According to reports authored by the International Association of Contract and Commercial Management, the Aberdeen Group, and the International Association of Outsourcing Professionals, the average contract loses approximately 17% to 40% of its value from the time of execution through to close-out. Value leakage can range from things like low adoption rates, non-value-added change orders, lack of innovation, poor governance, etc. This blog post will help contract professionals understand how customer-supplier relationships lose value and three best practices to preserve value.
Move Beyond Deal Points
Typically, negotiators think in terms of “getting the best deal”, meaning, financial and legal Terms that are favorable to the negotiator’s organization. Here is the problem: if businesspeople accept this premise, they are negotiating short-term “deals” in a complex, long-term business environment.
Focusing on the “deal” often leads to losing focus on the larger business goal(s) that a customer-supplier relationship seeks to address. For example, an overemphasis on “getting the best deal” often results in failing to fully document costly aspects of the work in the Statement of Work, failing to include adequate inspection, testing and cure processes, and failing to document and control common risk events.
Furthermore, focusing on the “deal” also precludes the inclusion of innovation in the delivery of goods and services. Buying emerging technologies like artificial intelligence, robotic process automation, cloud computing, or cognitive automation is the new norm, yet only 21% of respondents in Deloitte’s 2016 Global Outsourcing Survey reported that innovation was a key part of their contracts.
Jane Zhang is the Co-Founder of ETCH Sourcing, a Canada based consultancy specializing in providing strategy and execution services in the sourcing, procurement and category management space. She loves people, solving problems, and has years of expertise working throughout the entire sourcing spectrum, from building and executing multi-million-dollar tactical strategies, to being entrusted with some of the most complex and strategic contractual negotiations on business-critical projects. Graduating from the Haskayne School of Business twice over with a Bachelor of Commerce in Marketing and an MBA in Finance with a focus on Global Energy Management and Sustainability, she has returned to build and teach business contract negotiations with her Co-Founder as a part of giving back and elevating her alma mater.
Jane is passionate about education is a member for multiple boards, most notable is her role as Board Director and Chief Operating Officer of a non-profit designed to connect children aged 8-13 with industry learning and development through play.
Jane’s latest passion is to champion the role of sustainability in procurement and is celebrating the launch of ETCH’s sustainable procurement offering, which integrates the UN SDGs as a sustainability function into the procurement process from an end-to-end perspective.
It was the very best one-day event I have attended in my life! The Midwestern Regional SIGnature Event, held on March 6 at the Minneapolis Central Library, was attended by 66 extraordinary third-party risk management and sourcing professionals. Not only was the agenda amazing, but every speaker delivered insightful content and engaged the audience. At the Executive Roundtable, we had thoughtful conversations about many issues. Tom Lutz from U.S. Bank led a “day in the life” discussion that lasted almost 45 minutes because so many people wanted to discuss what he was doing, and it prompted other conversations as well.
In our opening session, Linda Tuck Chapman, a Sourcing Supernova Hall of Fame inductee, knocked it out of the park by delivering an interactive workshop on third-party risk management. People said that their two hours of training FLEW BY. When the group joined back together, we had an incredible presentation by Rohan Ranadive from BB&T about building an AI-powered digital workforce which prompted so many questions, I had to stop them to stay on agenda! Then we had an absolutely inspiring one-hour talk by Nancy Brooks, the CPO of Best Buy. Nancy shared that she had declined previous invitations to speak, because she doesn’t care for speaking engagements, but she agreed to speak at SIG’s event because she had a story that needed to be shared about her team. We are thrilled that she joined us. She engaged everyone with Best Buy’s story the entire time and Nancy’s team was so proud to be there.
“Impact sourcing results in a more engaged and motivated workforce for companies, and enables them to increase their global competitiveness.” — The Rockefeller Foundation
You need the work done and there are countries that are disadvantaged, war-torn or underemployed that have motivated, educated workers who can perform the work you need. It truly is the correct choice. Why continue outsourcing to developed countries or countries in which the vast majority of people already have access to the middle class?
Did you know that outsourcing to India is the number one reason it now has a thriving middle class? Are you aware that through outsourcing an entire generation was lifted out of poverty in both China and India? Do you know that when you outsource to a country, it can change the trajectory of people’s lives? In a 2003 speech, Anne Krueger, First Deputy Managing Director of the IMF stated that the impacts of globalization have benefited both India and China by lifting millions of people out of poverty since 1980 and putting tens of millions of people firmly into the middle class. In addition, China has seen their extreme poverty rate fall from 84 percent to about 10 percent largely because of trade, reports the Economist.
In previous blogs, SIG has covered the basic concept of sustainability, including an overview of its various dimensions. In this post, I will touch on the role that sourcing professionals can have in meeting corporate sustainability goals.
Why should sourcing have a role?
Sourcing is uniquely positioned to contribute to meeting a corporation's sustainability goals because sourcing typically has expertise in:
Creating alignment to corporate goals
Building frameworks to measure success
Researching market conditions and supplier capabilities
Conducting strategic negotiations
Designing innovative methods for value creation
Ranking the priorities of stakeholders with supplier offerings
Identifying risk and mitigating responsibly
The reduction in costs after implementing a sustainability program can exceed the costs of implementation – in other words, you’re spending money up front but in the long run, you save more than you spend. For example, if an organization were to target the spend category of corporate services and facilities management (FM), capital may be invested in working with a supplier to install a new system that reduces energy consumption at the company's North American headquarters, but in the long run, the reduction in energy costs saves the company money – which of course, can then be reinvested.
In this example, procurement and sourcing are uniquely positioned to make this happen. Most likely Sourcing negotiated the original FM contract, understands the innovative capabilities of suppliers, has heard many recent pitches on new products, and is adept at performing the analysis that proves an investment can have a significant return in hard costs, and even soft costs.
Mary Zampino, Senior Director of Global Sourcing Intelligence
In my time working in the sourcing sphere I have become passionate about ethical sourcing. Mexico, where I have lived for nearly eight years, is where many companies source cheap, nearshore labor and is a resource for bilingual, cost-saving talent. I have witnessed unethical sourcing practices in my time here and I am always looking to educate myself and others on the benefits of ethical sourcing. As companies chase better costs to remain viable, the possibility of building a supply chain with poor ethical practices increases. Ensuring ethical sourcing practices in your supply chain can be labor intensive but the benefits are immense.
According to the Chartered Institute of Purchasing & Supply (CIPS), ethical sourcing is the process of ensuring the products being sourced are obtained in a responsible and sustainable way, that the workers involved in making them are safe and treated fairly and that environmental and social impacts are taken into consideration during the sourcing process. Ethical sourcing also means the procurement process respects international standards against criminal conduct and human rights abuses and responds to these issues immediately if identified.
The relationship between buyers and providers can be a tricky one, especially when operating across multiple continents. Speaking during a podcast interview with Dawn Tiura, Sean Delaney, Vice President of Sales for cloud platform Determine, draws on his experience as both a buyer and provider to share best practices for relationships that are sustainable and strategic.
WORK ON YOUR SOFT SKILLS
Technical expertise is valuable, but your ability to establish a rapport with customers is important for sustainable relationships. “Candor is important because there's a large degree of personal credibility that buyers are putting on the line when selecting a vendor," says Delaney. "That needs to be understood as a seller and we need to make sure that we don't break that trust. That's our role.”
2018 is already shaping up to be a busy year for SIG and we don't anticipate slowing down. In fact, we're accelerating!
SIG INNOVATION ACCELERATOR
SIG recently announced the launch of the SIG Innovation Accelerator (SIA), which offers a portfolio of services to help develop and improve the innovation pipeline for Source through Supply Chain (SSC) and related functions.
The SIA was created to help SIG’s buy-side companies--and ultimately other Fortune 500/Global 1000 companies--capitalize on their combined knowledge, experiences and buying power to facilitate innovation and improve profits while simultaneously reducing risk for both buy-side companies and product providers.
Becoming an SIA Colleague is the first way for a provider to participate in and benefit from SIA’s services. Benefits of becoming an SIA Colleague include:
Eligibility to nominate a product for review and consideration for SIA’s Acceleration Program
Opportunities for product focus groups with procurement executives to get feedback on product and marketing/sales strategies
Discounts for online certification programs or courses offered by SIG University
A Leadership Council comprised of approximately 24 CPOs and select other executives from SIG’s buy-side member companies will lead SIA's initiatives. All of SIG’s buy-side members are eligible to participate in various SIA activities and benefit from its services. SIA is managed and staffed by SIG and Creatze, which is led by SIG’s founder and former CEO Barry Wiegler.
Situated in the southernmost part of the Brazilian state of Minas Gerais, nestled among green rolling hills, coffee plantations and dairy farms is the small town of Santa Rita do Sapucaí. A cursory glance shows Santa Rita as a charming town full of farms and churches but in reality, this picturesque little city has so much more to offer. In recent years, it has become known as “Vale da Eletrônica” or Electronics Valley because it is home to the highly respected technical school, Escola Técnica de Eletrônica Francisco Moreira da Costa and is also known as a hub for technological applications, from carpool and table service apps to toothbrushes with sensors that connect to children’s games. And Santa Rita isn’t the only city in Brazil ramping up their efforts.
Plagued by years of upheaval economically, Brazil is making a comeback and relying on the IT sector to help make their triumphant return. A $200 million joint investment with chipmaker Qualcomm, was welcomed in March by the federal government to build a semiconductor factory in the state of São Paulo where other major tech companies such as Samsung and Lenovo already have operations. Their hope for the investment is that this will be the first step for Brazil in becoming a noteworthy player in the manufacturing of high density semiconductors that are used in 4G and in the future, 5G devices, as well as IoT applications. The investment from Qualcomm is expected to bring in about 1,200 new jobs which only makes a tiny dent in solving Brazil’s unemployment rates—at 11% there is still a long way to go, but it’s a step in the right direction.
In the Mexican coastal town of Puerto Vallarta, where the weather is hot and the tequila flows like wine, a new trend is emerging from an old Mexican delicacy...chocolate. The town is host to a chocolate museum, chocolate tour and fancy tequila/chocolate-paired tasting. Last week I had the opportunity to attend to one of these tastings where I learned about the different types of tequila and how the chocolates amplify their flavors when properly paired.
This unique experience also came with a crash course on the history of Mexican cocoa, the main ingredient used to make chocolate. Cocoa was once only consumed by ancient Mexican royalty. According to my tequila sommelier and a report by the World Agroforestry Centre, the Olmecs – an ancient tribe in Mexico – were thought to be the first people to consume chocolate. These indigenous people crushed the beans, added water, spices and chilies and drank the delicious elixir.
Ironically, last week an article came across my desk about cocoa. What were the odds that in the same week that I learned about the origins and use of this delicious nut, I’d also circumstantially run across an article about its production? I found the correlation too good to be true until I read the article and discovered the unfortunate state of cocoa production. Sadly, this article did not come with tequila, but the bitter reality of a lack of ethics in the cocoa industry’s supply chain.
As supply chain practitioners know, it is critical to know where and how your products are being sourced, but the farther you are geographically from the beginning of the supply chain, the harder it is to control…and in countries where labor laws are lax, it becomes even more tragic. This gets tricky with products that can only be produced in very specific environments. Cocoa is one such product that can only be grown 10 degrees north or south of the equator with the majority of its production in West Africa, the Ivory Coast and Ghana.
Hailey Corr, Junior Editor and Marketing Associate, Outsource and SIG