time for industry pundits to don their prognosticative hat and tell one and all what the coming year holds for us . . . in the world of government contracting.

What is most interesting is that the public sector, and in particular government contracting, is potentially one of the most lucrative markets with which to deal yet it is also one of the most paradoxically frustrating – especially given the earnest shift away from relationship engagement as part of a misguided attempt at creating what amounts to a false transparency.

Add into the equation the advent of procurement contests (which I covered at length this past summer in a series of posts), and I would have to say that if nothing else 2012 does have the makings for a few interesting and perhaps even noteworthy developments.

Yes I know, many are suggesting that with the economic conditions and budgetary shortfalls in the coffers of governments at all levels – wasn’t it the Governor of Illinois who referred to his as being a deadbeat state, the main highlights during the next 12 months will centre on austerity.

While this may be true to a certain extent, developments relating to for example the GSA’s $2.5 billion cloud computing RFQ is certainly significant, especially given the corresponding study out of Washington which found that 92% of all government IT leaders have reservations about making the move to the cloud. Talk about an irresistible force meeting an immovable object.

As mentioned earlier, procurement contests are another interesting development as governments look to transfer both the risk and responsibility to competing vendors in terms of coming up with innovative solutions to solve specific problems.

It is an interesting twist in that while RFQ’s have been traditionally influenced by a trusted vendor with an inside track that ultimately limited as opposed to stimulated competition, the contest approach doesn’t start with the selection of a solution that qualified vendors can then bid on but, instead starts with a problem and let’s the vendors (within of course a pre-defined guideline) offer up what they believe is the best means by which the stated problem or requirement can be addressed.

Even though, and as demonstrated by the recent case involving a Colorado firm’s proposal for a Regional incineration project in Gatineau, Quebec, there have been points of contention as to the parameters of creativity afforded a participating vendor, procurement contests actually hold the promise for delivering to the public sector innovative solutions that might not have otherwise been considered.  Questions surrounding IP ownership notwithstanding.

Based on the above, while the news of strategic acquisitions of technologically innovative smaller players by the big boys is an interesting angle to be certain, I just do not think that 2012 is going to be the stand pat year that the WashingtonExec article’s writer is suggesting.

What are your thoughts . . . another year of same-old, same old bureaucratic manoeuvring or, the exciting start to a new era in government purchasing? Share your prognosticative musings in the comment section below.

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Tags: 2012 predictions, Bob Kipps 2012 Outlook: GovCon Game Is A Lot Like Football, Brynn Koeppen, Gatineau, government contests, government contracting, GSA $2.5 billion cloud RFQ, Regional incineration project, WashingtonExec

Will the courts ultimately become a key part of the government tendering process?

It seems apparent that the new rules have made it easier for suppliers to challenge. More information must be provided to suppliers losing a procurement competition and suppliers can now halt the award of a contract through an ‘automatic suspension’ mechanism if court action has been started.

Considering the current squeeze on the public purse, suppliers are going to be more inclined to take their chances with the courts. So watch out buyers.

from the November 21st, 2011 SupplyChainStandard article “Rising tide of supplier challenges brings danger” by Nick Allen

My initial reaction to reading the above story is that there is something seriously wrong with the acquisition process when an increasing number of suppliers can and are turning to the courts to settle disputes relative to the public sector bidding process.

Don’t get me wrong, the ability to challenge an award is an integral part of the RFP exercise in that it supposedly ensures an objective, third-party (at least in concept) hearing of grievances that is designed to keep the system honest.  Unfortunately, and as intimated by the article the real question is whether or not challenges that ultimately find their way into the courts are more punitive on the part of disgruntled suppliers than productive.

A point that is especially worthy of consideration when you consider Allen’s suggestion that “cuts to public spending have left many procurement departments lacking the necessary ‘in-house’ experience,” which implies that with the absence of important expertise in the vendor selection process there is an increased likelihood for reversible errors.

Truth be told, and referencing a roundtable discussion I had hosted on my radio show in April 2010 on transparency in government purchasing, this is nothing new.  In fact, one could make a reasonable argument that long-standing issues with buyer capability fuelled by inherently flawed policies within the public ranks has always been a problem.  At least this was the opinion of 35 year plus public sector expert author Colin Cram.

Cram’s opinion would tend to challenge, at least to a certain degree, Allen’s belief that “information, guidance and expert knowledge is going to be increasingly important to procuring organisations if challenges are to be avoided.”  This is due to the fact that the public sector belt with suspenders mindset actually cultivates if not encourages outright unimaginative, just following orders thinking.  Or to put it another way, all the expertise in the world will not overcome a culture of unthinking adherence to a flawed vision of a transparent and level playing field.

It is this homogenized view that all vendors and all vendor relationships are equal or at least the same that is more likely at the heart of the problems that ultimately opens the door to winnable challenges in the courts.

So while procurement legislative reforms such as the ones introduced in the UK in December 2009 may have had a direct impact on the number of challenges that have made their way through the legal system, the real issue is to find a way to loosen as opposed to tightening the legislative shackles associated with a flawed equal opportunity mindset.  Only when this has been accomplished can the government then look to attract the expertise that can be leveraged to deliver real value while reducing if not eliminating the reasons for said challenges to occur in the first place.

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Tags: award challenges, bidding, Colin Cram, government purchasing, Nick Allen, RFP, Rising tide of supplier challenges brings danger

Pharma Supply Chains (Part 2): The Optional Supply Chain

We’ve discussed why the vast majority of pharma companies will have to build supply chains with new manufacturing, distribution and service-management techniques, and some of the developments that can help them.  But what route should they take?

from the PwC White Paper “Pharma 2020: Supplying the future: Which path will you take?”

Considering the concern relating to what some would refer to as the growing drug shortage, in which crucial treatments for diseases such as cancer are being negatively impacted (read my October 7th post “Whether created artificially or reflective of a very real and serious issue, pharmaceutical supply chain problems can have deadly consequences for patients“), the timing of the PwC paper (or for that matter any such paper of this nature) could not be better.

Putting aside the possible origins relating to the shortages, there is little doubt that the pharmaceutical industry’s supply chains are experiencing a transformation of considerable magnitude.

As we continue our series examining this seminal shift, starting today, and over the remainder of the week, I will review the four options highlighted in the PwC paper for “restructuring the pharmaceutical supply chain” which are; the virtual manufacturer, the service innovator, the low-cost provider and the profit center.

What is most interesting is not so much the options themselves but the fact that they are divided into two distinct categories.  Specifically, the virtual manufacturer and service innovator are the strategies PwC recommends for pharmaceutical companies that focus on specialist therapies including the treatment for orphan drugs, while those focused on what the report calls mass market medicines are advised to consider the low-cost provider and profit centre options.  The interesting part of course is how these suggested strategies would be able to address the drug shortage question.

For example, deficiencies with Ohio-based contract manufacturer Ben Venue Laboratories Inc. were cited in a recent Globe & Mail article as being responsible for shortages involving a number of cancer drugs including Caelyx, which is used to treat ovarian cancer.

Even through alternative treatments are being pursued they are being done so with considerable reluctance as factors such as potential side effects and the alternative medications’ overall effectiveness come into play in terms of patient confidence.

While many believe that the problems are tied to the increasing concentration of drug production with a handful of companies such as a Ben Venue, which produces liquid and freeze-dried products, the Director of Government Relations and Public Affairs for the Canadian Pharmacists Association Jeff Morrison believes that they are more systemic in nature and as such could, if they haven’t already, become common.

The possible problems to which Morrison is referring may, as some suggest, include; contamination or scarcity of raw ingredients, manufacturing glitches as well as regulatory challenges.

In the case of Ben Venue, a company spokesman indicated that “manufacturing capacity restraints” are at the heart of the company’s current inability to fulfil orders.

While all of the above may indeed be contributing factors, there are also indications that these shortages might be reflective of a product vacuum that includes manufacturers cutting back production on older and/or limited use drugs – also referred to as orphan drugs, in which the level of demand does not justify (at least financially) continuing production.

Alternatively, shortages with newer drugs such as Caelyx present a problem in that while demand is not an issue, the lack of availability of generic versions means that production shortages leave doctors and their patients with little alternative but to pursue new courses of treatment.

The extent to which the PwC paper takes these real-world situations into account and prescribes viable solutions will ultimately determine both the immediate and on-going viability of the options being presented.

Over the next week we will determine the answers to these as well as other relevant questions.

Next Installment: Pharma Supply Chains (Part 3): Virtual Manufacturing

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Tags: Ben Venue Laboratories Inc., Caelyx, Canadian Pharmacists Association, cancer treatment, Jeff Morrison, Pharmaceutical Supply Chain Issues, PwC

Pharma Supply Chains (Part 1): A problem of focus versus avarice?

A report from PricewaterhouseCoopers (PwC) entitled “Supplying The Future: Which Path Will You Take?”, believes that the pharmaceutical supply chain will not be able to cope with new products as it is inefficient and underused. The reason for this conclusion is that PwC believe pharmaceutical companies are too focused on developing new products and regulatory issues while their manufacturing capability and supply chain is being overlooked.

from February 24th, 2011 About.com article “Pharmaceutical Supply Chain Issues” by Martin Murray

It is an interesting paradigm in which the effort to balance innovation and the introduction of newer drugs and treatments centering on illnesses such as Parkinson’s, could have such a significant impact on a pharmaceutical company’s supply chain so as to effect it’s current offerings.

After all, and if I follow the development and launch cycle of a new product in the high tech sector as described to me by a friend who works in this area for Cisco, an impact on existing product lines seems unlikely as such development usually takes place in relative isolation in relation to existing lines. Therefore the suggestion that the recently reported shortages of existing drugs that are essential to treating diseases such as cancer due to innovation and medical breakthroughs seems remote. Or is it?

To start, innovation in the medical profession is an ongoing and complicated process in which expected breakthroughs offer the promises for longer and healthier lives. In fact in my December 31st, 2010 segment with healthcare expert and author of the book Navigating The Healthcare Maze Jeff Knott, we reviewed the years most promising top ten medical breakthroughs and their expected impact on the industry.

What was most interesting is that unlike a Cisco which doesn’t have to contend with the same regulatory compliances that say a Johnson & Johnson does, the stakes of innovation in the pharmaceutical industry seem to be much higher and riskier than other industries which by and large do appear to operate in relative world of self-determination in which consequences for a product miss are delivered by the end user as opposed to a regulatory body such as the FDA.

Although I am certain that from the standpoint of having to stand before a congressional hearing as a result of an accelerator problem with their cars Toyota executives would beg to differ as it relates to this assertion.

Automotive industry exceptions aside, in which grievous infractions – anyone remember the Pinto’s gas tank that exploded on impact – generated a resounding outcry from the public, no other industry seems to be shackled or scrutinized in terms of new product launches to the same degree as the pharmaceutical industry. Based on both the civil and criminal convictions of late within the sector, whether or not such scrutiny is justified is a discussion for another day. For today, the real question is whether or not reports such as the one offered by Price Waterhouse Coopers points to an indigenous supply chain problem relating to new products and its effects on delivering existing drugs in the face of a decline in demand or, a demand that fails to generate the necessary revenues to warrant further production. In short, and if not directly, do the normal and expected challenges associated with a new product introduction actually have a direct impact on existing product lines or, is it merely a convenient excuse for the drug companies to drop offerings that are no longer generating the required revenues . . . even if said cessation has a negative impact on the public?

Click to access PwC Report

This of course is the moral divide that separates the pharmaceutical industry from all others, in that a Cisco is unlikely to garner the same widespread general public outcry for discontinuing a router that say a Schering Canada Inc. is for the lack of availability for its Caelyx drug, which is used to treat ovarian and other types of cancer.

It is also the point at which we come to the proverbial fork in the road as to the reason or reasons behind the shortages.

If you ascribe to the government’s take on why there are interruptions in the supply of such vital yet decreasingly profitable drugs, they are as pointed out in the August 18th, 2011 Globe & Mail article, due to an increased concentration of drug manufacturers. In essence, declining competition brought about by mergers and acquisitions such as was the case with Schering Canada’s parent Schering-Plough who, in a US$41 billion deal merged with competitor Merck in November 2009, are the reasons behind diminished capacity and availability as opposed to the reasons cited in the PwC Report.

Even though the PwC report focuses its attention on the development and launch of new products and the resulting logistical challenges in the here and now, pharmaceutical companies have been in the business for some time and as such the failure to reference supply chain problems with the launch of previous products and how those were addressed so as to enable drug companies to generate the profits they have for so very many years, represents a big hole in the firm’s research.

In short, and as is the case with the ongoing evolution in the product development process, manufacturing techniques and distribution management that has through the ages impacted business as a whole, being singularly focused on the introduction of new products fails to establish an historic trend through which one could identify the real reasons behind the recent shortages. Or to put it another way, and if one is to believe that improvements in current or future supply chain processes can also be applied (at least in principle) to existing offerings, the issues of product shortages and a changing global supply landscape are not mutually exclusive and therefore must be viewed through a collective versus isolated lens.

The real impact of drug shortages

It is within this context or view that I will in Part 3 of the series, examine more closely the four potential supply chain options highlighted in the PwC report, two of which are directed towards companies whose focus is on specialist therapies and treatment for orphan diseases and, the remaining two options for companies focused on mass market medicines.

Next Installment: Pharma Supply Chains (Part 2): The cornerstones for improved delivery!

Click to Join the Pharmaceutical Supply Chain Group

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Tags: drug shortages, Jeff Knott, Merck, Navigating The Healthcare Maze, Pharmaceutical Supply Chain Issues, pharmaceutical Supply Chains, Schering Canada Inc., Schering-Plough, Supplying The Future: Which Path Will You Take?

Under the banner of a legitimate report on negotiating cloud contracts Gartner’s latest report torpedoes the new players using IBMs old FUD approach . . . will the market listen?

The following first post in the 9-Part Analysing The Analyst: Negotiating Contracts in the Cloud Series has been reprinted with permission from the Procurement Insights Blog.

Under the banner of a legitimate report on negotiating cloud contracts, Gartner’s latest offering should be viewed in the context of my January 7th, 2011 post “Madison Avenue ooops . . . make that Gartner, names Oracle as a leader in supply chain planning.”

Leveraging the old IBM classic FUD approach (not Elmer but Fear, Uncertainty and Doubt), the Stamford Connecticut company which as I had pointed out in the January article is owned by a UK-based advertising firm, deftly and subtly I might add, attempts to walk the tightrope between embracing an emerging technical reality while simultaneously eschewing the up and coming players that are its driving force.  Its kind of like trying to separate the salt from pepper duo or Rogers from Hammerstein . . . it’s unnatural.

However, you gotta give the Gartner crew kudos for trying to set the tone of uncertainty right out of the gate in that they weave a cautionary tale of vulnerability in an effort to submarine indigenous cloud providers while leaving the door open to the old guard that by and large pay the bills to keep the lights on.  Maybe being owned by an ad firm with a crack copy-write team has its advantages?

The real question is simply this . . . will the market listen?

Given the results of a ScienceLogic Survey that was released at the FOSE conference in Washington this past summer, which indicated that there are serious and more universal reservations regarding soon to be former Federal CIO Vivek Kundra’s Cloud First policy the answer, at least in terms of the U.S. Federal Government, would seem to be yes.

As covered in my July 27th, 2011 post Fear and loathing in Washington: Why a recent survey found that 92% of government IT leaders have reservations about making the move to the cloud, it does appear that Gartner has a ready audience whose fertile minds are just waiting to have their worst fears confirmed by a supposed objective third party.  Or to put it another way, Gartner is merely giving that segment of the market what they want . . . a reason to keep things the same.  If you think about it, it is a brilliant dance in which mutually motivated, non-arms length stakeholders on both sides of the contracting fence seek a way to legitimately operate within the relative safety and familiarity of a lucrative and long-standing working arrangement.

An arrangement I might add that has its origins with Gartner founder Gideon Gartner, who spent many years working in IBM’s competitive intelligence operations division.

In fact, prior to starting the company that bears his name,  and immediately following his departure from IBM, Gartner joined Oppenheimer & Co. where “he was rated as the top individual securities analyst in the technology field for seven straight years by Institutional Investor.”  

To further stress my point regarding the importance of the relationship between Gartner and its client firms, in its early years it became well known for its “insider” perspective on IBM and the “comprehensive information that it possessed about the company’s products and services.”

Gideon Gartner

While this relational proximity did pose problems in the company’s early years as demonstrated by a lawsuit in which IBM alleged that Gartner and company had illegally revealed IBM trade secrets (the suit was later settled out of court), the die relative to the Gartner business model was nonetheless cast and over time perfected.  This is of course my point in that there is eventually a line that can be crossed when the revenue from the vendors you are covering become your lifeblood.

For this reason alone I will, if nothing else, offer a true arms length assessment of the Gartner findings by way of a 9-Part Series starting this Friday, in which I will review what the analyst firm calls the Nine Contractual Terms to Reduce Risk in Cloud Contracts.

It should be an interesting series.

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Tags: cloud computing contracts, FUD, Gartner Report on Cloud Computing, Gideon Gartner, Vivek Kundra’s Cloud First policy

Colin Cram’s 5 Recommendations for a Successful Government Procurement Contest

Similar to the Coles Notes or, the . . . For Dummies series of books, 30 year plus UK public sector veteran Colin Cram has, as a lead in to our October interview on the PI Window on Blog Talk Radio, provided his five recommendations for a successful procurement contest initiative.

For those who may not be familiar with the concept, I recently published the 3-Part Procurement Contests Review series that you can access through the provided link. It is a pretty interesting read as I have been told, and it should provide a solid foundation in terms of understanding the primary aspects of a very interesting approach to leveraging the procurement process to drive innovation within the public sector.

All this being said Cram’s key points relative to maximizing the opportunity for success are indeed worth noting . . . at least this is my opinion.

Why don’t you have a look and get back to me with your thoughts?

Colin Cram’s 5 Recommendations for a Successful Procurement Contest:

1. I can see nothing wrong in principle. The government announces the prize at the outset, so participants know how much money they will receive.

2. There needs to be an agreement that the government will use the specification – turning it into a rather more generic one – to invite bids to supply. So the prize-winner may not win a contract that stems from it.

3. It enables the government to find out if the problem can be solved.

4. It does not necessarily mean that companies are subsidising the government. They don’t have to go in for the competition. The downside might be that the government has to offer a prize that is greater than it might otherwise pay. Alternatively, it limits its financial risk.

5. The risk is that significant competition is avoided, though it should be evident if only a couple of suppliers choose to go in for the competition. So there need to be some safeguards so the government can demonstrate probity and genuine competition.

I will be posting the date and time of the Colin Cram interview that will air on the PI Window both here and in the Procurement Insights Blog Portal, where you can tune in to the LIVE or on-demand broadcast.

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Tags: Colin Cram, government purchasing, procurement contests

Are raising the discretionary spending caps a way for governments to keep business with local or preferred suppliers?

Of the many questions that came out of my interview with the City of Gatineau’s Alain d’Entremont regarding their new Supplier Portal is this . . . are raising the discretionary spending caps a way to keep business with local or preferred suppliers?

NOTE: Here is the on-demand link to my interview with the City of Gatineau’s Alain d’Entremeont, Head of Public Relations @ Gatineau’s New Supplier Portal.

As the City of Gatineau launches its new supplier portal does this mark a new era of engagement in the Capital Region?

I will be seeking the answer to this as well as other questions as I welcome Alain d’Entremont who is the Head, Public Relations Communications Department with the City of Gatineau to learn more about the municipality’s new supplier portal and what it means to local businesses on Buckingham This Week!

Click Here to tune in Live or On-Demand

Here is an example of the other questions that I will be asking Mr. d’Entremont:

1. What was the main impetus behind creating the portal?
2. Is the portal a natural progression of the amalgamation?
3. How will this address the potential challenges in terms of the pre-amalgamation relationships between say Buckingham and its suppliers?
4. Is the premise for the portal to create a centralized resource that will feature the best of the best in terms of suppliers?
5. What challenges do you anticipate in terms of supplier response/usage?  What about buyer response and usage?
6. Is it for example mandatory for suppliers to be on the portal?
7. Is it mandatory for buyers to use the portal has their first step in the purchasing process?
8. What tracking system or process have you created to capture relevant data as a means of demonstrating that the portal represents the best value for buyers and the best access point to municipal business for the suppliers?
9. Is the approach to a centralized supplier resource going to mirror what has been done with other governments?

Given my extensive research and work in this area, it should be a very interesting segment.

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Tags: Alain d'Entremont, Buckingham This Week!, Gatineau, government contracting, supplier portal

Bridging the disconnect between finance and purchasing (Part 3): EPS and the Swinging Pendulum of Responsibility

Now comes the fun part.  The changes which are possible – based on what I’ve described so far, are identified in blue in the next figure.  Revenues are shown to increase 3%, purchased goods and services costs (as a % of revenues) are reduced from 60% to 55%, and SG&A expenses as a % of revenues are reduced by 1%.  Those three improvements – which, by the way, are very achievable based on what we’ve covered so far – have a large cumulative impact on net income and EPS.

from the book Straight to the Bottom Line: An Executive’s Roadmap to World Class Supply Management by Robert Rudzki, Douglas A. Smock, Michael Katzorke, Shelley Stewart Jr.

In yesterday’s post I had indicated that the authors of the Straight to the Bottom Line book did not hold back any punches in terms of placing responsibility for the disconnect between purchasing and finance on the shoulders of executive leadership.

This limited or limiting vision on the part of senior management relative to the power of purchasing was reiterated in another book from the same authors titled On-demand supply management: world class strategies, practices, and technology.  In this text they had made the observation that “The same supply management leader who received corporate accolades for leveraging savings from spend analysis . . . quickly begins to hear the CEO’s and CFO’s relentless question, what have the suppliers (read: and you) done for me lately?”  The authors then go on to say that the previous “glory” has been replaced by even greater challenges.

The challenges to which they are referring is a common lament by purchasing professionals in that having harvested the low hanging savings fruit, there is an even greater expectation for duplicating the effort in subsequent years.  As indicated by a CAPS 2003 study in which the utilization of Reverse Auctions did not produce sustained levels of savings (in fact savings actually decreased before flat lining once the buying price was corrected to reflect actual market conditions), this is not an easy task.  As a result, purchasing departments are still confronted with management’s query demanding an answer to the question “how come you did so much better last year.”

Even though this reflects a one-dimensional understanding of the purchasing department’s power to significantly impact an organization’s bottom line, the author’s suggestion that “Seasoned supply professionals who read this book will certainly recognize this attitude shift,” which they contend is “driven by the dynamic nature of the competitive market game,” means that the onus or pendulum can also swing to the buyer side of the collaborative equation in terms of the need to make a responsible contribution.  In essence we can no longer claim ignorance in line with the you can’t manage what you don’t measure axiom.

Being aware of senior management’s limited understanding of purchasing beyond the traditional adjunct of finance view, coupled with the identification of key performance indicators such as ROIC and Earnings Per Share “EPS”, it is incumbent for each and every purchasing professional to demonstrate a broader, more enterprise holistic reach of their activities to demonstrate true value and finally silence the what have you done for me lately executive refrain.

While I had previously identified how a purchasing department’s proficiency (and efficiency) can have a positive impact on ROIC, today we will examine the extent to which the purchasing process and performance can and will have an impact on EPS.

What is Earnings Per Share?

According to the Stock Research Pro website, EPS is defined as follows; A company’s Earnings per Share (EPS) represents the portion of the company’s earnings (after deducting taxes and preferred share dividends) that is distributed to each share of the company’s common stock. The EPS measure gives investors a way to compare stocks in an “apples to apples” way.

For newer companies the EPS is based upon future or projected earnings, while the EPS for larger, more established companies is based upon actual earnings.  In the latter case, if earnings drop, the company’s share price will likely be impacted negatively.

Regardless of whether you are employed by a newer company or an established organization, the ultimate bottom line is just that . . . how can purchasing positively influence earnings re the bottom line numbers?

According to Investopedia, Most companies aim to improve their bottom lines through two simultaneous methods: growing revenues (i.e., generate top-line growth) and increasing efficiency (or cutting costs).  It is obviously in the reduction of costs where purchasing can have the greatest and most direct impact on a company’s EPS.

However, not all roads lead to the promised land of reduced spend and increased net earnings.  In reality, most organizations employ outdated and ineffective strategies such as vendor rationalization or centralized contract compliance as the levers to achieve the desired outcome.

As a regular subscriber to this blog you will undoubtedly think of the countless posts I have written about these purported best practice initiatives that when broadly applied across all areas of spend actually serve to undermine efforts to realize increased savings and earnings.  The key phrase here is the broad application of a specific strategy across all areas of spend.  This is important to keep in mind as your read the following paragraphs.  For those first time readers, here is the link to the post Kraft Buys Into the Mirage of Vendor Rationalization, that I am sure you will find interesting as it will serve as a primer in terms of explaining the logic behind my thought process.

Relative to today’s article, and in an effort to maintain a consistency of information source, I will once again refer to the On-demand supply management book and the Kennametal case reference in particular.

According to the book’s authors, Kennametal achieved cost reductions of about $16 million per year after taking their first steps towards spend analysis and the resulting move to establish “corporate contracts” in combination with a deliberate effort to “focus on key suppliers.”  Prior to this shift in strategy, cost reductions hovered between the $5 to $6 million range.

A key component of the initiative was to funnel 85% of spend within a given category through their top five suppliers.  The authors noted that other organizations strive to direct 95% of their spend through only two suppliers with one being designated as being in a dominant position, while the other being viewed as being in an opportunity position.

What is worth noting is that even though the company stresses compliance, at Kennamore it is not mandatory.

Referencing what management called malicious compliance, the company’s executive leadership recognized the fact that a blindly and broadly applied edict is tantamount to shooting oneself in the foot as it removes the leeway for a buyer to acquire something at a better price such as a loss leader.

Though forward thinking examples like the one provided by the Kennametal case reference is exciting, as it represents a long overdue move away from the aforementioned and lingering one dimensional view of the purchasing function, it is nonetheless an epiphany that continues to elude the majority of executives.

Hopefully, as more purchasing professionals take the initiative to understand the connection between procurement and EPS, we will see a Kennametal-type transformation occur more frequently and with greater urgency.

Tomorrow in Part 4 of the series I will examine the link between purchasing and Economic Value Add “EVA.”

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Tags: Douglas A. Smock, EPS, Investopedia, Michael Katzorke, Robert Rudzki, ROIC, SG&A, Shelley Stewart Jr., Stock Research Pro, Straight to the Bottom Line: An Executive's Roadmap to World Class Supply Management

Don’t sweat the small stuff? Why industry experts point to Indirect Material Spend as an important reservoir of untapped savings!

With regard to costs, the conventional wisdom is that procurement should focus principally on the “big ticket” areas of spend, such as raw materials and energy. And, you certainly should devote attention to raw materials and energy – not just to reduce costs, but also to reduce volatility through better risk management.

But, if you focus only on the big ticket spend categories, you’ll be missing out on the enormous opportunities presented by all other, indirect areas of spend. It is often possible to achieve double-digit reductions in costs for those indirect spend categories.

from Take It Straight to the Bottom Line: Drive Outstanding ROIC and EPS through World Class Management an Executive White Paper by Robert A. Rudzki, Greybeard Advisors, LLC

It is often times interesting how the same conclusion can be reached through multiple or varied paths.

For example and not surprisingly, I can readily remember 2003 when I could for the first time, consistently identify the emergence of a trend in the area of Indirect Material spend that held out the promise for significant but largely ignored savings for enterprises of all sizes.

Back then, the vast majority of companies were myopically focused on reducing the costs associated with the acquisition of Direct Materials as this represented the largest dollar expenditure and thus garnered the greatest attention from the finance department.

While there were important savings to be achieved in the DM area of spend, this was by no means the only area from which savings could be extracted. In fact, and as demonstrated by subsequent studies including a CAPS 2003 paper on Reverse Auctions, once DM savings were realized, subsequent reductions in spend leveled off to the extent that organizations could no longer justify the significant and on-going licensing fees for the ERP applications they had used to buy more effectively in the first place. In essence, and in an ironic twist in which the cure (i.e. ERP-based solutions) became worse than the ailment (re non-strategic DM buying) it was designed to remedy, companies ultimately bled more money through the pursuit of automated savings than they did through the prior purchasing inefficiencies. The why and the eventual impact on the industry as a whole of this revelation is best suited for a separate discussion, however and suffice to say, it provides an important window into why some analysts have predicted the possible demise of an SAP.

For the purpose of today’s post, I will examine more closely the inherent flaw with using dollar volume as the sole means by which to prioritize a company’s focus relative to savings.

In this regard, the words of Robert Rudzki referenced in the opening paragraph should provide a resonating ring.

Of course Rudzki, about whose efforts to bridge the disconnect between finance and purchasing I had written in a January 8th, 2008 post titled Bridging the Communications Gap Between Finance and Purchasing, approached the concept of widening the savings net to include Indirect Material spend from a pure finance perspective. That said he provides a compelling argument as to why this long neglected area of a company’s purchasing practice represents tremendous potential to improve the bottom line, especially from an ROIC perspective.

My arrival at the same conclusions came by way of a research grant from the Government of Canada in which I had identified what I would eventually refer to as commodity characteristics. Specifically the existence of both Dynamic Flux and Historic Flat Line tendencies that aligned with Indirect and Direct Material pricing performance. For those who read the recently re-released Dangerous Supply Chain Myths Series here in the Procurement Insights Blog, you will undoubtedly recall Part 7 (Enabling Technology), in that I discussed the existence of commodity characteristics at length. You can also check out the link (see below) to my white paper Acres of Diamonds: The Value of Effectively Managing Low-Dollar, High Transactional Volume Spend for actual commodity characteristic examples.

What is most noteworthy is that even though there was back in 2003 ample evidence to support the earnest pursuit of IM savings, the confining limitations of ERP-based solutions made it a somewhat cumbersome and in the opinion of many, unprofitable exercise. Today, it is a generally recognized fact that low-dollar and high transactional spend actually represents a tremendous and sustaining opportunity to impact a healthy bottom line paralleling that of the expected savings through an efficient big ticket acquisition process.

As a result the disconnect that I had referenced in my January 2008 post between finance and purchasing has for the most part dissolved into a more holistic understanding of the interconnecting complexities of individual functions within a global enterprise, and how they collectively impact an organization’s financial health.

The advent of SaaS technology and, the corresponding shedding of the unflattering “bolt-on” application moniker, has in no small way helped to facilitate this change in executive thinking and savings pursuit, however . . . to what extent has the finance department’s jargon become a discernible reality for those in purchasing and vice-versa?

After all, it was not that long ago that an Aberdeen Study reported that more than 80% of all savings claimed by purchasing are routinely discounted by CFOs as being irrelevant to the company’s bottom line.

In this week’s Procurement Insights series I will once again recall and review what Robert Rudzki, president of Greybeard Advisors and author of the book Straight to the Bottom Line indicated were the “five critical finance terms” every purchasing professional should know.

Robert Rudzki

Acres of Diamonds White Paper:

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Tags: Aberdeen, CAPS 2003 Study, Direct Materials, Indirect Materials, Robert Rudzki, Straight to the Bottlom Line

Fiscal realities and Government contracting (Part 4): Supplier cause and effect

It is a funny thing that as a writer when you put the virtual pen to paper you never really know what will or will not strike a note with your readers.  All you can truly hope is that your passion for the subject matter coupled with sound research practices will  prove worthy of consideration in what is at times an overcrowded social media world.

Occasionally, and when all the proverbial stars align, you will write an article or a post that has enduring value beyond the immediacy of its publication.

As we wind down this week’s series which focused on the fiscal realities that are impacting governments the world over, including the implications for those involved with (and in) public sector procurement, I immediately recalled an article that I had originally written back on December 13th, 2007.

Titled The Bands of Public Sector Supplier Engagement, the post highlighted the multitude of challenges faced by vendors looking to penetrate the government market in the hope of grasping the elusive revenue brass ring.

It’s relevance in terms of today’s article is that through a better understanding of the supplier mindset and the realities of the contracting process, you as the reader, will be able to decide if growing financial pressures will create the required impetus for a meaningful and long overdue change or, result in an even stricter adherence to existing practices?

“To really leverage vendor partnerships, solution providers need an in.  For the public sector, that entre has to go beyond the program to the individual behind it who understands the market nuances and challenges that can hold partners back.”

From the article 25 Public-Sector Channel Leaders (ChannelWeb Network, March 19, 2007) 

In one simple statement within the confines of a single article there has never been a better or more succinct explanation of what plagues public sector procurement practice today.  Especially in the area of supplier development and engagement!

As you review the backgrounds of the “leaders” featured in the ChannelWeb article, one cannot help but note that 11 of the 25 individuals listed have at least 20 or more “years in the public sector,” and for the most part all represent large, multinational suppliers.

While experience is not the sole domain of the corporate giant, the relationships that are developed over a period of two or more decades combined with the high level of what I refer to as “cross pollination employment” activity certainly provide the needed “in” referenced in the article.  An “in” which is by its very nature exclusive and therefore is not extended to include the vast majority of the supply market.

The Bands of Engagement

Over the past several years I have extensively researched and where possible monitored supplier engagement practices in both the public and private sectors.  While there are some elemental differences linked to political influences and considerations within the public practice itself, by and large the hierarchy or “class” distinction relative to suppliers has remained constant.  I call this hierarchy the Bands of Supplier Engagement (Bands Graph).

The “natural” evolution of these bands is not due to the exclusive nature of relationships alone, but is also part of the fall-out from the erroneously broad application of a flawed vendor rationalization strategy.  My November 27^th post titled “The Continuing Dangers of Vendor Rationalization” expands on the challenges associated with the utilization and subsequent misapplication of vendor rationalization as a means of driving both efficiency and bottom-line savings.

However, one cannot logically suggest that relational influences do not provide avenues of opportunities that are for the most part unavailable to the so called masses.  In fact, to deny this as a crucial factor in public (and private) sector decision-making would in and of itself raise an issue with creditability.

That said there are degrees of influence that have created grey areas of ambiguity that is similar to the carton of milk whose expiration date is within a day.  The milk is not necessarily bad, but nonetheless it leaves a somewhat questionable taste in your mouth.

It is within this context of understanding that the individual supplier bands or classes have been identified, and are explained below.

The Masses: Representative of the majority of suppliers who are detached, somewhat cynical and for the most part disinterested in pursuing opportunities originating from the public sector.  (Once again, it is important to note that the high level of disengagement is not limited to the public sector.  Many private sector organizations continue to struggle with an eroding supply base and the resulting negative consequences.)

The Strategically Displaced: Like gamblers buoyed by past windfalls, this group of suppliers are in the most unenviable position vacillating between stirring-up the emotions of the unsympathetic “masses” when a perceived injustice occurs within the public acquisition process and, delicately navigating the reefs of relational elasticity with bureaucratic taskmasters who hold out the carrot of replicating past victories.

The In Crowd: Representative of the select few suppliers who through direct relationships (i.e. cross pollination employment) with key government decision-makers have nestled themselves and their respective organizations into the enviable role of incumbent.  Referring once again to the March 2007 ChannelWeb article, very few suppliers have the needed “in.”

Way Forward Polarization

Given the seemingly diverse and contradictory nature of the three different classes of suppliers, it was really quite an amazing feat on the part of the Canadian Government in terms of how the Way Forward initiative first unified then polarized the vendor community as a whole.  This I believe is a mistake that the current leadership will not duplicate in the future.

What is interesting is that public sector procurement and the bureaucrats who drive its policies are not so different from the very politicians they often bemoan as being nuisances and interlopers.  I am thinking of a former Treasury Board executive’s comments relative to my reference to a letter written by the former Minister of Agriculture and Agri-Foods.  The Minister, Andy Mitchell wrote to me expressing his interest in the novice (nee new and unique) approach associated with my methodologies and insights.  To paraphrase the Treasury Board executive’s response, “it doesn’t matter what he says, he may not be around after the next election.”  Of course Mr. Mitchell wasn’t, and nothing further came of it.

The similarity of course is that like the electorate in the last Provincial election in Ontario (in which only approximately 50% of all eligible voters actually cast a ballot) a largely disengaged and cynical supply base neither asks the tough questions, nor has the majoritarian clout to both demand and exact the needed answers.  As a result, continuing supplier abstinence limits the ability to effectively challenge public-sector decision-making in any meaningful way.  This means that the let sleeping dogs lie analogy is likely being embraced by senior level bureaucrats within the Canadian Federal Government.  Like politicians, and unless you spend $24 million in a seven month period instead of the budgeted $1.7 million – a folly that all Canadians can easily grasp, you are not likely to stir-up the needed motivation to effect change.

This in turn exacerbates the challenges faced by independent lobbyists (re individual suppliers) and associations such as ITAC.  And with a recent Government analysis that recognizes the steadily declining level of supplier involvement, the ongoing “dialogue” between senior bureaucrats and vendor representatives are not likely to produce any meaningful outcomes anytime soon.

One merely has to refer to the Commonwealth of Virginia’s eVA program, which was launched in 2001 (coincidentally within the same time frame that the Way Forward program was also introduced), to clearly see the stark contrast in both the approach to supplier engagement and the corresponding results.  (Note: refer to the Yes Virginia posts (Parts 1 and 2) in the Procurement Insights Blog for details of the eVA program.)

With the Virginia initiative (which, in a twist of irony, senior Way Forward champions had supposedly modeled the Canadian program after), the Commonwealth’s supply base has grown from 20,000 in 2001 to 34,000 in 2007.  The distribution of business has also increased from 23% of all suppliers receiving orders in 2001 to more than 40% in 2007.  Finally, and this is the most telling statistic, in 2001 only 1% of the targeted $3.5 billion in spend was processed through eVA.  In 2007 that number has increased to more than 80%.  And this was all accomplished with an On-Demand (now called Software as a Service) pricing model.

No such numbers are available relative to the Government of Canada’s program.  And even if they were, it is unlikely that the results would come close to demonstrating an outcome similar to that of Virginia’s eVA initiative.

This then leads to a number of hard questions including why, if two similar initiatives having started at roughly the same time, produced completely  different (polar opposite) results?

The paucity of answers has of course led to wide-spread speculation.  This includes assertions of incompetence in key areas of senior management to high levels of corruption and a deliberate attempt to euthanize the SME community in terms of winning government contracts.  While I do not necessarily agree with these positions (at least not at this stage), nor will I pretend to have all the answers, I do believe that many of the issues originate with traditional mindsets surrounding purchasing in general.  This includes the persistent view by senior executives that rather than being a strategic contributor to a dynamic vision, purchasing professionals within the Government are seen as nothing more than a functional cog in an adjunct accounting (or IT) exercise.

Unless the Government of Canada’s thought leadership experiences an epiphany of significant magnitude, or there is an equally impressive reversal of sagging supplier interest, it is very unlikely that any meaningful or sustainable changes will take place in the foreseeable future.

The RFx Mirage?

In an effort to gain a more in depth understanding of the reasons behind increasing levels of supplier apathy, particularly in the public sector, I have recently participated (indirectly) in a number of Requests for Proposals etc. (RFx’s)  at the Federal, Provincial/State and Municipal levels.

The impetus behind this exercise actually began in 2005 when I spoke at an automotive industry conference for suppliers.

Consisting of more than 200 senior executives, the following is just a sample of the comments I received from the audience:

“I do not think that buyers spend any time at all analyzing RFQ’s . . . once they have sent them out they go directly to the price auction and get on a phone and those who cut the price get the business.”

“We spend too much time working on RFQ’s . . . the RFQ process chews up dollars and time for something that is going to bring us no return.”

“It (RFQ’s) will have a negative effect on my business . . . we should charge the issuers of RFQ’s for responding.”

These of course represent only the tip of the proverbial ice berg.  There is a general perception that the RFx process is ultimately little more than an elaborate fact finding mission that is geared toward bolstering and justifying a pre-ordained outcome.  Otherwise known as an exercise in decision justification.

At its best, the public sector RFx process can act as a negotiating mechanism to leverage down prices with a preferred supplier.  This of course only works if the RFx exercise provides a true reflection of market conditions and prices.  Something that is virtually impossible to do without broad supplier engagement.  Refer yet again to my post on the dangers of vendor rationalization.

At its worst, the public sector RFx process is considered to be an ineffective legislative requirement which needlessly lengthens the procurement cycle in which a “gravitational leaning” toward a particular vendor already exists.

Over the next few weeks I will report back to you on the results of my research.

Conclusions?

The more I talk with organizations on both sides of the transactional fence the more I am reminded of a line from a movie (The Thomas Crown Affair, not the Steve McQueen – Faye Dunaway release, but the newer version).  Dennis Leary, who plays a detective in pursuit of Pierce Brosnan’s Thomas Crown, was asked why he would continue to pursue the art thief whose main occupation was buying and selling corporations.

Leary’s response that “besides making him mad” (he used more colorful prose), he would do what they (his bosses) “tell him to do.”  However and here is the connection, during the same time that he worked the Crown case he arrested a real estate fraud artist and a guy “who was beating his kids to death.”  So if they (being his bosses) ask him to continue pursuing Crown for what he considered to be a painting that “only mattered to a very few, very silly rich people” he would do it.

It is unfortunate, but many suppliers share the same sentiment regarding public sector procurement.  They will do it if they have to, or have time to but almost always feel that their efforts can be best spent on other, more productive and fulfilling activities.

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Tags: 25 Public-Sector Channel Leaders, ChannelWeb Network, government contracting, government finances