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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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Strategic Sourcing is Dead!!!

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Re-posted from Sourcing Innovation

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

Strategic Sourcing is Dead!!!  And if it’s not, it should be. In our last post, we talked about one of the major challenges in a transformation journey for Sourcing/Supply Chain organizations — namely, the vowels A, E, I, O, and U (which stood for Adoption, Execution, Implementation, Optimization, and Utilization). In this post we’re going to address the second, equally important, challenge. Strategic Sourcing has not delivered the promised results years ago, and it isn’t delivering the right results today. Why not?

First, some assumptions. We can safely assume that the goal of every transformation is Exceptional Business Results (EBR). Furthermore, based on an analysis of recent market events, which contain a very high rate of bankruptcies and warnings, we will also assume that most supply chain organizations are not achieving Exceptional Business Results. Our own research over the years appears to affirm this assumption. It is safe to say that the vowels are not the only major challenge organizations face today.

Basically, we believe that the Strategic Sourcing process is fundamentally flawed. And while our research has shown that fixing the vowels will drive better performance and results, we will never achieve maximum EBR executing a flawed process. In fact, we go one step further and surmise that the flaws sometimes lead to destruction of overall, or system wide, value (which ultimately drives Exceptional Business Results). At some point in the maturation of every organization, if we are going to maximize Exceptional Business Results, in addition to tackling the vowels, we must address the process itself. We do not expect everyone to agree with us, and we hope that there will be some spirited exchanges to flush out where the problems lie and what can be done. We strongly encourage our colleagues in the professional services community to challenge their thinking, and especially their clients’ thinking, on this topic. We are all responsible for the situation we are now in. It’s up to us to change it!

We started by challenging our own beliefs and modifying our own core processes — and we were surprised by the results. And while it could be the case that our research to-date may not apply to the larger population, we have been testing our “next practices” approach on clients for the past year. This group includes a number of very large and complex multi-national organizations who thought that they were already achieving EBR, and found that when they tried our new approach they were able to achieve EBR that were significantly beyond what they were already seeing with their best practices methodologies. Now, every other organization we have spoken to has jumped on the argument and embraced it almost viscerally. (After all, shouldn’t the goal of every supply chain organization be to achieve EBR for the year that are better than last year?)

Our belief that the core processes need to be transformed to truly achieve EBR is striking a chord. At a recent workshop with a Fortune 25 client, where we had the senior executives from the supply chain organization and their internal customers, the reaction was ecstatic. It literally reminds me of the old days back in the early nineties when we talked about change management as the absolute single most critical issue for supply chain organizations. (How time flies when you’re having fun!) The reaction then felt very much like the reaction now. In addition to the very positive responses we’ve been receiving from industry, we have also found some academic research that supports our argument (including some by Prof. Michael Jensen of the Harvard Business School, but we’ll address that in a later post). We even went back and talked to some of the very early proponents of Strategic Sourcing from A.T. Kearney (whose benchmarking roundtables we participated in), who strongly nodded their heads in support of our argument.

If we go back to the beginning, it started with cost … and to this day, it is still about cost. While we have moved from unit cost to landed cost to total cost of ownership, it’s still cost focused. And while cost cannot be ignored, we firmly believe that a process rooted in cost can never be a strategic process. Cost as a strategy, for the majority of organizations, is not, and has never been, a core strategy. Long term growth has not been achieved from a foundation of cost cutting. Cost cutting is not viewed favorably by the rest of the supply chain, which then explains the absolutely horrendous change management issues that we have all faced. And while we are not trying to add to the discussion 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 hiccups has been focused on them squeezing costs out of either the supply chain (the entire system) or just the supply base (and no, they are not the same … I assume we all agree on that). Furthermore, cost reduction is not very high on the goal sheet of any of our major internal stakeholders.

Since the focus on cost ignores almost all of the other elements of the entire system that contribute to EBR, it may actually be sub-optimizing the entire system. While we do recognize that we have moved from the traditional three-bids-and-a-buy to using TCO and risk and supplier management and all of the other best practices out there that you can buy in cubes, magic boxes, checker boards, and benchmarking quartiles, the reality is we are still trying to roll a large boulder up the devil’s staircase with this myopic focus on cost. We can say this with certainty as we have all been there, done that as industry executives and at the Mpower Group and have not seen much in the way of change in the last 15 years. We need to move from cost, which is not a strategy, to value delivery, which is.

When we focus on cost, we lose the argument with the entire supply chain system before we even start the conversation because the system sees the goal of cutting costs as a threat to the rest of the elements that are contributing value towards EBR. Furthermore, in most cases when we’re sourcing, we don’t even know what those elements are! If we don’t know them, we can forget about knowing what their impact is on the EBR.

Let’s use an example to illustrate our point … a simple hamburger. While deploying the current best practices, I am sure that we will all be able to provide the best lead times and quality and cost with the least amount of risk, and so on. But how will we identify the impact of the hamburger on the quality of work life for the corporation and therefore its ability to attract and retain the best talent? And if attracting and retaining the best talent is a competitive advantage, especially if that talent does not end up with the competitor, then how will we ever include that impact on the entire system? Will our current best practices ever uncover that value contributor to EBR? (The cost of acquiring and retaining talent is nothing to be sneezed at either. If you’re snickering right now, think about how an offshore drilling platform feeds their people, or Google’s famous cuisine) Should we be purchasing Kobe beef for the hamburger because the value that the hamburger contributes to the entire system is far greater than the 5% that we might have saved on our TCO models? Capturing this value is what will get us closer to EBR. Our stakeholders know that; the head of HR knows this issue intimately. But wouldn’t you agree that most sourcing strategies around hamburgers would NOT include talent management as one of its major decision variables? Voila … we have met the resistance because our stakeholders know that we are approaching it from a cost management perspective and that we are ignoring their many other performance metrics. Unless we figure out a way to approach the decision starting with their value perspective, we will not succeed and we will continue to roll a large boulder up the devil’s staircase.

Another way to look at this is that unless we start expanding our pool of stakeholders to start considering our stakeholders’ stakeholders’ stakeholders needs, and start with those needs, we will never uncover these value contributors. They are real, they are tangible, they are measurable, they are observable, and, in most cases, they are ignored! Consider Prof. Jensen’s basic argument which states that in trying to maximize things like Balanced Scorecards (TCO, risk etc.), we can destroy value because it leaves managers with no way of making the tradeoffs. Thus, a balanced scorecard is in fact counterproductive as a performance evaluation system, even though the process of creating the scorecard is critical because it helps “managers understand both the company’s strategy and the drivers of value in their business”. While we may not necessarily agree with everything that Prof. Jensen claims, the similarity between our arguments are pretty clear. Approaches like TCO and Balanced Scorecards do end up actually destroying value and leading us away from the EBR they claimed they would deliver.

There are a series of articles coming out from us at The Mpower Group that will continue to lay out the next practices that we have proposed to our clients. We will explore why we think the strategic sourcing process needs to be fundamentally altered. While we do not expect everyone to agree with us (and we are sure that there will be some spirited exchange), as we pointed out, we have been and are talking to a number of very large and complex organizations, as well as some not quite as large, and every organization that we spoke too has literally jumped on the argument and embraced it. In addition, we conducted a fairly comprehensive comparison with the doctor’s favored approach TVM (Total Value Management) and Demand Driven Value Networks proposed by AMR and Gartner. These conceptual frameworks appear to go the furthest in extending current thinking. In our upcoming posts, we will discuss where our approach is very similar to TVM and DDVN but we’ll also point out where our thinkings diverge.

We will tie in the concepts of AEIOU that we discussed in our first post. We will also tie in some very powerful academic research that supports most of what we are saying. There is a significant amount of value in our respective organizations and we suspect most of our organizations are frustrated because they cannot seem to capture this value. It’s time to change the axis, to fundamentally alter the way we make these decisions.

So whether you agree or disagree, please, please, please let us know what you think.  This is way too important for a one way dialogue.  Call me nuts, call me genius, call me Al, just keep sharing your thoughts with us!

Strategic Sourcing is Dead!!

Thanks, Dalip!

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