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Utilizing an Intelligent Filtering Platform to Enhance Contract Performance White Paper
 

Utilizing an Intelligent Filtering Platform to Enhance Contract Performance White Paper

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If as industry experts claim, effective contract management which includes the entire contract life-cycle, “from identification of a need, through negotiation, agreement, monitoring, and ...

If as industry experts claim, effective contract management which includes the entire contract life-cycle, “from identification of a need, through negotiation, agreement, monitoring, and close-out,” is so critical, then why do the majority of programs struggle with non-compliance and stakeholder resistance?

The purpose of this paper is to delve into the core elements of how effective contract performance is realized through the utilization of emerging process-centric technologies developed by organizations such as Strategic Relationships Solutions Inc. (SRS Inc.) and in particular their SourceX contract life-cycle management solution.

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    Utilizing an Intelligent Filtering Platform to Enhance Contract Performance White Paper Utilizing an Intelligent Filtering Platform to Enhance Contract Performance White Paper Document Transcript

    • Ottawa, Canada 2009 Utilizing an Intelligent Filtering Platform to Enhance Contract Performance White Paper A Knowledge Leadership Publication By Procurement Insights Author Jon Hansen
    • Utilizing an Intelligent Filtering Platform to Enhance Contract Performance Table of Contents EXECUTIVE SUMMARY: CONTRACT MISALIGNMENT . . . ..........................................2 GLEICHER’S FORMULA.. ……….. ………………………………………. . . . . ……………4 THE ROOTS OF NON-COMPLIANCE? . . . ............................................................................5 THE OTHER SIDE OF THE NON-COMPLIANCE COIN......................................................6 WHEN NON-COMPLIANCE IS JUSTIFIED............................................................................7 WHAT IS THE SOURCEX INTELLIGENT FILTERING PLATFORM? . . . ......................9 A FINAL POINT ……………………………. ….………………………….. …………………10 INTERNAL COMPLIANCE AND SUPPLY BASE SYNCHRONIZATION . . . .................12 ABOUT STRATEGIC RELATIONSHIPS SOLUTIONS INC. . . . .......................................13 Appendices APPENDIX A ...............................................................................................................................15 1
    • Utilizing an Intelligent Filtering Platform to Enhance Contract Performance Executive Summary: Contract Misalignment and Non- Compliance A 2004 automotive study by the Power Transmission Distributors Association (PTDA) found that of the 45 percent of their membership’s U.S.-based customers who have contracted vendors, 33 percent of all purchases were from non-contract suppliers. In Canada, the number of off- contract purchasing reached a staggering 79 percent. If results such as the ones referenced above were the exception to the rule, then one might not be sufficiently alarmed to question the viability of current contracting methodology. However, and as demonstrated by the continually high rate of supply chain/e-procurement initiative failures of which contract creation and compliance management is a core element, the PTDA result is not an exception but the rule. The premise behind a purchasing contract is of course simple, even with the most complex acquisitions. Specifically, contract management or administration can be summarized “as the process of systematically and efficiently managing contract creating, execution, and analysis for the purpose of maximizing financial and operational performance and minimizing risk.” These are certainly reasonable objectives which form the basis for a sound procurement practice model. Especially in an increasingly globalized market in which multiple supply chains and foreign or international sources of supply extend relationships beyond a traditional regionalized supply base or cluster. In fact a 2007 study found that one of the primary driving forces behind improved contract management is the mitigation of risk. So while the merits for pursuing an effective contracting process within the modern supply practice is not in dispute, why then do organizations “continue to use inefficient, labor intensive contract processes.” And even with the introduction of “automated” contract management systems that include the utilization of the overly simplistic MS Office products Word and Excel to what one source called “home grown, rudimentary web tools” like ACT! or Microsoft Share Point to the purportedly comprehensive ERP- based offerings from traditional licensing model giants Oracle and SAP, the high rate of initiative failure persists across all platforms. 2
    • Utilizing an Intelligent Filtering Platform to Enhance Contract Performance Referencing the automotive industry once again, you merely have to point to the failed Covisint initiative to see that neither purported technological superiority or the corresponding level of stakeholder resources and expertise is a guarantee for success. This again begs the question, if as industry experts claim, effective contract management which includes the entire contract life-cycle, “from identification of a need, through negotiation, agreement, monitoring, and close-out,” is so critical, then why do the majority of programs struggle with non-compliance and stakeholder resistance? Based on extensive research it is our position that contract creation and compliance isn’t a simple matter of picking the right clause from a buffet of legalese, nor is it an exercise that originates with the simple automation of an antiquated RFx process that fails to engage what has become a largely cynical supply base. To be effective, the contract life-cycle management process must be based upon true market intelligence which is subsequently filtered through a dynamic and perpetually expansive integration mechanism that simultaneously links the diverse attributes of contract stakeholder capabilities and interests. The purpose of this paper is to delve into the core elements of how effective contract performance is realized through the utilization of emerging process-centric technologies developed by organizations such as Strategic Relationships Solutions Inc. (SRS Inc.) and in particular their SourceX contract life-cycle management solution. 3
    • Utilizing an Intelligent Filtering Platform to Enhance Contract Performance Gleicher’s Formula “Gleicher’s Formula “illustrates that the combination of organizational dissatisfaction, vision for the future and the possibility of immediate, tactical action must be stronger than the resistance within the organization in order for meaningful changes to occur . . . . . . a resistance to change is often referred to as the cost of change. It is then subdivided into the economic cost of change (monetary cost) and the psychological cost of change. What this tries to demonstrate is that even if the monetary cost of change is low, the change will still not occur should the psychological resistance of employees be at a high level and vice versa.” From Wikipedia Formula for Change Article With References to: Beckhard, R (1969) and Smith, A. (1998) 4
    • Utilizing an Intelligent Filtering Platform to Enhance Contract Performance The Roots of Non-Compliance? I have written extensively about the many factors that lead to non- compliance. A good segment of my findings were based on research that was funded by the Government of Canada’s Scientific Research and Experimental Development (SR&ED) program which centered on the identification of two primary commodity characteristics, historic flat-line and dynamic flux, the latter of which is not conducive to a contractual purchasing agreement. What was interesting about the identification of the two commodity classes is that they helped to expose the misalignement of contract utilization in the procurement process. Specifically, there was mainstream acceptance that the broad application of a contract creation/compliance management program could be applied across an entire enterprise’s spend and achieve significant savings. Referencing once again past research on commodity characteristics and their impact on proper spend alignment here is a brief overview of the difference. between a historic flat-line and dynamic flux commodity. A historic flat-line commodity is characterized by a static price performance where there are minimal cost fluctuations over an extended period of time. It is further accentuated by a “narrow” floor to ceiling price chasm. Direct Materials and “specialty” products including scientific and medical equipment commonly exhibit historic flat-line characteristics. (It is important to note that there are no absolutes and therefore temporary exceptions or what I refer to as circumstantial spikes can occur from time-to- time. One example is from the mid-nineties with computer memory chips. Taiwan is a primary source for memory chips, so when that country exerted its independence from China, the Chinese Government decided to conduct missile practice over the tiny island. Memory prices, albeit for a relatively short time, went through the roof. This is the exception or spike to which I had referred. That said the findings which lead to the classification of a particular commodity are based over an extended period of time.) Usually accounting for 80 percent of an organization’s entire spend and 10 percent of its procurement cycle time, historic flat-line commodities are best served by a centrally negotiated contract. 5
    • Utilizing an Intelligent Filtering Platform to Enhance Contract Performance Besides providing an ability to leverage volume discounts, contracts that are structured around this classification of commodity ensure consistent levels of quality, reliable delivery and the required level of collaboration between stakeholders of what is usually a complex acquisition. The Other Side of the Non-Compliance Coin Gliecher’s Formula, and in particular the observation that “even if monetary cost of change is low, the change will still not occur should the psychological resistance of employees be at a high level and vice versa” is noteworthy. This suggests that even with financial data supporting a contract’s creation, non-compliance can be a matter of buyer (and even supplier) resistance for a variety or reasons. In the case of buyer resistance, which can and in many instances is a significant issue with increasingly decentralized supply chain practices, there are a number of factors that lead to non-compliance. In a 2007 article I wrote titled Double Marginalization and the Decentralized Supply Chain, I made reference to a Robert Schenk paper regarding the characteristics of a “downward sloping demand curve” which occurs when a “buyer must expend time and effort to discover the prices or characteristics of a product (or service).” I concluded that the prospect of making this level of expenditure usually means that “once the buyer has picked a seller – even a non-contracted supplier – they will stay with that supplier as long as they find the exchange satisfactory.” And while there are certainly instances when resistance on the part of the buyer is justified (the circumstances for which we will cover in the next section), generally speaking commodities that consistently demonstrate historic flat-line characteristics are best served through the creation of a contract. Non-compliance in this instance is counter-productive on a variety of levels including financially as buyer unwillingness to transition from existing supplier relationships under the downward sloping demand curve scenario almost always fuels “supplier motivation to increase prices.” An interesting side note is that a misaligned contract, that is a contract that is created for the 6
    • Utilizing an Intelligent Filtering Platform to Enhance Contract Performance procurement of dynamic flux commodites has the same effect, that being a substantial premium over market price. In the latter instance, giant retailer Best Buy paid a 23 percent premium over market price on products that were analyzed through a market verification exercise. The Department of National Defence in Canada paid a premium of 157 percent over market price under a multi-year contract. The key according to Gleicher is to “isolate the actual problem areas of change and develop unique strategies specifically designed to resolve the correct form of resistance. A key component of a change strategy should center on the process and technological expertise that is provided by SRS Inc. and their SourceX platform. Leveraging the unique and totally indigenous expertise within the SRS organization, SourceX creates and then verifies contract utilization and performance through dynamic data capture points and an intuitive user interface that truly simplifies the procurement process at the operational (re buyer) level. In essence, by addressing the very real buyer concerns that are associated with the downward sloping demand curve, SourceX removes an important barrier to adoption and ultimate compliance. When Non-Compliance is Justified While commodities displaying a historic flat-line tendancy are ideally suited to being procured through a centrally negotiated (and managed) contract, commodities that demonstrate a dynamic flux characteristic are ill suited to this type of purchasing mechanism. A dynamic flux commodity is characterized by a dramatic and consistent fluctuation in cost that is mirrored by a steady downward price trend over an extended period of time. The unstable price performance is accentuated by a wide (usually significant) floor to ceiling price chasm. Indirect Materials and in particular MRO products commonly exhibit dynamic flux tendancies. On average commodities that are classified as being dynamic flux account for approximately 20 percent of an 7
    • Utilizing an Intelligent Filtering Platform to Enhance Contract Performance organization’s overall spend, and 90 percent of its procurement cycle time. Individual commodities within the Indirect Material ORM classification tend to exhibit both dynamic flux and historic flat-line characteristics. The reason that the identification of commodity characteristics is an important breakthrough in spend analysis is that prior to their discovery, the ability to accurately forecast pricing performance was a major factor in process and technological misalignment. This ultimately resulted in what is referred to as a “pull through” strategy where the same processes and related technologies utilized for historic flat- line (Direct Materials) procurement were also being utilized for dynamic flux (Indirect Materials) acquisitions. The difference between the two classifications is significant as the perceived volume discount savings associated with Direct Material purchasing were all but negated within a very short period of time, sometimes as little as a few days. This is what fueled buyer resistance to comply with centrally negotiated contracts in that they could usually pick-up the phone and with a single call obtain a substantially lower price from the local supplier than they would from the enterprise-wide contract. Under these circumstances, achieving buyer compliance is a virtual impossibility as demonstrated by the PTDA study numbers regarding the high level of off-contract purchasing. Ultimately, off-contract purchasing undermines the entire procurement process as suppliers who take the time and inccur the expense of becoming an approved source through a negotiated contract rarely realize the promised revenue. This is where the SourceX solution shines, as it simplifies the complexity of today’s diverse supply practice through an intelligent interface that both measures contract compliance while simultaneously confirming the veracity of individual agreements through a real-market verification process. In reality, what SRS’ SourceX technology delivers is an adaptable platform that ensures the on-going, real-time best value performance of contractual spend by identifying and removing barriers to adoption. In short, compliance is not an issue when the organization’s purchasing mechanism is properly aligned with its spend. This includes the proper management of the entire contract life-cycle from the identification of a need, through negotiation, agreement, monitoring, and close out. 8
    • Utilizing an Intelligent Filtering Platform to Enhance Contract Performance The results speak for themselves in the form of increased contract compliance rates, a reduction in revenue leakage and an overall improvement in contract life-cycle management (CLM) performance through significantly reduced cycle times. Ultimately, what SourceX has done, is remove the need for the front-line buyer to expend the time and resources to “research” all elements of a best value purchase. Based on Schenk’s paper and the effects of the downward sloping demand curve, this was a significant obstacle to overcome in terms of contract compliance and performance. And the SourceX Intelligent Filtering Platform successfully removes that barrier by creating sustainable stakeholder confidence in the contract life-cycle management process. What is the SourceX Intelligent Filtering Platform? The SourceX Intelligent Filtering Platform can be summed-up in a simple statement . . . it is complexity simplified. Structured around the Software as a Service (SaaS) or On-Demand model, in which clients have the option of self-hosting or hosting the service through an external service provider, the innovative force behind the SourceX platform is Strategic Relationships Solutions Inc. (SRS Inc.), who has been in existence since 1999. Leveraging the organization’s extensive knowledge and expertise in the area of “complex multi-stakeholder projects and programs,” the ability of the SourceX platform to seamlessly “integrate functional views for the complete team,” involved in the “sourcing and management of the acquisition process,” is an essential element of a sound and adaptable procurement practice. Referencing the SRS organization’s indigenous Knowledge Library Module, the SourceX Intelligent Filtering Platform drives sustainable, “best-value” decision making at all levels of the enterprise. This in turn substantially shortens the sourcing cost timeline while ensuring that organizational “Best Practices” (including contract compliance) are adhered to on a consistent basis. 9
    • Utilizing an Intelligent Filtering Platform to Enhance Contract Performance Referred to as the “Next Generation Sourcing Service,” SourceX focuses on several key sourcing and relationship management functional objectives including;  structured process and automation for RFP planning, evaluation, bid preparation, contract and service management  incorporation of knowledge, expertise, content and embedded best practices processes  reduced procurement and management costs  reduced risk for bidders (suppliers)  shortened procurement cycle times  provision of an intuitive and secure web-based platform  accessibility to an integrated User Group Forum and related support services Collectively, the SourceX Intelligent Filtering Platform is a sustainable, intuitive sourcing mechanism that is always gathering and synthesizing data – in essence learning with each transaction, the best way to maintain process integrity in a rapidly evolving and increasingly complex global enterprise supply chain practice. A Final Point As the migration of traditional ERP-centric license model vendors such as Ariba continues, it is important to remember that the SaaS or on-demand world is more than a simple pricing model. The evolution of on-demand solutions by organizations like SRS Inc. is based upon an approach spanning many, many years in which adaptability within the framework of a synchronized versus sequential architecture is the key characteristic of a dynamic platform such as SourceX. Therefore, it is important to realize that SaaS or on-demand organizations are technologically more seasoned to deliver sustainable results on a cost efficient basis within a significantly shorter time period than traditional license model vendors. 10
    • Utilizing an Intelligent Filtering Platform to Enhance Contract Performance While the “leading” or “cutting” edge moniker usually assigned to SaaS organizations has often been equated with an increased risk from a less experienced vendor, in the SaaS world it is in fact a symbol of proven excellence. 11
    • Utilizing an Intelligent Filtering Platform to Enhance Contract Performance Internal Compliance and Supply Base Synchronization How important is effective internal collaboration and compliance? Just ask a candy company in the U.S. mid-west. As the manufacturer of a number of leading brands, the organization grew dramatically in a very short period of time through a serious of acquisitions. Unfortunately, an extemporal supply base was a by-product of the transactions leaving the acquiring company with a highly suspicious, deeply segmented group of suppliers. The biggest challenge as expressed by a senior procurement manager from the parent organization was convincing the former suppliers of the acquired companies that becoming part of the larger pool would expose them to opportunities for increased sales. The suppliers did not buy the “increased opportunity” mantra and as a result, the transition process was challenging as the supply base remained deeply segmented. What is worth noting is that the degree of collaboration between the different purchasing organizations was not clearly established from the beginning. This only served to fuel rather than douse the internal divisional fires resulting in both a practical and operational lack of cohesiveness and ultimately an effective consolidation of spend across the entire enterprise. The end result was a “territorial” struggle that manifested itself in a divided supply base which ultimately had a significant impact on program (and contract) compliance. 12
    • Utilizing an Intelligent Filtering Platform to Enhance Contract Performance About Strategic Relationships Solutions Inc. Strategic Soultions Relationships Inc. (“SRS”) (http://www.srscan.com/Default.aspx) is a knowledge-based, customer- focused, strategic services and relationship management firm specializing in achieving results for clients through sustainable business relationships. SRS was established in 1999 with the vision of enabling clients to succeed in the execution of their organizational strategies so that they might achieve the desired outcomes and benefits of their efforts while mitigating the structural risks that so often imperil complex multi-stakeholder projects and programs. Since then, SRS has become a trusted partner of choice to many Government organizations, Health Sector organizations and Global 500 companies for innovative business transformation, strategic management and alignment services, strategic sourcing, collaboration management and sustained benefit realization. On the cutting edge of professional management consulting services and solutions such as SourceX, SRS focuses its strengths and depth of experience on organizations and sectors that are taking a leadership role in modernizing the way they do business and how they provide services to their clients and/or stakeholders. From vision and strategy development, project feasibility analysis and strategic project management, to sourcing and managing strategic partnerships, SRS provides you with the best people, best tools and proven processes to help you achieve your expected outcome. © Procurement Insights 2008-2009 13
    • Utilizing an Intelligent Filtering Platform to Enhance Contract Performance About the Author Jon Hansen has studied and written extensively about e-Procurement and the changing face of procurement around the globe. In addition to being a highly acclaimed international speaker, his Procurement Insights Blog reaches 300,000 syndicated subscribers each month worldwide, and is currently available in several languages. He has written more than 200 articles and papers on subjects ranging from supply chain optimization and the utilization of agent-based modeling in the software development process to the evolution of sustainable purchasing practices and the impact of traditional ERP-centric implementation methodologies on the high rate of supply chain initiative failures. Funded by the Government of Canada’s Scientific Research and Experimental Development (SR&ED) program Mr. Hansen’s work in both identifying the existence of Commodity Characteristics as well as defining and recording their impact on “best value” purchasing practices represented a seminal breakthrough that led to the establishment of new theories surrounding the practical utilization of synchronized platforms in achieving sustainable coordinated savings and overall process efficiencies. Other white papers by Jon Hansen: The Greening of Procurement: How Social Consciousness is Re-Shaping Procurement Practices Preserving Supply Base Integrity During an Economic Downturn Yes Virginia! A Profile in Excellence Riding the Crest of a New Wave: How the Original SaaS Companies Have Gained the Upper Hand Using Business Process Mapping as a Communication Facilitator in the Global Enterprise To obtain copies of the above referenced white papers, or to inquire about Jon’s availability to speak at your next conference or seminar contact Jennifer Cameron at jenncameron@sympatico.ca, or 819-986-8953. 14
    • Utilizing an Intelligent Filtering Platform to Enhance Contract Performance Utilizing an Intelligent Filtering Platform to Enhance Contract Performance White Paper Appendices 15
    • Utilizing an Intelligent Filtering Platform to Enhance Contract Performance APPENDIX A Pages 2, 3 (Contract Life-Cycle Management); http://en.wikipedia.org/wiki/Contract_management#cite_note-1, Wikipedia (April 17, 2009) Page 4 (Gleicher’s Formula Reference); http://en.wikipedia.org/wiki/Change_management_(people), Formula for Change Article - with References to: Beckhard, R (1969) and Smith, A. (1998) Wikipedia (April 17, 2009) Page 5 (Scientific Research & Experimental Development “SR&ED” Program Reference); http://www.cra-arc.gc.ca/sred/ Page 5 (Historic Flat-Line/Dynamic Flux Reference); http://procureinsights.wordpress.com/2007/07/04/dangerous-supply-chain- myths-part-7/, Dangerous Supply Chain Myths (Part 7), Procurement Insights (July 4, 2007) Page 6 (Double Marginalization Reference); http://procureinsights.wordpress.com/2007/08/09/double-marginalization- and-the-decentralized-supply-chain/, Double Marginalization and the Decentralized Supply Chain, Procurement Insights (August 9, 2007) 16