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Dude, where’s my personalised spend report?

COVID-19 has dragged many kicking and screaming into the digital era. The Queen has been seen on Skype, the UK Cabinet met on Zoom and many of us mere mortals have turned to online shops to get essential items. Mintel reported the online grocery market in UK is forecasted to grow by 33% in 2020, up from a growth rate of only 2.9% in 2019.

Nick Carroll, Associate Director of Retail Research at Mintel, said: “Over the course of just a few months, COVID-19 has had a seismic impact on Britain’s grocery sector. The pandemic is giving a significant short-term boost to online grocery services…, however, the impact will last beyond the crisis.”

Will COVID-19 have the same seismic impact on procurement?

Some organisations identified the benefits of digitisation before the pandemic. Vodafone, for example, embarked on the digital transformation journey a long time ago and are more efficient and have higher levels of compliance. Better visibility helps procurement professional identify opportunities and issues more quickly. A greater use of artificial intelligence, and in particular the use of one of its sub-areas, machine learning, improves productivity.

Despite improvements that brought about the recent “AI summer”, the Economist believes that progress might be reaching a plateau. The forecast is based on an analysis of the factors that have created the latest machine-learning revolution, viz: improved algorithms, more data, and more powerful computers.

Machine learning uses thousands of examples to train algorithms. The resulting systems can do some tasks, such as recognise changes in the pattern of third party spend, far more reliably. Systems programmed in the traditional way with hand-crafted rules often fail to fully incorporate key factors, like changes in the cost centre structure. Machines, however, are not “intelligent” in the way that most people understand it, a phenomenon known as Morovec’s paradox. Machines excel at well-bounded tasks but get things wrong if faced with an unexpected input, such as a pandemic.

Despite digital systems collecting every increasing amounts of data, some critical data fields are often absent, or require further data wrangling to get right. When supplier master data contains duplicates, for example, the machine is unable to provide an error-free spend report.

AI systems’ demand for computing power is expensive. Building a business case, competing with other areas of the business for the same resource and implementing systems takes time. Given the downturn in the economy due to COVID-19, many businesses will not have extra cash to invest.

If COVID-19 has a silver lining it will be to jolt procurement laggards into action and use the “AI winter” to catch up.

The economic effects of coronavirus

Lockdown measures in England are starting to be eased after more than two months of restrictions. Many questions remain open about the economic impact of coronavirus and the extend to which is has affected different goods and services.

The Bank of England has categorised goods and services by the level of social contact. Staple goods and services like utilities and health services comprise about half of total consumption and have remained largely unaffected by coronavirus. Recreation, furnishing and clothing comprise about a quarter of total consumption and people have chosen to delay any non-essential purchases. The remaining quarter are either work related like transport or social like restaurants which are going to experience considerable structure change.

The analysis is useful when reviewing category plans and strategic sourcing initiatives. For a quarter of purchases that have been delayed we are likely to see a spike in demand once lockdown measures are removed. For the other quarter, procurement professionals should consult with established suppliers and challengers to understand the full impact of coronavirus on their market.

Coronavirus 2

As coronavirus continues to take its toll on people’s health and finances, we hear stories of individual heroism which provides hope. Neighbours helping the most vulnerable in their community, medical staff putting themselves at risk to care for those who are suffering and corporate organisations donating equipment to be adapted for use in health centres.

As far as I am where they have been no positive stories about procurement and supply chain. Insufficient ventilators have left patients suffering unduly and low stocks of personal protective equipment (PPE) have put health professionals at risk.

Most governments have tried to assure worried health professionals and patients, but it has only increased suspicion that they are out of touch with ordinary people trying to do their best. Photos of doctors using diving masks and nurses wearing bin liners have proved much more memorable than the politicians’ empty words.

Many reasons have been put forward for the poor performance for procurement and supply chain: unprecedented global demand, fragile supply chains and inadequate logistics to name but a few. In response, commentators have made predictions, both positive like a new era of collaboration and negative like the impact of suspending supplier payments.

Are all these reasons linked in some way? And if they are, can they be used by procurement professional to help their organisations, their suppliers and the global community recover more quickly?

Let’s take the example of PPE. Most medical staff need a standard set of PPE – gloves, apron and, in some cases, masks. They are all inexpensive and disposable. What this simplistic analysis fails to recognise it that there are millions of medical staff, some with specific needs, in thousands of locations. The issue is not the product but the scale and complexity of demand. The challenge for procurement professionals is as follows:

  • Simplify demand: rationalise specifications and standardise process
  • Manage master data: identify all the locations and ensure data is kept up-to-date
  • Analyse data: continually analyse demand and share the analysis with key stakeholders like suppliers

Unfortunately, this level of complexity can only be managed by enterprise resource planning (ERP) systems which requires a significant investment of money and time. Perhaps coronavirus will provided the burning platform to accelerate existing trends and fundamentally change the way markets operate.

Coronavirus

There’s only one thing to talk about this month because there is only one thing in the news: coronavirus. Aside from supermarkets running out of toilet roll, kids appearing in work video conference calls and an increase in alcohol consumption at home, what is the impact of coronavirus and how should procurement professionals get ready to deal with the medium term effects?

“The coronavirus is the most significant adverse shock the world has experienced in post-war history, with unprecedented health, social, and economic impacts. Under various scenarios, the global economy is projected to go into a deep recession, worse than the 2008 Global Financial Crisis” said Mari Pangestu, Managing Director for Development Policy and Partnerships from The World Bank at the Virtual Meeting of G20 Trade Ministers yesterday.

  • The coronavirus has exposed further weaknesses in global supply chains. The trade war between US and China led to an increase in the purchase price of many products including clothing and electronic goods. Brexit caused the value of sterling fall by a fifth which has affected all goods and service imported into UK. Restrictions in the movement of people designed to slow the spread of the virus means that any goods that are shipped are at risk. The further and more complicated the logistics the greater the risk. Buyers should look to source goods and services locally. This may mean paying a higher price (even taking into account the value of sterling) but will achieve greater resilience for the future.
  • Travel, hospitality, house building and the oil industry have been hardest hit so far. Despite government efforts to keep people in work, we are already seeing high levels of lay-off as businesses in these sectors struggle to survive. A shortage in capacity in those industries hardest hit will lead to higher prices when the crises passes. Buyers should reach out to critical suppliers and ask for preferential terms for preferential treatment after the crisis has passed. They should also look for alternative suppliers as contingency.
  • While some sectors are struggling, a handful are experiencing a boom, notably personal protective equipment (PPE) manufacturers and distributors, drug companies working on the vaccine for covid-19 and ventilator makers
  • When the crisis is over, questions are going to be asked whether the public sector procurement rule (OJEU) are fit for purpose. Dyson, a maker of household appliances like vacuum cleaners can develop a ventilator in a matter of days and that other companies can develop a basic ventilator called a continuous positive airway pressure (CPAP) machines in a similar timeframe for a fraction of the price, is going to led critics to ask if the public sector is getting value for money.
  • Restriction to combat the spread of coronavirus have forced people to who still have jobs to work from home. Many of these habits are likely to linger long after the virus has passed as managers realise that it’s easier to attract and retain talent by offering more flexible working.

The situation is changing every day. It is not clear even whether the current period of lockdown is going to last 12 weeks, 6 months, 12 months. What is clear, however, is that coronavirus is a killer and that the lives of those people who survive is going to be changed forever.

Cutting edge

So often the benefits of automation are described in terms of headcount reduction. I’ve worked on enough projects to know that any cost savings achieved by cutting heads is dwarfed by a well executed procurement driven cost reduction programme. The starting number is bigger, the regulations around it are much lower so the speed and value of delivery are much greater.

A recent article by Harvard Business Review links automation to other benefits such as better data accuracy, improved compliance, reduced risk and, most interestingly, greater insight. By releasing people from mundane and repetitive tasks while arming them with data that their stakeholders really value, it claims that procurement can become a strategic function.

But what does “strategic function” actually mean? For me, it means that procurement are invited to shape the agenda, their views determine the outcome and ultimately are considered an essential to creating an organisation’s competitive advantage. Now wouldn’t that be nice!

Life is really simple

“Life is really simple, but we insist on making it complicated.” As true today as it was when Confucius said it two and a half thousand years ago.

Two recent articles about procurement claim that complexity is the main challenge for today’s Chief Procurement Officer (CPO).

The highly regarded writer, Peter Smith, lists some of the subjects CPOs are expected to have mastered today that weren’t considered important a decade ago. The Rana Plaza disaster put modern slavery and health and safety on the agenda. Climate change, deforestation and use of plastics are as difficult as they are topical. And we should not forget economic and political issues like the China–United States trade war and Brexit (as if we could).

The recently published Deloitte Insights splits complexity into two categories: “Bad complexity” introduces risk, hampers procurement performance and should be eradicated; “good complexity” can be exploited to expand procurement’s influence beyond the traditional services of sourcing, purchase to pay and contracts.

Both articles see digital transformation and the appropriate use of technology as the only way to master this complexity. There is no other way to manage large volumes of data across such a diverse range of subjects. Digital transformations requires significant investment from the CPO and the organisation at large. Unfortunately, life is not going to get any simpler, so it’s better to invest sooner rather than later.

Chasing a jet plane with a horse

Given the size and complexity of procurement data sets, it is often difficult to identify exactly where it is wrong and to explain it succinctly to people who are senior enough to hold a big enough budget to get it right. A recent article in Supply Management answers the question why clean data is essential. It points out that the move to cloud-based technology as a “once-in-a-generation” opportunity to cleanse data. The opportunity is to address the different types of data, data silos, non-standard interfaces for accessing information, quality and duplication are all issues, for example, multiple versions of the same supplier in different legal entities.

There are two ways to address the problem: cleanse existing data, which is typically done by the team affected; or invest in improved technology or processes to prevent new sources of unclean data.

A more interesting question is why organisations continue to muddle through with inaccurate and incomplete data. I think the answer is that clean data requires more time and money than many organisations are prepared to invest. To overcome this barrier, organisations should treat cleansing data like any other project and apply an enterprise grade approach.

  1. Create a business case and continually review it, and if necessary, terminate the parts of the project that no longer meet the criteria
  2. Set up an organisation to support the project including a sponsor
  3. Manage the project in stages and learn from experience

To ensure there’s enough resources, the project must prioritise the parts of the organisation’s data – procurement, production, customer, HR and finance – that offer the greatest return on investment. Anything less will feel like chasing a jet plane with a horse; you’ll never catch up, because the data is constantly changing.

Number crunching

In the race to implement the tools to capitalise on the rapid expansion of available data, we sometimes forget why we are bothering. It’s not because we like looking through thousands of lines of data. Or because we want people to complete fields with data that they think is irrelevant. It’s because we want to understand the world we live in so that we, the humans, make better decisions.

Procurement technology and data is a familiar subject to regular readers of this blog. I wish to return to it now to explain how to approach. With the help of the IBM business analytics blog I’ll describe each stage and show how each step builds on the output of the previous stage.

Before going further, we should take a moment to recognise the place of humble spreadsheets in the history of business software. Spreadsheets are the original killer app because they are easy to use and ubiquitous. They are, however, disconnected, siloed, and ungovernable which means they are not reliable, and they cannot scale effectively. If procurement really wants to make the most of big data then an enterprise-grade approach is requires. Data scientist should be involved at each stage of the process and use dedicated, connected tools that help collect, prepare, analyse, adjust and present data to decision makers.

Planning analytics What is our plan?

It all starts with a plan. Whether it’s the corporate plan, a category plan or next year’s budget. It requires an understanding of past performance, identification of deviations from the norm (plan vs. actual), evaluation of possible scenarios, prediction of likely outcomes, and assessment of risks and constraints.

Descriptive analytics What happened?

Now that we’ve got a plan, we want to know what’s happened. Descriptive analytics use two or more historical data points to illustrate a trend, for example, the spend on IT contractors in 2017, 2018 and 2019.

Diagnostic analytics Why did it happen?

Diagnostic analysis takes the descriptive analysis, adds third party data and provides one or more explanations for the changes. Continuing with the example of IT contractors, agencies that engage contractors in the public sector – rather than the personal service companies that employ the contractor – became responsible for applying IR35, the United Kingdom’s anti-avoidance tax legislation designed to tax disguised employment at a rate similar to employment, from April 2017. Some IT contractors in the public sector found their take home pay cut significantly while they were expected to do the same work. Many terminated their contracts in March 2017 or declined renewals and looked for work in the private sector companies that were unaffected by IR35 at the time. While demand remained the same, supply increased leading to a decrease in day rates in the private sector.

Predictive analytics What will happen next?

Predictive analysis takes diagnostic analysis and applies it to the future. IR35 is going to be introduced in the private sector from April 2020. We are likely to see a couple of different outcomes: some IT contractors will look for permanent roles while others will try to negotiate higher day rates to offset the greater tax burden. This will put private companies under pressure but supply and demand will stay the same so there will be no economic reason to increase day rates.

Prescriptive analytics What should be done about it?

Prescriptive analysis takes all the previous analysis and suggests actions to achieve certain outcomes. One of these outcomes might be to reduce the cost of providing the current level of IT support. One suggestion would be to offer IT contractors who have been with the organisation for a long time the option of a permanent role at a lower overall cost (pay and benefits is less than the day rate). It might be to outsource more of the IT support and additional tax liability to a third party. Finally, it might be to seek IT support from outside UK thereby avoiding IR35 altogether.

Conclusion

The number of organisations using each stage – descriptive, diagnostic, predictive and prescriptive – decreases sharply. As the value of later stages becomes more apparent and easier to achieve, we will see more organisations using diagnostic, predictive and prescriptive analytics. Afterall, as the British philosopher Carveth Read said, “It is better to be vaguely right than exactly wrong.”

6. Window on managing suppliers

The cultural change at Microsoft has been well documented, partly because everyone knows
the brand and partly because the change has been so dramatic.
What can procurement learn from this most famous of case studies? In the sixth in the series
of blogs about change management in procurement, I consider the cultural change at
Microsoft and what it can teach us about managing suppliers.
There are many anecdotes about Microsoft, the personal computer software company under
the leadership of Steve Ballmer, CEO from 2000 to 2014. The culture was highly competitive
and at time ruthless. In an interview with the Chicago Sun-Times early in his tenure in 2001,
Ballmer called Linux, an open-source operating system and popular Windows alternative, “a
cancer that attaches itself in an intellectual property sense to everything it touches.” This was
at odds with many Microsoft staff who viewed the open-source concept, or the idea that
software should be shared publicly for others to use, as vital to collaboration and the key to
technological progress.
Microsoft became the butt of jokes, laughed at for missing out on mobile entirely, as well as
its clunky hardware, talking paperclips, and susceptibility to viruses and spyware. The share
price also suffered.
Fluctuation in the technology sector are more extreme than many other sectors and
Microsoft’s dominance, like any other organisation, was only temporary. Procurement
professionals often feel that they are the preferred buyer of a supplier’s goods and services,
but this is rarely the case and circumstances can change quickly.
The surprise appointment of Satya Nadella 5 years ago marked a dramatic change in
Microsoft’s approach to business and culture. It shifted away from software licensing to
cloud based solutions.
Central to the new CEO’s world view was the growth mindset, the
belief that skills are improvable and they aren’t set in stone. Nadella wanted his company to
become one of “learn-it-alls,” not know-it-alls. People needed to see themselves, and the
organisation, as more fluid entities. The focus was on improving, not proving, themselves.
Although the leadership team established a long list of principles, they recognized the
neuroscience research which shows that humans have an extremely hard time remembering
exhaustive list. They shrank it to shrink to just three, two-word phrases: “Create clarity,
generate energy, deliver success”.
One of Nadella’s first announcements was that Microsoft was going to release a version of its
signature software suite—Microsoft Office—on the iPad, bucking Microsoft’s reputation for
not collaborating with rivals. As the keynote speaker at Salesforce’s Dreamforce conference
two years later, Nadella used an iPhone during a product demo, a sight that would’ve been
unimaginable in the Ballmer era.
Since taking over as CEO five years ago, Microsoft’s share price has tripled. Last November,
its market capitalisation briefly passed Apple’s, temporarily making Microsoft the most
valuable company in the world.
Many procurement professionals are protective over their organisation’s intellectual rights
and are wary of collaborating, especially with competitors. The Microsoft case study does not
suggest that buyers should ignore the value of their organisation’s intellectual property, but it
does show that having an open mind, exploring opportunities and taking some chances can
have a positive benefit on the bottom line.
These days all the cool kids may still have Macs, but Microsoft, under CEO Satya Nadella,
has turned a corner. Procurement can do the same.

On time, on budget

Why does a task always seem to take longer than you think it should? It doesn’t matter if it some DIY at home or the implementation of a new IT system at work, it takes longer than everyone expected. Procurement projects, whether that’s getting a purchase order approved or sourcing a new product, often suffer the same fate.

The planning fallacy, first proposed by Daniel Kahneman and Amos Tversky in 1979, is a phenomenon in which predictions about how much time will be needed to complete a future task are under-estimated. The planning fallacy is one of the most common and consistently demonstrated cognitive biases.

In the fifth in the series of blogs about change management in procurement, I consider the planning fallacy, why it occurs and what we can do about it.

There are 3 reasons for the planning fallacy: optimism bias, coordination neglect and procrastination.

  • Optimism bias is a cognitive bias that causes someone to believe that they themselves are less likely to experience a negative event. It is also known as unrealistic optimism or comparative optimism. Examples include buyers who think they are less exposed to price increases and project managers who think they are less inclined to go over-budget.
  • Coordination neglect exists when organisations divide a task and then fail to integrate it effectively. This is as a result of many factors including inadequate communication (lack of a common language and lack of perspective taking), partition focus (an emphasis on dividing a task and to do this quickly which results in inadequate planning) and component focus (people focus on a particular task and have narrow functional specialties).
  • Finally, procrastination arises do a lack of impulse control, that is, we do what is more instantly gratifying. Unfortunately, the digital communication revolution and the way it is designed to distract us make procrastination more likely.

So how can we avoiding or minimise the planning fallacy? There are 3 ways:

  • The first step is to recognise that the planning fallacy exists. When a new project is presented that requires procurement input, we should recognise that the presenter has probably under estimated the cost and overestimated the benefits. This is called strategic misrepresentation. All though this may sound like we are calling the presenter a liar it is common among all presenters of new projects so the only way they can get their project noticed is by following everyone else. To avoid any mudslinging, it is advisable to have a record of previous projects so that we can see the level of strategic misrepresentation in the past. The UK government have a green book which contains data about public projects and have found that they are typically 40% over budget. Now I must be clear, I’m not saying that we should give contractors 40% more money. We must draft contracts that incentivise contractors to meet the original target and construct liquidated damages that enable us to claw back a representative proportion of the over-spend.
  • More time should be given to effective planning. Procurement have a key part to play here by ensuring that sufficient time is allowed to develop the scope of work, conduct the negotiations and finalise the contract.
  • Finally, more resources should be given to communication across the team. Again, procurement have a key role. Procurement can help with translation, for example, where engineers can’t talk with marketers and where suppliers can’t talk to cost centre managers.

The planning fallacy is real but we are not helpless. No one wants to tell the boss that it’s going to cost more and take longer but she’s going to find out eventually. It’s better to be the trusted advisor that is proved to be right that someone who’s seen to be part of the problem.

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