Why Making It Easier For Vendors To Do Business With Your Organization Is A Vital Competitive Advantage

 
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Edmund Zagorin
CEO & Founder

Ask yourself this question: What is the difference in value between your organization’s best vendor relationships and average vendor relationships? Is it significant? 2x difference? 10x difference? What is the true value of reliable, consistent, trustworthy excellence in a supply or service partner?

During periods of rapid technological acceleration, most leaders will tell you that the difference in value between the best and the rest is more than 2x. In other words, the distribution of excellence in your vendor portfolio looks more like a ski slope down from your y-axis (e.g. a “long tail”) than a bell curve.

The reason for this phenomenon is profoundly connected to the acceleration and diffusion of digital technology that can reduce the cycle time of a business process by an order of magnitude. Some of your vendors are probably fast adopters, meaning that they are able to answer your questions quickly, adapt to changing market circumstances faster, respond to your emails and answer your questions in real time. Consider that the phenomenon of a greater than 2x difference is observable in many other parts of the enterprise, including:

-          departmental cycle time

-          sell-side product market share

-          employee talent & compensation

In other words, your organization’s best department has a cycle time more than 2x better than your organization’s average department. The market share of your organization’s best product or service has more than 2x greater than your organization’s average product or service. Your organization’s most compensated employee is paid more than 2x your organization’s average employee compensation, and is likely to have skills that are worth more than 2x your organization’s least skilled employee. In each of these cases, the difference between the best and the rest is more than double. What does this mean for your supply chain?

 
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After three decades of outsourcing, it is likely that some of your greatest levers of enterprise value work for your vendors. Consider that there may even be people who work in your office, side by side with your FTEs or on site in other locations across the globe who are actually employed by your vendors. They are helping your teams create and launch new products, they are making sure that your contracts are being sold, they are driving important commercial results for your organization. And they are part of your supply chain! This is why talent is only part of the value creation story: awesome vendor relationships will likely play a key role in company biggest outcomes, especially in technical and creative roles that are challenging to hire for.

The classic example in Silicon Valley is Uber and Twilio. Twilio enabled Uber’s ride-hailing service with the technical platform to create a phone number in any country to connect driver with rider, and to enable text messaging. The rest in Silicon Valley history. Would Uber have been able to grow as fast or spread as broadly if drivers and riders couldn’t call each other to ask where the other was? What would the market share versus Lyft look like if the vendor relationship had shaken out differently or was done on unfavorable terms?

This same dynamic is ultimately true of all globally integrated manufacturing supply chains over the next decade, particularly as 3D printing and CAD workflows become ubiquitous. We are already entering an era of extreme price volatility, where commodity prices in different parts of the world fundamentally alter what contract manufacturers will be competitive for the Bill of Materials (BOM). What happens when innovation itself begins to drive price volatility, as a companies prices are literally impacted by their speed of adoption of connected, distributed, autonomous machines? (Think: 3D printers but for everything and everywhere, from metals, plastics and even human tissue, from integrated circuits to nanoparticles). What happens when the use of new fully automated production affects bottom line revenue more than any other single factor? What happens when the disruption created by autonomous manufacturing makes the disruption from autonomous vehicles look like child’s play?

It is quite possible that over the next decade there will come a sudden, urgent tipping point where all manufacturing companies will have to rethink their approach to sourcing, contracting, transporting, assembling and managing all of the materials that go in all of their physical products. Ask yourself: how ready are my vendors for this tipping point? Who are my top vendor partners and my top relationship managers, and what are they doing to prepare for this? How many of them will have retired by 2025? Executives are already doing that math and realizing that if this tipping point for autonomous manufacturing has even 1% the force of what’s described above, then the speed of their procurement’s status quo digital transformation looks a lot more like the speed at which Blockbuster adapted to Netflix (by going bankrupt) than the speed at which Microsoft adapted to Dropbox (by launching Sharepoint). Microsoft has had an amazing turnaround and in some parts of the world Sharepoint is and will remain dominant. The story of the VHS rentals business model provides a cautionary tale.

The good news is that change is possible. The best insurance against the unknown investing in excellent talent is either in your team or in your supply chain partners.

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Why Digitization Will (And Won’t) Displace In-Person Vendor Negotiations

 
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Edmund Zagorin
CEO & Founder

Negotiation is fundamentally a human act, between one or more humans. When two servers “talk to each other” to determine the optimal load-balance, we probably would not say that they are “negotiating”. However, the procurement profession is changing rapidly and globally, and negotiation is part of that profession. So what does the future of procurement negotiation hold?

People

-          Ubiquity of Retirements: a double-digit percentage of the current procurement workforce will reach retirement age and either leave the workforce or remain as consultative relationship brokers

-          Ubiquity of Millennials: many of the executives that will replace the current leaders grew up using delightful digital apps, have an extreme aversion to inconvenience and demand user-friendly business processes, and have a high degree of comfort eliminating broken processes

-          Changing Talent Profile: procurement job descriptions in 5-10 years will look substantially different than they do today, and the demand for advanced data analysis and business strategy will increase

Technology

-          Ubiquity of Procure-to-Pay Digitization: the vast majority of procurement departments will require that their vendors send invoices and receive purchase orders in fully digitized and machine readable formats in order to get paid

-          Ubiquity of Cloud-driven Solution Unbundling: successful procurement departments will use many different digital apps from different providers rather than having one centrally integrated platform

-          Adoption of Fully Integrated OR Outsourced Data Cleansing & Unification: most enterprises will give up trying cleanse, integrate and unify their data with a central directory, and instead will either hire  and support a staff of very experienced data scientists or outsource the task entirely to automated third party solution providers

Process

-          Ubiquity of Tenders, Bids & Auctions: in order to counter-balance the rise in captive contracts brought on by the sell-side’s global ubiquity of CRM solutions such as Salesforce, buyers will enforce tendering processes even with preferred suppliers to benefit from market competition

-          Adoption of Automated Vendor Compliance / Management: chasing down stray documents from vendors for compliance purposes is not a good use of anyone’s time, and anyone with the ability to automate those profoundly tedious document collection tasks will do so

-          Adoption of “Know Your Vendor” (KYV) Risk Management SLAs: procurement negotiation teams sick of putting out fires will prefer both processes and technology that helps them identify red flags and opportunities with their strategic vendor partners in advance, rather than reacting to surprises under sub-optimal conditions

Now, some readers will already rolling their eyes either because they think that these projections are way too conservative (“these things *already* exist) and others may find them outlandish (“that will *never* become mainstream”). But the truth is actually more complicated than either/or.

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Recently, I had a fascinating discussion with an executive at one of our European customers who stated unequivocally that certain procurement negotiation activities will always be done via in-person meetings between buyers and vendors. Actually, I quite agree with this statement. Consider that for the people participating in these organizations, it is quite likely that their companies are booking their travel through a web app that aggregates and discounts airline tickets, book their hotel or Airbnb through a similar service that is also delivered via a digital app, hail a ride to the negotiation meeting via a digital app, and that even the sign-in to the building and the physical dashboard for a meeting room will be an app. Thus, the technology stack that supports this “in-person meeting” is most likely already mediated by at least 5-10 digital apps.

Now, the interesting question becomes: is the company that is relying on apps to get their person to the negotiation going to accept in perpetuity that the best tools for the job are a legal pad, an email account, a smartphone and a spreadsheet?

Given that apps are used to deliver services that are changing the business process of every other enterprise department, it would be shocking to me if the critically important role that procurement teams must play to negotiate vendor contracts were the sole exception to the present wave of innovation. But that doesn’t mean that in-person negotiations will end. It just means they will happen differently, and hopefully better.

Remember what it was like to have factual disputes with someone? I remember being in the Second Grade and arguing with my best friend about what the capital of Russia was (yes, I am a huge nerd). My friend said it was Moscow, I said it was St. Petersburg. He stormed off and said he was going to the library to look it up. A full 24 hours later, he proved me wrong, I admitted defeat and we resumed being friends. Now, there’s Wikipedia, there’s Google. If people have a factual dispute, it is so trivially easy to look up the correct answer. What if looking up how much money your company spent on a vendor was as easy as looking up the capital of Russia on Wikipedia? How would having that type of information at your fingertips change the game?

There is simply too much enterprise value in making this type of data accessible to procurement managers for someone not to do it sooner or later. And making that info available doesn’t mean eliminating in-person negotiations (or the relationships they sustain) any more than eliminating my Second Grade best friend’s trip to the library to find a World Atlas gets in the way of friendship. In fact, getting the facts quickly makes it easier for us to resolve our adversarial positions and then get onto the next thing. This is the role that data will likely play in vendor negotiations, rather than fully displacing the need for in-person relationships between buyers and vendors.

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Bid Ops Webinar: Friends Don't Let Friends Run Bad Bids

Bid Ops CEO, Edmund Zagorin, discusses insights from the private and public sector on how to improve and develop efficiencies related to solicitation, vendor management and vendor negotiation. Click play below to watch the full webinar.

To view additional information and register for our next webinar, click here.

 

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Art of Procurement Podcast: Automating the Negotiation Process w/ Edmund Zagorin

 
 

During ProcureCon Indirect West in September Bid Ops CEO Edmund Zagorin sat down with Philip Ideson from the Art of Procurement Podcast to discuss the impact of emerging technologies in sourcing and their importance in the negotiation process. Listen as they discuss the opportunities automation unveils when introduced in complex sourcing events.

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THE FUTURE OF PROCUREMENT Q&A PANEL: HAL GOOD

THE FUTURE OF PROCUREMENT Q&A PANEL: HAL GOOD

I think one of the exciting things that's happening is the whole cognitive idea where we basically don't allow things to break down, but we basically rely on smart sensors to be able to do predictive analysis and to be able to sense when there's a problem and intervene with no downtime.