Monthly Archives: August 2010

Old MacDonald Was Right — It Is About E-I-E-I-O!

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Re-posted from Sourcing Innovation

Today’s guest post is from Dalip Raheja, President and CEO of The Mpower Group (TMG) and a contributor to the News U Can Use TMG blog.

Most of us missed it. They were trying to tell us about it when we were very young. We were not even in nursery school yet! It’s all about the vowels. It’s not about Old MacDonald’s farm, his pigs or hens or any of that … it’s about E-I-E-I-O! Now what do vowels have to do with Sourcing and Supply Chain Management you might be wondering? Well, as it turns out … everything! The vowels are the most critical link between our alphabet and our language. Without vowels we don’t have words … we just have letters! Without words, we have no sentences, no language, no meaning, no intelligence — in short, we have nothing! And so it is in our organizations. We focus on the tools, templates, processes, systems (the farm, the pigs, the hens) and we forget about the most critical elements in achieving superior business results — the vowels. And without the vowels, all we have are letters. There is no meaning … and we add no value!

The vowels I am referring to are Adoption, Execution, Implementation, Optimization and Utilization. Without these, all we have is an organization that has the best practices, the best processes, the best tools, the best templates, etc. In other words, what we have is a Toyota. We might have an organization that may be succeeding at a large-scale, but we don’t have a sustainable model in the long run. For that, we need the vowels … the ever powerful vowels! If you were strategically sourcing a surgeon for yourself, I am sure you would look at more than just the tools that the surgeon has at her disposal and the training that she has been through. You would want to know what she could do with the tools and the training … n’est-ce pas?

And yet, sadly, it is still very hard to convince most organizations where they need to invest their focus and their energy. They all think that all they need is to develop the right infrastructure in terms of the processes, tools and templates and then train their people on the infrastructure and — voila — just wait for the results. We keep trying to tell them that they should budget at least an equal amount of effort in the vowels, including the help of an expert talent management consultancy, and they continue to insist that all they need is what Old MacDonald talked about … and that the vowels will take care of themselves. Alas, they don’t. The superior business results never materialize. The organization gets frustrated and decides that it needs to adopt new processes, tools and templates because the current processes, tools, and templates must be broken. The cycle starts all over again. And the lessons of childhood are forgotten … that’s it’s not in the verse … it’s in the chorus … it’s all about E-I-E-I-O!

And the focus on the vowels needs to start very early. After all, the alphabet does begin with an A! Furthermore, the focus cannot end with just the creation and training around the process, tools and templates. It has to extend all the way to the point where superior business results are achieved. And while we will need the best tools, templates and processes (for the infrastructure), the mere presence of, and training on, the infrastructure is clearly not enough. In order to truly achieve superior business results, we have to make sure that we pay attention to the vowels.

The focus has to be on what happens beyond the training, how people will actually achieve superior business results, and how they will successfully adopt, implement, and execute the processes. It is the same with supplier relationship management processes. It’s not how you design them, it’s how you implement them. You need to focus on how these relationships will be established and managed to extract maximum value. It’s not just about getting to the contract. At my company we believe in this so much that we even approached a couple of the major law firms to encourage them to include the vowels in their deliverables to clients when they work on executing large transactions between providers and suppliers to help set up these relationships. We did not avail, but we know we’re right. (By the way, it is the same with organizational structures. To optimize them, we have to focus on the lines [vowels] between the boxes, not only the boxes.)

Here is how the doctor described the goal of a transformational journey:

We mostly agree with this except we think the potential is even greater than that. A truly transformational Sourcing / Supply Chain department actually should be transforming other departments. They should be totally focused on value across the entire supply chain. The department should function as if it was a consulting group. The best strategy for such a department is actually a “Sunset” strategy. This concept, and others, will be discussed in later posts.

We will examine this issue in detail in a series of posts. We will begin the transformation journey together. We will discuss the use of maturity models, both current and emerging ones (which look almost identical to the current models) and talk about the gaps and the roadmaps. You can rest assured that we will not ignore the consonants (the maturity models, roadmaps, infrastructure and talent management) … but, we will also focus on the vowels (Adoption, Implementation, Execution, Optimization and Utilization). Because there’s gold in them thar vowels. We will take you back to your childhood, to the days of Old MacDonald, to E-I-E-I-O and then we will build a solution framework and challenge your thinking. We encourage you to join the conversation. Add a cluck, cluck here and a cluck, cluck there … and pretty soon we’ll have everywhere a cluck, cluck!

Thanks, Dalip.

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The Sourcing Emperor Has No Clothes!

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Re-posted from Sourcing Innovation

Today’s guest post is from Dalip Raheja, President and CEO of The Mpower Group (TMG) and a contributor to the News U Can Use TMG blog.

As we pointed out in our last post (where we killed off the old sourcing process), Strategic Sourcing has always been fundamentally flawed. It clearly did not deliver the promised results years ago and it isn’t delivering the right results today. Furthermore, I would argue that the results that Strategic Sourcing is delivering may not be totally accurate because the unintended consequences that the function creates (more on this later) may actually destroy value. The current process is penny wise and pound foolish. That’s never a strategy for long-term success. What we need is a new way of looking at this function. We need a set of next practices to elevate us beyond what current best practices recommend.

Now, there are many “defenders of the faith” who have argued, quite vehemently, that the TRUE process is not flawed; it was just never executed right. Semantics. What’s interesting is that not a single one of them has argued with our fundamental premise, that Strategic Sourcing has failed to deliver promised results and that it may have actually destroyed value along the way. I guess there’s no point in trying to change their minds as long as they agree, and they wholeheartedly do, that the traditional Strategic Sourcing process must be changed. Are you at least intrigued? Enough to at least join in the debate, regardless of which side you take?

As we alluded to in our last post, sourcing has always been focused on cost. And while cost cannot be ignored, a process that is rooted in cost cutting simply cannot be considered a strategic process for any sourcing organization. Cost has never been a long-term strategy for most corporations. I’ll put it another way. Long term growth was never achieved on the foundation of cost cutting. And while we are not trying to use scare tactics generated by recent headlines outlining the major hiccups for some of the world’s largest and most admired corporations (like Toyota, Apple, BP etc.), a significant portion of the conversation around those blunders is focused on how squeezing costs out of either the supply chain (the entire system) or just the supply base (and there is a difference) was at the root of the problems.

Cost cutting is not viewed strategically (or favorably) by the rest of the Supply Chain either. If you think otherwise, then tell me, have you asked them? This might help explain the absolutely horrendous change management issues that we have all faced as practitioners. Cost reduction is not very high on the goal sheet of any of our major internal stakeholders, other than the CFO. And if it is, it’s either there temporarily or was imposed by someone else. What your stakeholders and their stakeholders will say is that they want Exceptional Business Results (EBR) that drive long-term competitive advantage. Since the focus on cost or Total Cost of Ownership (TCO) ignores many of the other elements that contribute to EBR, it may actually be sub-optimizing the entire system. While I do understand that we have moved from the traditional three-bids-and-a-buy to using TCO calculations, risk analysis, supplier management, decision optimizing, and all of the other best practices out there that you can buy in cubes, magic boxes, checker boards and benchmarking quartiles, it’s still not enough! Since the initial goal of the process is cutting costs, it will always be like rolling a large boulder up the devil’s staircase. We lose the argument with the entire system before we even start the conversation because they see the goal of cutting costs as a threat to the rest of those elements in their system that are contributing value towards EBR. In most cases, they are right. Most of the time, Sourcing doesn’t even know what those elements are — forget about knowing what their impact is on the EBR. This also explains why Strategic Sourcing has never been fully integrated into the Supply Chain and why many still continue to think of those two functions as separate from each other.

In addition, the argument that we proposed almost ten (10) years ago, that the sourcing process cannot be strategic and competitive differentiator if everyone else is also doing it, still holds. Think about it. We are all using basically the same process, going to the same supply base and trying to extract the same leverage using the same techniques. What we have just described is a “commoditized” process. Beating down the same suppliers that all your competitors are beating down for the same 3-5% savings just isn’t strategic. Call it something else, but it isn’t strategic!

We can continue to differentiate ourselves on the basis of improving this “commoditized” process using best practices OR we can fundamentally alter the game by using a set of next practices. We can either compete against others or we can move our organizations to competition free zones. We can either benchmark ourselves against others who are all in the “commodity” world or we can re-define the measurement system so there is no benchmark for a while. We can either move up and down the traditional TCO curve or create and relocate to a totally different value curve. We can either defend our position in existing markets or create new markets. How great would it be to get the best terms for a contract without ever needing to negotiate? That’s what I’m proposing.

There are intended consequences and unintended consequences to all Strategic Sourcing decisions. Some of these consequences have a positive impact on the overall value while others have a negative impact. Some of these are known consequences while many are unknown consequences. Since the Strategic Sourcing process is based on TCO, it often only takes into account some of the variables needed to create Exceptional Business Results. As it stands, the Strategic Sourcing process is constrained from ever incorporating all of the variables mentioned above (intended consequences, unintended consequences, positive and negative, etc.). The result, many times, is a decision that clearly optimizes at the TCO level but sub-optimizes at the system level. (Exceptional Business Results Sourcing optimizes at a systems level). Tweaking the current process with best practices will certainly give you some benefits but it will clearly not lead to any type of sustainable transformation or EBR. For that you need next practices. And over the last year, we’ve created a suite of services to help our clients capture increasing value through each step-change of the Strategic Transformation. That is the summation of our argument.

While some organizations have clearly made very good progress in elevating the role and strategic importance of the sourcing / supply chain function, I think it is safe to say that we are nowhere close to being where we all thought we were going to be by now. Wouldn’t you agree? We will also be discussing this and similar topics on our own blog, News U Can Use. Come by and weigh in on the discussion!

Thanks, Dalip!

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Apple Kickback Scandal: A Lesson in Risk Management

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Today’s post is from Dr. Lowell Yarusso, Senior Vice-President, Talent Management, of The Mpower Group (TMG) and a contributor to the News U Can Use TMG blog.

News reports that an Apple global supply manager is accused of receiving illegal kickbacks in return for providing access to inside information about Apple’s sourcing strategies reminded me of an old Baseball story.  A rookie was at the plate for his first at bat in “The Bigs”.  The umpire was one of those old timers who had seen it all.  The pitch came in on the borderline and the ump paused before making his call.  The impatient rookie quickly asked, “What was it?” The ump’s response, “Kid, it ain’t nothin’ ‘til I say it is.” The same can be said about risk.  It “ain’t nothin’ ‘til someone says it is”.

And that’s the rub.  While I’ve talked around this issue in several other blogs and articles, the Apple case focused me on it again.  The early efforts to determine where Apple went wrong seem to point out the frequent tendency to close the doors that have “Entrance” signs and to ignore the ones that say “Employee’s Only”.  Many of the comments I made in discussing employee theft (What’s in the Wheelbarrow: Theft and the Supply Chain) apply here as well.  But, more to the point, how does an employee get the opportunity to take hundreds of thousands of dollars in kickbacks without someone noticing?

Part of the problem lies in the way companies approach the issues of risk and security.  Before you can address a risk, you have to recognize that it exists.  Like the umpire said, until you put a name on it, it doesn’t exist, at least not in the sense that you can do something about it.  One of the key issues I raised re: the Barings Bank collapse (Risk Management Lessons from Barings Bank (RIP)) is the tendency to apply a “black box” mentality so long as results appear to be favorable.  In this case, I can only speculate that, if anyone asked about it at Apple, the response was something along the lines of “We made our goals; everything must be under control.”  The possibility seldom occurs to anyone that, sometimes, things are not just going better than expected; they’re going better than should be believed.

While there are lots of clues to such situations, in most cases, they seem to only become clear after the fact.  The natural assumption is that, because they were recognized after the risk was identified, no one could have seen them in time to do some risk mitigation.  That assumption is wrong.  The clues are always there and are always identifiable IF the organization takes risk management seriously and makes it a top priority, from both a leadership and a management perspective.

Leadership has to make honesty and integrity the cornerstones of the business.  Everyone, from the top down, has to make it clear that there is zero tolerance for behaviors that cross the line.  Apple’s reaction to the scandal has been vigorous and shows the right attitude at the top.  The question that I have is whether or not that same attitude has been driven down through the entire organization.  How many individuals at lower levels were more concerned about what cost goals they achieved than about how those goals were met?  Organizations need to continually and consistently talk about the values and ethics that are expected and the behaviors that will not be tolerated.  A placard on the wall proclaiming that “We are an ethical organization” quickly becomes part of the background if it is neither strongly reinforced nor vigorously applied.  That’s a leadership issue and it requires that leaders make calls on a daily basis so that everyone knows the balls from the strikes.

From the management perspective, organizations have to craft their processes and procedures to reflect their commitment to ethical conduct.  In the sourcing arena, that means that there should be a periodic review of results that focuses not only on such issues as adherence to internal control procedures but also considers whether or not results are consistent with business expectations.  And, yes, every organization assumes its suppliers will bend over backwards to make them happy.  But, if one person has a significantly better track record, if one category area is always out in front in terms of hitting should-cost estimates, exceeding requirements, or in other ways outperforming the norm, red flags should go up.  Unfortunately, such a situation is frequently called “great work” rather than “potential risk”.  And, as in baseball, the pitch becomes what it is called.

Another management issue is that of the reward structure for the sourcing organization.  Bonuses based on cost savings are a two-edged sword.  They not only motivate good sourcing practices, they also provide powerful temptations to cut an ethical corner here or there so that bonus goals are met.  It should be obvious (and usually is in retrospect) that a sourcing group that consistently meets its price reduction goals year in and year out may not be working with the best interests of the organization as its primary motivation.  (I have seen situations where buyers asked suppliers to spread an offered price reduction over three years rather than granting it in the first year so they would be sure to make their numbers now and in the future!)  Here, again, what you call it becomes what it is.

The bottom line is that organizations need people, like the umpires, who look at the pitch dispassionately and call it as they see it.  A great tool in this regard is the application of scenario planning as part of the risk assessment effort.  One approach is to establish a process review system that includes the question, “What would we expect to see if someone broke faith with our ethical code?”  While there is no guarantee that such a review would have spotted the issue at Apple sooner, by naming surprising results a risk, the potential problem might have been identified and investigated more diligently.

What’s your take on this area of risk?  I’m interested in your thoughts, especially with regard to: 1.  Do you think that Apple’s experience is only remarkable because it was discovered, i.e., does this kind of thing go on far more than we realize?  2.  What have you seen that falls into the realm of risks that “…ain’t nothin’ ‘til someone says it is”?

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Risk Management Lessons From Barings Bank (RIP)

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Today’s post is from Dr. Lowell Yarusso, Senior Vice-President, Talent Management, of The MPower Group (TMG) and a contributor to the News U Can Use TMG blog.

In February of 1995, the financial world was shocked to its core. Barings Bank, the 200 year-old flagship bank of the British Empire, the bank that financed the Louisiana Purchase and funded the Napoleonic Wars, among other historic accomplishments, declared bankruptcy. What had happened? There was a massive failure in risk assessment and risk management. As a result, Nick Leeson had run amok on the Singapore Exchange. By the time his superiors figured out what had happened, the bank faced a $1.4 billion shortfall and its directors had no alternative but to declare the bank insolvent.

It is instructive to speculate on whether or not Leeson would have been successful were he not half a world away from his bank’s headquarters in London. In a sense, Barings had outsourced a large share of their futures and derivative trading staff. If the five third-party risk categories cited by the Office of the Comptroller of the Currency (OCC) were faithfully and regularly assessed, Barings may have averted financial disaster. The five risk categories OCC looks to are:

  • Strategic Risk
  • Reputation Risk
  • Compliance Risk
  • Transaction Risk
  • Credit Risk

The OCC’s risk assessment guidance indicates that these five categories apply to any function or service the FSO might consider outsourcing. When services are taken off-shore, it is imperative that “Country Risk” be added to the list. The remainder of this article will focus on the unique aspects of these six risk categories for financial services firms.

Strategic Risk: The risk arising from adverse business decisions or improper implementation of those decisions.

Strategic risk is an issue anytime a third-party conducts banking functions or offers products and services in lieu of the bank doing so. Going off shore adds to those risks in three key ways:

  • Distance
  • Experience
  • Cost

Distance between the FSO’s home office and the off-shore provider’s location can significantly increase strategic risk. Oversight of an off-shore provider typically requires on-site review of processes, management, personnel, and so on.

Compounding the distance issue is the FSO’s potential lack of experience in overseeing off-shore operations. Lack of experience in assessing third-party risk can make managers too willing to accept “black box” explanations (“You don’t need to know how we do it; focus on the outputs”.) Finally, the decision to move the function off-shore is often driven by cost factors.  There can be a reluctance to make expensive trips that were not part of the economic analysis supporting the off-shoring decision.

Reputation Risk: The risk arising from negative public opinion.

For Barings, this one is obvious. Your reputation takes a big hit when you declare bankruptcy. Similar (though less spectacularly destructive) “image problems” abound in the current economy. The image of many financial institutions in the U.S. will long be tarnished by the image of “millions of dollars in bonuses on the taxpayers’ dime”.  For FSOs, this risk gains significance given the importance of good faith and trust to successful financial dealings.

Compliance Risk: The risk arising from violations of laws, rules, or regulations and / or from nonconformance with internal policies, procedures, or ethical standards.

The OCC guidance on this risk area is clear. The FSO is responsible for compliance, regardlessPrivacy of who actually does the work. It is critical that the off-shore provider and its management be brought into the FSO’s cultural and ethical milieu. The evaluation of potential suppliers must include a detailed and comprehensive assessment of organizational alignment, especially around cultures, values, and ethics.

Transaction Risk: The risk arising from problems with service or product delivery.

This risk relates most directly to the off-shore supplier’s inability to actually deliver the products and services promised.  It not only “Acts of God”, it also includes situations where the third party’s internal systems, processes, etc. are not compatible with the FSOs. Ability to deliver goes beyond the technical issues of competence with a system or process. It is important to also evaluate the way in which the process is implemented by the people who are involved.

Credit Risk: The risk arising from an obligor’s failure to meet the terms of their contract or otherwise to perform as agreed.

Credit risk is a measure of the FSO’s financial vulnerability based on obligations that are passed through from the third-party’s action to the FSO. This risk has two dimensions. First, what are the financial implications if the provider breaches their contract? Second, what are the financial implications of customers, underwritings, programs, etc. that are established by the provider acting as the agent of the FSO? One of the dangers of outsourcing in general and off-shoring in particular is the temptation to erroneously assume that, because the FSO was not directly involved, there is a wall of separation between the FSO and any financial impact that results from obligations of the third-party provider.

Country Risk: The risk that economic, social, and political conditions and events will have an adverse impact on the third-party relationship.

One impact of an ever shrinking world is a significant increase in the risk that country differences in, for example, the technical and / or legal definition of fraud will affect results. It is critical that part of the selection process include gaining upfront knowledge of such issues as:

  • How stable is the country’s political system?
  • Which country will have jurisdiction should legal issues arise?
  • How will differences in accounting practices impact both operations and reporting of results?
  • Are there restrictions / limitations on the flow of capital into and, more importantly, out of a given country?
  • What is the ethical climate in the provider’s local business community?
  • And so on

A key point is that this risk does not go away. There must be an ongoing process to remain current on the political, social, economic, etc. evolution of third party nations over time.

Conclusion:

Going off-shore is a viable option if outsourcing is a viable option. Taking the third-party provider off- shore does increase the risks, however. As we have discussed here, FSOs must actively manage those risks to ensure financial integrity and stability over time and to comply with the OCC’s third-party risk guidelines. To manage these six risk factors successfully, two key questions need to be asked throughout process: “Can They?” and “Will They?”  It is highly likely that the next Barings Bank will fall victim to third-party and not to internal providers. Risk assessment and risk management are the only way to reduce the likelihood of occurrence and the impact of adverse events in an off shore environment.

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A Simple Soda: Penny Wise, Value Foolish

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Yesterday I flew coach on Delta Airlines from Atlanta to Chicago.  .  .  It was almost an hour into the flight when I realized that I had yet to be offered something to drink.  In trying to determine where the delay was coming from, I observed the flight attendants offering passengers drinks and I noticed that it was taking an inordinate amount of time when a passenger ordered soda.   This was because the flight attendant needed to fill a glass with ice, open the can, pour the soda into the cup of ice (the can needed to be tipped several times so that the liquid could be distributed slowly so as not to spill while filling the glass)  and then hand the cup (not the can) to the customer.  This process took twice as long (four times as long for diet soda since it “fizzes” more)as someone who simply ordered water (no bubbles to deal with) or beer, wine or other alcohol because the passenger was handed the entire container (bottle or can) to pour themselves.

Being a supply chain geek AND being somewhat obsessed by our recent focus on Value, I decided to apply our Value model.  I started with the flight attendant.  I asked her opinion of the soda process and was told that she had been instructed to pour the soda into a glass as opposed to offering the can because she can get two drinks out of one can – thereby accomplishing the “Intended Consequence” of cost savings.   If I were to guess, I would assume that this decision was made by the Controller (a key stakeholder in this case) – without consulting two other major stakeholders, the flight attendants and the customers.  Along with this strategy came a few “Unintended Consequences” such as a significant decrease in productivity, increased waiting time for passengers, decrease in the perception of the brand (Delta looks cheap) and poor customer satisfaction.  If I apply the Value model to this business problem I discover that the $.10 cost savings per can must be weighed against the destruction in Value (defined here as productivity, wait time and customer satisfaction).  Is it really worth it??? By the way, if I ask the flight attendant for the entire can of soda,  he/she will give it to me or if I ask for a second glass of soda later in the flight he/she will give it me.  So why not do it right the first time????

If you still don’t believe the Value model works try it on anything you buy – good or service and use the “Intended” and “Unintended Consequences” approach to see where Value is either enhanced or destroyed.  It really does works!   This is why we are rather vocal in explaining that taking a cost focus (traditional Strategic Sourcing), like my soda example, can actually destroy value.  In this case, the most important stakeholders, the flight attendants and the customers were not even considered. Does that sometimes happen in Strategic Sourcing?

Now let’s take this model one step further by taking a closer look at the Airline Industry as a whole. Over the last several years, the Airline’s have had a relentless focus on cost.  They have uncovered almost every possible source of cost savings imaginable and as a result have destroyed most of the convenience and/or enjoyment (VALUE) many of us experienced in flying.  In a traditional cost focused approach, which is considered “Best Practices”, I suppose next year the Airlines will be looking for at least another two cents to shave off the price of soda – isn’t that how Strategic Sourcing works?  Isn’t that how they are measured?  Is this model working for them??  Is it sustainable?  If not, perhaps it is time to move on to “Next Practices”.

In the spirit of exploring “Next Practices” I tested my theory on Value with a few of the passengers sitting around me on this flight.  I asked a number of business travelers (because these are frequent travelers) if they would be willing to pay more for a better experience (VALUE).   What I suggested was a nominal fee ($50 – $75) which could buy them early boarding (this costs the airline nothing), free drinks and WIFI (this costs the airline pennies), etc.  The response was a resounding YES – even if their company would not pick up the tab.  If what I heard was true then here is an untapped opportunity to increase revenue for the airline and VALUE for the customer.  This takes the “Best Practice” model of squeezing every last dime out the system (thereby destroying value) and turns it upside down.  Is creating VALUE for both sides sustainable?   Could it be a competitive advantage?  Could this approach be the “Next Practice” for Strategic Sourcing?  Should it? Without “Next Practices” we may find the next wave of cost cutting to include a charge for restroom use or a discount for standing as opposed to sitting during a flight!

As a side note, later in the flight, I overheard the flight attendants discussing this value idea.  They suggested that I send a note to the CEO of Delta which I intend to do.  I will keep you posted.

The debate continues around cost verses Value.  We welcome your comments and examples . . . . . . . . .

Anne

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