A few blogs ago we were talking about how the next generation of Cloud services will evolve. To make a long story short, the best candidate would be large scale, on-line merchants with a lot of excess computer capacity. The most interesting possibility, or interesting new player is eBay. They are a big on-line merchant. Technically, they are a cloud service because they are selling themselves as an Internet “storefront,” and alternative to smaller firms building their own servers and web sites. Furthermore, eBay owns Skype, so they can replace traditional phone and conference call services with their VOIP offering. A good start, but I haven’t heard anything about plans at eBay to take over their biggest market opportunity: taking over the world of corporate procurement.
Today’s blog is a deeper dive into this proposition. If you’re a manager in a major corporation, you’re just getting used to the idea of a procurement department playing a major role in all corporate activities. How would eBay’s arrival in your corporation help you? Let’s take a look…
Moving From Purchasing to Procurement: What exactly does a procurement department do? Like its predecessor, the purchasing department, they buy stuff. The difference is in how they buy stuff. Purchasing departments often stressed the importance
of relationships in getting the best products and services. Fair enough. However, this was also the time of the three-martini lunch and conferences at big resorts, with the signing of contracts at the end of the event. Gifts from suppliers were the norm, and it was hard to tell the difference between “industry practice” and bribery. Even if a purchasing department had the best possible deal with a supplier, they could rarely prove it. Purchasing departments were almost completely devoid of analytic capabilities. They might have an instinctual feel for pricing, perhaps because they used to be a sales person (which was not unusual) but how long does this knowledge last before it is out of date? As purchasing became more complex and corporations wanted more transparency into the decisions that consumed billions of dollars in corporate revenue.
Around this time global corporations were getting feedback from internal audits and external consultants that purchasing departments did not have strong controls or understanding of the money that the firm was spending. Why? Primarily four major factors. First, different offices did not coordinate purchasing decisions; aside from territorial issues, international standards and needs differed. Opportunities to leverage purchasing decisions were lost. Second, the lack of integration in corporate accounting systems made it very difficult for purchasing departments to know when and how other groups (accounting, business units, IT, etc.) were making purchases or if they were violating global standards when purchases were made. Third, throughout the 80’s and 90’s corporations were sourcing a wider range of increasingly sophisticated products and services (computers, networks, private jets, temporary employment contracts, cell phone contracts, etc.); purchasing departments had little expertise with these items and could not effectively purchase each item. The fourth reason why purchasing lost control of suppliers… because individual business groups wanted to buy their own products (because they had the expertise, corporate was too bureaucratic, a group had specialized needs, etc.), so they became very skilled at aggressively bypassing the purchasing department.
Purchasing departments looked ineffective or even corrupt, and many were cleaned out and replaced with new procurement departments. These new groups were re-staffed by MBA’s and individuals with analytic backgrounds, rather than individuals hired for their ties to the firms they would buy from. Procurement introduced tools like six sigma to make each purchasing decision measurable and repeatable, identifying opportunities, and providing metrics to compare different supplier responses… often from Request for Proposals (RFP’s) issued to suppliers. However, even when armed with the most sophisticated personnel and software few Procurement departments are big enough and
sophisticated enough to be experts in everything. Without the necessary expertise and knowledge, you cannot effectively interpret the responses you get from suppliers. The tools of a modern Procurement department put all the information you need in front of you, but that data remains in indecipherable language until it is interpreted with the necessary expertise.
Hail eBay, Savior of Procurement: Fortune 100 corporations simply cannot justify staffing all the experts needed to cover all the purchases made by a modern corporation. The smaller the firm, the more resource constrained and less capable a procurement
department becomes. For small firms, which provide the majority of jobs and purchasing decisions in the world, the “procurement department” is one of the many hats worn by the firm’s owner. Large corporations are repeating past mistakes by trying to big omni-competent procurement groups. It didn’t work a hundred years ago when financial firms provided their own credit ratings, although they did eventually yield to “public” ratings by Standard & Poors, Moodys and others. It didn’t work when the world’s largest firms built their own secure communication networks in the 80’s, which they eventually dropped in
favor of public communication carriers. It didn’t work when IT departments tried to support every possible software and hardware platform in the 90’s, leading to the current migration to the Cloud. There are few to believe that it will work this time for procurement. The alternative is to look outside, perhaps to the Cloud, for a firm that will provide many of the most difficult procurement services. I believe… and if there are any Investment Bankers out there listening… that the right firm for this huge market is, eBay. Here’s what they bring to the party:
- Auctions: This is, obviously, the core of eBay’s competency. Auctions have become legitimate vehicles through which large corporations make purchases, everything from PC’s to outsourcing services. But did you know that a well-designed auction looks a lot like an RFP? You provide information in advance on what you want (just like an RFP) and the suppliers you’ve qualified to bid in the auction show up at an agreed-upon time and bid against each other for your purchase. Unlike an RFP, suppliers see each other’s bid and can decide if they want to hold or lower their price, or raise questions, or withdraw their bid, etc.
- RFP’s: Ideally, most purchases would go through an RFP like process. But the reality is that the development of a good RFP consumes a lot of resources, so this
excellent tool is often rationed and only applied to the most costy procurement exercises. If they were more easily produced, they would be used more often, and smaller firms would be able to use this powerful technique. If eBay builds off its current capabilities and launches a corporate auction site, with a few extra RFP elements, they can replace or supplement the RFP process at most fortune 500 firms and make this powerful process available to a huge number of smaller firms. The better the process becomes, the smaller the purchasing decision that can be sent via eBay. Consider the fact that Corporate IT spending alone is expected to account for $3.5 Trillion in 2011. How much of this is efficiently procured today? How much money is left on the table every year?
- Supplier Qualification: Once eBay creates the world’s largest marketplace for procurement and suppliers, what else should they do next? Well, they should expand on their current model where information on sellers is provided buyers. This not only provides information on what the seller offers, but also how long they have been selling through eBay, how many sales they’ve engaged in, and feedback directly from buyers. This is a very large part of what the RFP process
- RFI: However, eBay would be in a position to provide yet another invaluable service. Before an RFP is released, an RFI (Request for Information) is sometimes sent first to prospective suppliers. Sometimes this is to pre-qualify suppliers for the RFP stage, and sometimes it is to gather information used to develop the RFP. Because eBay would process an enormous number of RFP’s and auctions, both aggregate information (current average price for a specific model of PC, six months pricing trend for 20lb 96 brightness copy paper, price difference between two star and four star rated ink suppliers, etc.) and supplier specific data (what has your average pricing for this product been over the last year)… although suppliers may see this as too much information.
- Ratings of Procurement: Turnabout is fair play. Suppliers would like to get
information on who they will be working with. A bad relationship means the contract will be overly expensive or will fail to meet service targets. From a supplier’s point of view, one of the most important things in a relationship is getting paid… preferably on time. Next to that you would like to know just how
difficult the client is to deal with on a day to day basis. Some clients are far more resource consumptive (higher requirement for meetings, reporting, etc.), and it raises the cost (or lowers the profitability) of a project. Suppliers need to know this so that pricing can be realistic. Of course, if individual firms find that pay late and are seen as poor managers, this might provide the incentive to fix these problems and make future procurement exercises more successful.
- RFP Writing: Finally, could produce template and custom RFP documents. This would be an entirely new capability, but one that would be neither expensive
nor exceptionally difficult to implement. It could be started with professional RFP writers and then supplemented through the development or buyout of RFP
software. There are a lot of potential acquisition targets, or all sizes and capabilities. Although I’ve never used it, I’d vote for “RFPMonkey”, if only for the name.
Should eBay rule Corporate Procurement? Yes, it should! Procurement departments are popping up everywhere, and each new department merely duplicates the work of other departments without adding new value. Corporations are paying for increasingly larger procurement groups, that are each faced with sourcing projects that are not equipped to sucessfully impelement. The vast majority of American corporations are small and lack the volume discounts granted to larger purchasers, yet they cannot afford even a basic procurement group. If eBay provided an RFP process, an Auction based marketplace, and a few support functions (such as writing RFP’s), not only would eBay dominate an unorganized but huge market opportunity it could also offer a huge efficiency boost to all
corporate America. And that, dear readers, is my Niccolls worth for today!