Procureville

Does supplier-funded actually work? (Part 2)

Last week, I discussed the impact of the supplier-funded model on suppliers and overall spend coverage. What’s really interesting, though, is how the supplier-funded model actually affects customers.

Without skin in the game, customers seem less inclined to be as involved as they should be in pushing the program forward. Without any (obvious) cash outlay, there’s no target Return to achieve because there wasn’t any Investment. For companies to achieve the potential savings and efficiencies of managing services spend, they need to commit the necessary resources and executive support to drive compliance.

They also need to ensure that both internal and supplier users are adequately supported throughout the process, especially one as potentially complex as services. And it is very important to put in place the necessary feedback mechanisms, such as reporting and analytics that will drive continuous improvement.

None of these requirements are earth-shattering – they are the usual building blocks of a successful spend management initiative. The bottom line: Don’t let a “cost-free” solution blind you to what you need to put in place to make your program successful.

-Henry Hwong

Does supplier-funded actually work? (Part 1)

The services spend space is unique in several ways compared to goods spend. One of the primary differences is the use of a “supplier-funded” approach to pay for the deployment of a spend management solution.

If you’re not familiar with the supplier-funded concept, it entails a service provider short-paying a supplier up to 3% on each invoice. It also requires that the service provider take over settlement responsibility for these transactions. For example, for a $100 invoice on a 3% supplier-funded model:

• The customer pays the service provider $100
• The service provider keeps $3
• The service provider pays the supplier $97

From a customer standpoint, it looks like the proverbial “free lunch.” The customer gets a services procurement solution without a significant investment. It seems cost-free to deploy, and a few suppliers, usually on the staffing side, accept this tariff as a cost of doing business.

But is it really the best approach?

For many non-staffing suppliers, especially smaller ones, this supplier “tax” is actually a large burden – a chunk of margin they cannot afford to lose. Some of those suppliers will eventually leave the program, or allow their rates to slowly creep up to recover margin. So the customer ends up footing the bill anyway.

Furthermore, once you get out of the typical staffing areas, like professional services, legal services, facilities, and so on, many of these suppliers will resist joining this program once they hear of the cost. Thus the supplier-funded model can actually hinder the customer’s ability to increase services spend under management, thereby stalling the program.

If a supplier is going to contribute to the funding of the program, the supplier has to see value from joining. The current approach of arbitrarily taking a cut from suppliers without any obvious benefit to them will continue to hinder enablement and adoption.

The bottom line: Ask your service provider what benefits suppliers are receiving from paying for this program. Also ask them what their plan is if you need a supplier that is, for one reason or another, unable to participate in this approach.

Next week: How the supplier-funded approach impacts customers....

-Henry Hwong

Cranking up the volume

We recently went live at a Financial Services firm in the Southeastern United States. We helped the customer transition from a procurement point solution for managing services to our hosted, Oracle-based Category Spend Manager platform, which we integrated with their current Procurement, Financials, and HR infrastructure. It was a "Big Bang" implementation -- something we normally don't recommend, but they really wanted to get off their legacy solution as soon as possible.

Speaking of big bang, here are a few statistics from the first week:

• $242M active Work Orders in system
• 2,929 Timesheets entered
• 44 Progress Logs entered
• 996 Invoices created
• 103 Requisitions

We expect some of these numbers to moderate slightly in the future, as there was some pent-up "demand" to use the system during the cutover. Starting with $242M in work orders on Day 1, however, speaks to sheer size of the deployment. It definitely speaks to Oracle ERP technology's ability to handle large volumes of transactions.

- Henry Hwong

Yearly update to ERP? Not really...

David Bush over at the E-Sourcing Forum turned me on to the article Does Your ERP System Need a Service? by Sam Graham. Most of his points were fine, if general, but he also claimed that “Most ERP systems are updated at least yearly.”

That’s definitely not what I have seen. When I was at PeopleSoft managing the eProcurement module, I actually researched how long companies generally spend on each version of PeopleSoft Financials before upgrading. Instead of upgrading every year, customers typically upgraded every three to four years.

The question we were trying to answer is whether or not we should offer integration to older versions of Financials. You see, PeopleSoft ERP applications are housed in one of several “databases,” including:

• HCM (Human Capital Management – the cool way of saying HRMS)
• CRM (Customer Relationship Management)
• FSCM (Financials and Supply Chain Management)

Each database could have its own release schedule, which is why sometimes you saw the same release of different PeopleSoft applications occur at different times. Or you have an application suite that has its own unique version number (like HCM 8.3)

SRM applications, which include eProcurement and the Financials suite, both reside in the FSCM database. The problem we had in the SRM group was that our applications were evolving much faster than mature Financials applications like AP and GL. We were seeing that customers were holding off buying or deploying SRM applications until they upgraded their ERP to the current version. Or they would have to implement older, less capable versions of the SRM applications, because applications in the same database had to be the same version (with some exceptions).

We would have liked to have a separate database just for Supply Chain (SRM rolled under Supply Chain at PeopleSoft), but that wasn’t feasible, so the other option was to have what we called “version independence.” As part of my analysis, I determined the time a typical customer stayed on a version of Financials before upgrading.

What I saw wasn’t an annual upgrade parade. It was more like a transition every three to four years, which, interestingly enough, coincided closely with how long PeopleSoft would support that version. If I remember correctly, PeopleSoft supported each version up to five years from the General Availability (GA) date at that time. Since companies rarely go live on GA releases of ERP systems—they usually wait for at least the first major set of bug fixes—the timing made sense.

Fast forward to today. I imagine that we will see the cycles between upgrades grow even longer with Oracle’s Lifetime Support Policy and the emergence of third-party support companies.

The bottom line is that upgrading an ERP system, especially the modules managing the underlying financials of your company, is not a trivial task. It’s not an investment that companies are going to be making annually.

-Henry Hwong

Welcome!

Welcome to Provade’s new blog. Many of us at Provade have deep experience in procurement and enterprise solutions, and we’ve seen first-hand how this business has experienced dramatic changes over the last 20 years. Today’s procurement department is no longer the dim back office with people hunched over their desks, thumbing through stacks of paper catalogs, grinding out purchase orders in triplicate.

Procurement groups have become more strategic, but their legacy transactional responsibilities have not disappeared. In fact, as companies attempt to reach beyond managing goods (both direct and indirect), their operational needs become much more complicated. How companies manage these divergent requirements will determine the success of their new procurement strategies.

At Provade, we’re excited to be participating in—and even shaping—this process of change. Stay tuned for more insights, opinions, news, and real-life customer stories about procurement. Bookmark us, subscribe to our RSS feed, and share your ideas and questions whenever you like.

- Henry Hwong