Mobile devices are now part of the modern business uniform. Mobile phones created a culture of always available, but mobile devices enable constant connectivity. What telecom companies don’t want CPOs to know is that bundling voice, data, and devices with them is no longer the most effective way to manage telecoms spend.
This week, my recommended procurement webinars are all about doing MORE. More categories managed, more results, and more visibility into the supply chain. Click on the title of each event below to view the full description and register or visit the BMP events calendar to see what’s on tap for the rest of the month.
Procurement is undergoing a transformation, moving away from process and price and towards undertaking initiatives that demonstrate value for the business. Therefore, when the opportunity arises for procurement to demonstrate its value, you would expect them to seize it in both hands… or maybe not!
We want to share with you a real life situation undertaken this month. We have removed the names of those involved to limit embarrassment; both company names are fictitious, but the scenario is real.
It is not uncommon for procurement to receive a bonus payment based on the savings the department has achieved. In this post we discuss if procurement would benefit more from being on a salary plus commission payment structure.
AFTER READING, TAKE OUR TWITTER POLL: Should procurement be paid commission?
The traditional approach for calculating pre-contract savings is to obtain a minimum of three supplier quotes, select the mean as the base point then count the additional savings achieved above the base point. The challenge for the CFO is because the savings are subjective, they are unable to truly identify tangible and quantifiable savings from procurement’s impact, therefore the level of bonus they might apportion directly to procurement is limited.
Assessing bid submissions based not just on initial costs but total forecasted end to end costs is becoming more prevalent as businesses take a wider view of the true cost of ownership. However, since the model for encouraging procurement to strive for savings remains focused on the bid submission, applying this approach to determine bonus compensation has a high likelihood of conflict. The bonus payment approach could arguably be stated as outdated, thereby creating an opportunity for procurement. An alternative approach might be to replace the bonus model with a commission structure, based on the end to end total contract savings.
Procurement benefits would include:
- Ability to be recognised for the full business value a team/individual delivers.
- Encourages and rewards end to end contract ownership and relationship management.
- Encourages post-contract collaboration, ultimately leading to the possibility of generating post-contract savings within the same contract term.
The potential benefits for the business include:
- Maximises pre and post-contract savings. Post-contract savings is an area currently underdeveloped as the main focus remains on pre-contract savings, which is understandable given it is the main area for bonus achievement.
- Creates a catalyst for procurement cultural change, focused on supplier collaboration and successful implementation. This unlocks the supply chain and drives innovation and collaboration across the business to increase bottom line profits.
- Ensures operational costs are kept to a minimum.
- Encourages and rewards end to end contract, maximising contract savings
There are many people within procurement who have “fallen” into the role rather than pro-actively sought to become procurement professionals. Even those who have deliberately sought after the role, few may still believe it was a good career choice. The change to commission based compensation has the potential to raise procurement salaries to new levels, provide a catalyst for change, and enable procurement to reflect their full business value, which could in turn could attract new talent and retain experience that is sorely needed.
Like all new ideas, there is an upside but also a downside. Moving onto a commission structure based on the overall savings from successfully managing the contract could quickly lead to some personnel being identified as under delivering. The key to gaining business support in this initiative is by demonstrating greater profitability for the CFO in undertaking this route. The central question is: does procurement want to undertake this direction?
How often can you find 80% savings in your telecom bills? When it comes to legacy services, more often than you’d think!
In all industries there are mergers and acquisitions: Telecommunications and Technology being one where M&As occur more frequently than most. These changes can have significant impacts on the products and services customers are purchasing in terms of the actual technology being offered and the prices they are paying for it.
I recently completed an audit for a customer in the healthcare industry where I was asked to review their telecommunications invoices and look for more cost effective solutions than their current voice services. The first thing I noticed was how high their bills were for basic voice services - almost 480% higher than normal industry standards! The customer had not really looked at their bills for years and simply continued to pay the same monthly charges thinking all was right as rain. Understandably, patients are the priority for them - not the cost of their phone service. For this specific customer, the technology they had in place was a legacy service where the underlying carrier had recently been bought by a global industry leader, who had subsequently developed more cost effective products offering the same functionality at a much lower price. Unfortunately, carriers do not always offer up the insight into technology changes and lower cost options when it is in their best interest to keep the higher price bills in effect.
Presented below are some quick tips for reviewing your telecom bills to determine if a change in service is viable, beneficial, or more cost effective:
- Recurring Charges: How long have you been paying the same price? Pricing changes are common with technology-driven services. If you have had the same price for 3-5 years and under multiple contract terms, it is time to take a look at the market with fresh eyes. There are always compelling reasons or special circumstances for contracting a fixed price for longer terms such as newly implemented networks and systems; but for basic voice services…I don’t think so.
- Time Passed Since Last Going-to-Market: As mentioned, most telecom companies are continuing to develop new innovative ideas and upgrades to their technology; most likely within 3 years of their current technology. If you have the same service in place for more than 5 years, it is probably time to take a look. I know “if it ain’t broke, don’t fix it”; but why not just get a feel for what is available and for a potentially lower cost? After all, it may be up to procurement to determine when something is ‘broke.’
- Contract terms: When was the last time you looked at your contract? Do you (really) know what your current terms are? If you cannot answer these questions, chances are the answer is probably too long and you are month-to-month or under some ridiculous auto renewal clause. It is important to read the small print in your contract as you could be committing to an unrealistic term length with no out...unless of course you are planning to spend more money with the same supplier for an even longer term.
When we presented the opportunity assessment to our healthcare client, they were understandably shocked. We moved forward by leveraging the market-competitive offers to contract a new technology at almost one fifth of the current cost. The soft dollar costs of implementing the new service were eclipsed by the overall savings, making this a huge financial and technological success.
As I encourage you to review your bills more closely, let me add that the idea of tracking down wasted spend and going to market for legacy products and services is not limited to the telecom industry. It can be applied to any business commodity and begins with simply questioning the products and services you’re paying for.
Continuous cost reduction in the manufacturing industry is a supply chain best practice, but all too often it is mistakenly seen as unsustainable by strategic sourcing and procurement departments. For many companies the question is, ‘how can I reduce costs while limiting the impact on quality?’ Before jumping right to substituting materials, there are other options for delivering cost savings - yes, even over time.
It is the worst question Procurement ever faces. C'mon – you know what question I'm talking about. That horrible, terrible question from Finance for which there is no good answer…
If Procurement worked so hard and saved all of this money, WHERE IS IT?
The problem is that the space between negotiated and realized savings is full of pitfalls: unexpected requirements, inaccurate demand, and budget holders who see an opportunity to unofficially reallocate savings elsewhere. Even when additional value is created, many times by the end of the year the savings have all but evaporated.
This is a problem that has to be handled by the top level of the organization. If the strategic vision of the leadership team requires that all uncommitted funds be returned to a central account, they have to be willing to support Procurement by issuing a mandate. Declaring that all funds saved by Procurement are to be removed from line of business budgets is a tough love decision. But all that really matters is whether or not it is the right decision for the company as a whole.
“Although procurement has certainly evolved from its early roots, it still faces challenges in terms of executive recognition, talent management and organizational challenges. Modern enterprises are faced with a massive set of new challenges, including the forces of globalization, increased risk, complex supply chains, and the spread of government regulation on decision making, not to mention the tremendous strain of man’s presence on the earth’s natural resources.” (p. 1)
The Procurement Value Proposition (Kogan Page, December 2014) takes on some of the most pressing challenges facing procurement today and makes them seem both more comprehensible and realistically addressable. As acknowledged in the quote above, taken from the book’s introduction, procurement has evolved significantly since the early days when we got our start in the railroad industry. The problem we must own today is that the organizations we support have evolved faster and more dramatically than we have. What procurement needs is a better understanding of how to fuel our development.
“Crate training uses a dog's natural instincts as a den animal. A wild dog's den is his home, a place to sleep, hide from danger, and raise a family. The crate becomes your dog's den, an ideal spot to snooze or take refuge during a thunderstorm.”
In a July 14th article on NewsDay, NYASHA CHIZU asked ‘Is Procurement an Art or a Science?’
In the article, he makes the following statement:
“There is definitely an art to good procurement but on the other hand, taking a scientific approach to options analysis, requirements development and the procurement evaluation process can facilitate a more successful procurement project.”
Last month, Alun Rafique from Market Dojo and I co-wrote an article for Procurement Insights about Variables in the Adoption of Auctions. A discussion about the article really picked up steam in the ISM group on LinkedIn, and one of the questions posed in response was “Someone explain to me how a Reverse Auction is fair and equitable to the supplier..."
After considering that question carefully, Market Dojo published an article that asks a question in response: “Should Suppliers Still Fear eAuctions?” The article, which you can read here, takes an interesting look at the progression of auctions from carefully managed consultant resource, to part of an ERP system, to their somewhat questionable state today – in limbo in a world where procurement is driven to create as much value as savings. A third question in this discussion might be, are auctions still relevant?
In this week’s featured event we heard from the Sourcing Interests Group Thought Leaders Council. They offered their definitions of savings as well as best practices. If you are interested in more about the members of the Council, read the SIG page about them in the Resource Center.
The Thought Leaders Council advises SIG on the build-out of the SIG Resource Center, makes regular contributions, serves as subject matter experts, and conducts working groups. The Council is representative of the SIG Membership, in that the majority of members are sourcing executives from the Buy-side. The Working Groups take suggestions from the SIG community and build guidelines for sourcing initiatives and categories.
This week’s featured event (hosted by ISM and sponsored by Zycus) was primarily presented by Spend Matters’ Jason Busch. The webinar was recorded and will be available on ISM’s webinars page.
In this year-opening Procurement on YouTube feature, we'd like to kick off the year on a lighthearted note. The team at Market Dojo has put together a series of six very entertaining videos on how to save your company money.
This week’s Wiki-Wednesday article is about the challenges of capturing savings due to cost reduction and avoidance. One of the sections addresses Total Cost of Ownership (TCO), and the difficulties of calculating and reporting on those costs.
Note: This post by Kelly Barner originally appeared in the March 2012 PSD Group Procurement & Supply Chain Newsletter.
In this week's eSourcing Wiki-Wednesday excerpt on Seven Facets of Cost Reduction and Avoidance, compensation structures are brought into question as they incent procurement professionals to behave a certain way, 'Like all employees, a supply manager will engage in behaviors rewarded by the company. This will create a problem if cost avoidance or cost reduction efforts beyond hard savings do not count toward a supply manager’s compensation and performance.'
As organizational expectations of procurement increase, many practitioners are questioning the structure of their compensation plans. Traditionally, procurement professionals received a straight salary. If there was a bonus structure in place, the bonus was typically based on corporate performance against stated goals and qualitative individual performance rather than savings targets.
This week’s event pick was hosted by Sourcing Interests Group and sponsored by Ariba but the team from McDonald’s absolutely stole the show. They shared information so detailed that SIG was unable to share the slides from the webinar even with their own members. In an effort to respect their wish to contain the detailed information they shared within the live session, I will focus on their general recommendations regarding a successful category management program and how it is different than traditional strategic sourcing.
We are all familiar with the line from the "Jerry Maguire" movie - SHOW ME THE MONEY! In procurement we are often asked to SHOW ME THE SAVINGS! The blog of the week discusses just that which is why I selected it.