Business & Technology Nexus

Dave Stephens on technology and business trends

The Future of Sourcing

with 4 comments

Hrrumf. Michael Lamoureaux (of Sourcing Innovation fame) asked Tim Minahan, Jason Busch, and yours truly to post some thoughts on what our beliefs were.. I told him I believed in beer, and could post extensively on the subject. Then he clarified – he wanted to know how we saw the future of Sourcing & Sourcing tools. Not nearly as tasty – but true soldier that I am, I gave it a go.

Tim Minahan fired the first shot, and as usual, his stuff was sound and strong. To be honest, I avoided reading Tim’s post until after I was done with mine.. Too much temptation for a little innocent plagiarism. And I have to say he and I have talked previously about taking commodity pricing from external markets and blending with your internal view of corporate contracts, essentially triggering alerts and activity based on the way the market is moving. And that’s cool stuff.

The prism I see Sourcing through dates back to the 1999 NCAA Basketball Tournament. You see, I was working on html mockups for a sourcing platform proposal all during the tourney. At the time I was living in Merced, which is neither here nor there but it was nice. And I remember as if it were yesterday sitting in front of the TV for hours watching hoops and hand-crafting html to showcase how electronic tools could help professional buyers evaluate bids not only on price but on quality, lead time, and more subjective measures.

That initial proposal and html concept car were pretty much immediately derailed, at least in part, by the .com boom and the B2B Exchange craze. But the seeds of Oracle Sourcing were planted, albeit in Marketplace form – and to this day I remain proud of the platform my team built. Eventually we ported the software back into Oracle’s ERP suite & built what I had first envisioned. And my team’s last release, Oracle Sourcing minipack J on 11i10, incorporated iLog for optimization and handled so many other high-end features it still makes me smile. The team did a wonderful job.

Of course a lot happened from 1999 to 2005, not the least of which was the collapse of the standalone Sourcing market as it commoditized & was merged with Contract Management (or at least that’s how I see it – Procuri, with their very public 71% revenue growth in 2005 might have quite a different view). I thought Emptoris’ purchase of DiCarta was smart & telling about where the Sourcing solution boundaries had evolved to.

By now you’re probably on to me – I’m trying to predict the future by looking backward. So now that we have that straight, let’s go ahead and do it. I certainly have come to believe one of the reasons Sourcing became such a hot, hot, hot area had to do with the economic climate the US, UK, and much of Europe found themselves in from early 2001 onwards. With oversupply in many areas, and with power firmly in buyer’s hands, prices came crashing down in many different areas. And once you’d saved 40% in one area, you might as well have been a “reverse auction drug addict” – you couldn’t get enough of it. Sure, the first movers were going in 1999 and 2000, but the economy made a mass move possible and more likely to be sustained. What was a supplier to do?

I remember and have shared many of the Ford successes. Ironically, and tellingly, one of the biggest savings areas were tires. Ford buyers, for years, thought 4 tires cost around $100. Nope. Try $40. (Naturally, as luck would have it, I told this story as a dig on Ford while trying to close a big Financial Services deal at Oracle.. Turned out the decision maker was an ex-Ford buyer and, yep, had been responsible for tires. He didn’t think my story was funny, and we didn’t get the deal.)

The net of the Sourcing craze was there was this big one-time fat stripping across many categories of goods and services. It worked in direct materials, it worked for indirect, why it even worked for services.

Lost in all the hoopla behind the one-time megasavings was the process discipline these tools enabled. Suddenly there was a kind of transparency to the sourcing process that the CPO had always wanted but never had. And certainly this made the tools super attractive to public sector.

I remember numerous meetings where I would drill the VP of Procurement and ask what the policy was for competitive bidding. “3 bids and a buy if the value of the purchase is above $25k” was a typical response. Occassionally one of the leader’s key resources would pipe up: “No one does that.” Then silence. Paper processes are fine, but online processes give managers much better auditing and policy compliance tools. And when buyers know their work is online, they act differently.

Of course, dropping public sector into the mix changed what it meant to be transparent. Strange requirements like “adjectival ratings” added complexity and confusion to what should have been a straightforward process. I won’t go deeper here as I’ve found it’s better not to dwell on government practices.. It’s almost guaranteed to lead to high blood pressure, especially if you take the time to remember your tax dollars are funding their big mess.

So what does the future hold for Sourcing? The secret to knowing this, I believe, has to do with understanding how global economic trends will play out over the coming decade. And oh by the way, it doesn’t hurt to realize that all the complexity in Sourcing really isn’t useful for a large segment of companies. Woops, there I’ve done it. Blasphemy! :)

First, as I’ve posted on again and again, I believe global natural resources will face steady upward pricing pressure for the foreseeable future – which then, whether pure economists like to view it as such or not – will likely translate into inflation (or decreased buying power if you like that better).

Now I’ll be the first to admit there are a very large segment of people who see just the opposite. They believe downward pricing pressure due to the unrelenting decrease of trade barriers and progression of global markets will contain prices for the foreseeable future. If you buy into this view count yourself in the “it’s all about me the buyer” camp & please continue building ever larger matrix algebra optimization equations to optimize your optimizations :)

But if you think power is likely to be shifting more towards suppliers for large segments of categories, perhaps it’s time to hit the pause button on over-zealous “let’s beat up the suppliers continually” approaches. Maybe it would be better to leave some bridges un-burned. Ask Ford and GM how much they wish their supply base loved them as much as their share-winning Japanese cousins.

When it comes to the future of Sourcing, I think you’ll see a recession of Sourcing functionality back into transactional systems. That will certainly bode well for SAP and Oracle. Essentially, the mass market will look at “3 bids and a buy” as the process they want to move online & make transparent. And those capabilities will likely be bundled with Contract Management and transactional buying. I think 5 years from now customers will have a really tough time distinguishing Sourcing as separate from Procurement. (Except in niche areas)

I also hold the view that Strategic Buyers and Transactional Buyers will blur together as well – as transactional buying becomes more about value-add and less about paper-pushing. You’ll just have a different type of professional in the role & they’ll be able to cross-over from contract negotiation to business unit assisted buying more easily.

Now I’d expect my fellow Procurement bloggers to talk about the emergence of canned, templatized sourcing processes by UNSPSC categories, an increase in group-based scoring, and other efficiency gains plausible within the Sourcing process over the coming years.

The only problem on going ever deeper in Sourcing functionality is that it continues to dehumanize negotiations. Which wouldn’t be a disaster if there weren’t so much darn information gained by direct human interaction – let’s face it, relationships are valuable. In the PLM space we always discussed the balance between getting suppliers to open up and provide cost breakdowns for component designs and reverse auction approaches. Get in suppliers’ faces too early on price & their feedback on which design is the best will never be yours..

So to summarize I believe sourcing for the mass market will seem a lot more transactional and mundane in the future. And that a lot of the advanced capabilities we see in RFP’s today will fall by the wayside. A few, like scoring models that accommodate more than price alone, will stay and become absolutely mainstream.

What I’ll add is that in specific verticals and for specialty buys the functionality and capabilities will continue to evolve and deepen, perhaps morphing into specialty services. I’ve always loved Transportation Sourcing as an example. There’s no reason a compelling service couldn’t exist that would make freight lane capacity far more transparent & find a way to fill up more of the trucks driving around our highways and freeways. It’s stunning once you study the free capacity statistics on freight and transport – the waste is truly staggering. Beyond transportation I think you could see specialty sourcing in faster-moving category segments, like electronics. And to some extent the better vendors (Iasta, Procuri, Ariba, etc) do a good job with that now.

My beliefs probably lead you to a better understanding of why Coupa didn’t start in the Sourcing space. There’s a lot of good software out there today. And I certainly wish my Sourcing friends the best of luck as they pursue new releases, new frontiers, and new customer segments in this important area.

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Written by Dave Stephens

08/22/06 8:51 PM at 8:51 pm

Posted in Opinion

4 Responses

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  1. Dave, a well-written and enjoyable piece.

    I do think we need to step back from the RFP “blunt instrument” a bit. Simple but smart actions sometimes generate surprising results. For example:

    o Do we clearly understand the demand side of spend?

    It’s said that deploying a T&E system reduces demand by about 10%, because employees self-regulate spending when they believe there is auditability. So, even if we stipulate that no other benefit is forthcoming, deciding whether to deploy a T&E system is straightforward.

    I’ve heard a similar 10% demand-reduction heuristic for Ariba Buyer.
    And, by transitivity, perhaps, for Coupa!

    Eric Strovink

    08/23/06 4:58 AM at 4:58 am

  2. […] However, comments in a recent post from Procurement Central master Dave Stephens questions whether Ford has the skills to make supply management job one. Dave tells the following story of his experience with Ford’s procurement team in the late 1990s: “I remember and have shared many of the Ford successes. Ironically, and tellingly, one of the biggest savings areas were tires. Ford buyers, for years, thought 4 tires cost around $100. Nope. Try $40.” […]

  3. […] As I looked into the other people that were participating – Dave from Oracle with deep market knowledge at the largest companies, Tim with access to every CPO in the world, Jason as the new world leader of online media in sourcing, and Doug who actually is working in sourcing, it seemed to me that just creating my own forecast of the future would be somewhat redundant, and maybe even less credible. My contrarian view is more from what I have seen already – since 2000. […]

  4. Hi Dave,

    Great article and one that I have a lot of shared views on. In the 5 years I previously worked as a purchasing consultant offering managed e-auctions amongst other serivces, we used very simple software that could deliver fantastic results for a broad range of categories and spend profiles. There may have been a little more work up-front to prepare the process but it does make me question many of the feature extensions I’ve seen in other e-RFx software.

    I fully agree that there is a future in bringing such electronic tools and processes to the mass market. There are still so many companies out there running a “3 bids and a buy” process via e-mail, fax and whatever else. Surely there is a great market to bring a simple, easy to use, e-sourcing / e-RFx process to the SME market so they too can benefit from the efficiencies, traceability, improved communications and so on that such a tool offers.

    We are making early forays into this at Market Dojo and I hope that if we market it suitably, it will be a fruitful market.

    marketdojo

    12/8/10 3:20 PM at 3:20 pm


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