Business & Technology Nexus

Dave Stephens on technology and business trends

Archive for April 2007

The Three C’s – Cost, Complexity, and Compartmentalization

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As usual, a day late and a penny short due to the overwhelming interest in my new startup Coupa, I’m pleased to bring you my view on what the “Top 3” issues are holding purchasing departments back.

First, some housekeeping. Michael L. of Sourcing Innovation came up with the idea for this series. Imho, he provides an increasingly valuable service bringing up topics of conversation across blogs dedicated to Purchasing. Despite his Saturday posts, which are “rhymey” in a Weird Al Jankovic meets Lawrence Welk (youngsters may have to look this one up) kind of way, I’m still glad to know him. :)

So what are the Top 3 Bugaboos I think are most relevant to Purchasing Departments today? Procurement Central’s view is:

  • Cost
  • Complexity
  • Compartmentalization

I’ll call these the Three C’s from here on out.

The First ‘C’ – Cost – Never one wanting to err on the side of subtlety, I want to start with the basics. A good Purchasing department controls corporate buying. Its goal is to provide great service to the company while minimizing spending. So any Purchasing department worth their salt is looking at the amount of money they spend per year & the amount of time spent spending the money (did you get that) and is constantly seeking to improve. Now it’s important to mention here that most firms do not have a lot of leverage over their supply base. So negotiating for best value, while important, is more of a process than an art form. On the other hand, the basic blocking and tackling productivity gains that are possible through good automation are right up their alley.

It’s funny, a few old grizzly Purchasing guys shared an inside secret with me – that they sandbag and sometimes milk the savings. They don’t save everything the first year so they can keep on demonstrating value to the CFO. And while that’s too bad, it is true that working the First ‘C’, Cost, is a continual challenge.

The Second ‘C’ is Complexity. In systems, in processes, in organizational structure, and in the Purchasing department’s own objectives.

For most organizations there’s just no need to get fancy in the Purchasing domain. Sure, if you’re a manufacturer and you’re making huge strategic decisions like whether or not to bank on China, how to optimize supplier contracts to hedge against demand fluctuations in global markets, keeping it simple might mean failing to evaluate game-changing opportunities. But for the rest of us, the Purchasing function and its role in the organization are far more straightforward.

On process, fight complexity and resist the urge for customizing procedures such as approval paths for special situations. Make the exceptions exceptional. For systems, error on the side of solutions you know your organization will understand vs. the system with 10,000 features. And measure progress with no more than 3 variables – and preferably just 1. You will likely underestimate the value of focusing the organization on a single, specific purpose.

The Third (and final) ‘C’ is Compartmentalization. Here is where Purchasing Departments often fail to invest heavily enough in communication and outreach with the rest of the organizations in the company. Systems can help ensure groups collaborate, but your people, with an emphasis on customer service while fulfilling your group’s mission, will really make the difference. Examples of groups you should meet with monthly include: Facilities, Operations, Manufacturing, Real Estate, HR, Engineering/R&D, and even Sales. You may not think you’ll have anything to talk about, and yet issues will surface that will help the entire company operate more effectively. And, importantly, you’ll be building the relationships you need to effectively pursue your Purchasing programs.

So there you have it: Cost, Complexity, and Compartmentalization – Three C’s that just might be holding back your Purchasing department.

Thanks again to Michael for organizing the blog series. And, as always, feel free to send me your thoughts and opinions to dave at coupa dot com.

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Written by Dave Stephens

04/29/07 10:44 PM at 10:44 pm

Posted in Coupa, Opinion, Procurement

On Artificial, Captive Markets

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Competition drives efficiency – we all seem to know and believe that. But what is the corollary?

I’ll bet it has something to do with Trade Shows.

Captive markets are funny things. Suddenly you’ll pay $5 for $1 popcorn (movie theater), $80 for a $40 bottle of wine (restaurant), or $4.50 for a hot dog (baseball game).

I thought I had seen all there was to see about captive markets – until I started learning about Trade Shows.

I understood the expense of the Trade Show booth itself – you pay for having a place from which to showcase your products and reach an audience. But when you dig into the details and learn you have to “buy” things like power and internet access, and rent anything from upgraded carpet to 4′ long desks, that you start to understand the breadth of this captive and artificial market.

Imagine calling PG&E (the power company here in the San Francisco Bay Area) and asking for service. The PG&E salesperson responds with “would you like our hourly rate or our 24-hour rate?”

“How much is it for power?” you ask, voice straining with concern.

“Well, it’s $90 per hour but only $270 for a 24-hour period.”

Wow! And of course all the other examples are likewise pricey. These are good markets to be in if you’re the supplier – after all, you have a mini-monopoly. A prospect either buys your power / internet / etc or does without.

If any of you have used the power of effective procurement against a captive market and lived to tell the tale, drop me a line at dave at coupa dot com.

Written by Dave Stephens

04/22/07 10:47 PM at 10:47 pm

Posted in Opinion

Alligators That Remain Are Not Going Hungry

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The enterprise software M&A phase we’ve been going through has certainly reduced the number of large vendors in the market, increasingly turning Oracle and SAP into “restaurants” with software packages varied enough to suit almost all corporate palettes (and wallets).

You might assume the M&A mania would effectively spell disaster for the independent vendors that remain. But quite the opposite is proving true. Lawson proved the point quite recently, doubling sales despite incurring lower profits due to restructuring.

The alligators that remain (in the enterprise software swamp that Oracle and SAP are “draining”) seem to be eating just fine thank you very much. Is this a temporary phenomenon? We’ll see.

Written by Dave Stephens

04/15/07 1:55 PM at 1:55 pm

Posted in Opinion

Cowen Slams Salesforce

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Peter Goldmacher got downright curmudgeon-ly on Salesforce.com in a recent Cowen & Co. research note. Peter believes Salesforce.com faces a questionable future – and that for reasons he never explains, Oracle, SAP, and Microsoft will now suddenly be competitive with the firm. Too bad analyst reports can’t receive “star ratings” like books do on Amazon.com.

As for me, I’d like to understand what “imminent competition” the big boys will be offering Salesforce – given that Marc Benioff has made the company’s primary mission to go replace failing Siebel implementations – and he has seemed to find runaway success at doing just that.

At some point, you’d have to acknowledge Salesforce as the “market leader in CRM software people actually use.” And at that point, you have to start finding reasons for people to switch from Salesforce to something else.. Why would they?

Maybe there’s some new strategy afoot here – either in Redwood Shores, Walldorf, or Redmond – something that Peter is privy to that the rest of us don’t see. But Salesforce.com growth numbers seem to paint a far different picture – one where it’s the big boys who are struggling to keep pace with Salesforce.com market share gains. In fact, Salesforce.com is on the verge of moving up a weight class itself.

Written by Dave Stephens

04/13/07 11:40 AM at 11:40 am

Posted in Opinion

Is Zillow Going To Make Appraisals Obsolete?

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In the US if you buy a house (and even when you refinance a loan) chances are you are required to do a property appraisal. And at $400-500 a pop, it sure does add up.

Take the above trend for existing home sales from February 2006 through January 2007. If you  average the monthly data for existing sales you get to around 6MM. In addition there are around 1MM of new home starts to tack on, which starts us off at around 7MM mortgages issued. Add refinancings and you get north of 10MM pretty quickly. So, “the appraisal market” (by this logic) is at a conservative minimum around $4B (10MM * $400).

Enter Zillow – “your edge in real estate”. In many areas where comparable neighborhood sales are readily available to be used by an algorithm to compute a predicted price (called a Zestimate TM), it’s not clear why an appraisal is necessary, except perhaps to check to make sure the property is not in a state of disrepair. And that’s more of a $50-100 house check, not a formal process with pictures and reports.

So will Zillow kill the appraisal business? Well, since Zestimate’s are free I can think of around 4 billion reasons why they just might…

Written by Dave Stephens

04/9/07 2:40 PM at 2:40 pm

Posted in Opinion

Climate Change Report A Hot Read

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With all the politicizing of climate change, it’s tough not to get the ‘Chicken Little – The Sky Is Falling’ feeling when hearing scientists talk about the tough changes seemingly in store for us.

Here are a few links you may want to follow & read:

NY Times Article: “Emissions Already Affecting Climate, Report Says”

Intergovernmental Panel on Climate Change

Climage Change 2007: Summary for Policymakers (23 boring pages)

Good Powerpoint Slide Deck Detailing Data Behind Climate Change Assertions

Written by Dave Stephens

04/6/07 8:44 PM at 8:44 pm

Posted in Opinion

The US Economy: Recession?

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The Purchasing managers’ index slid this month, dropping to 50.9. Here’s a graph of the last year:

Any reading below 50 many interpret as a contracting economy. The more precise interpretation is contraction in US manufacturing output.

People seem to disagree whether the US is falling into a recession, but the PMI trend sure seems to predict just that. For many businesses, a recession in the US will lead to the proverbial tightening of the corporate belt – which usually involves being more disciplined about spending. But with inflation not budging, where will savings come from? Perhaps more offshoring, combined with more urgency around initiatives designed to boost corporate efficiency.

For those who are interested, here’s the inflation story (for finished goods). We’ll get a new chapter (the March reading) quite soon. Click anywhere on the chart to get a copy of the February report:

Written by Dave Stephens

04/3/07 5:51 PM at 5:51 pm

Posted in Opinion