“To say that a process is complex is the not the same thing as saying it is complicated.”

For example, we can imagine the developer of a large mixed-use residential and commercial construction project. These undertakings can have upwards of twenty-five levels between the prime contractor and the smallest supplier on the site. At the lowest level, imagine a two-man HVAC company providing additional swing capacity.

It is complicated in that there are many moving pieces.

It is complex in that it is a system.

The multi-dimensional interaction of these moving pieces can lead to emergent consequences. If one of the pieces fails to deliver, then there can be a real problem in terms of quality, timing, or cost.

These projects are best thought of as complex adaptive systems.

It should be easy to see that a company is a complex adaptive system, too.

Its success depends on employees doing their jobs, suppliers fulfilling promises, and customers demanding what the company sells. This is a dynamic process.

Seen in this context, supply chains are better described as supply ecosystems.

To really blow one’s mind, now recognize that each firm exists in a latticework of other firms. The supply ecosystem for an individual company is part of a broader, economywide tapestry.

Applying mechanical rules to complex adaptive systems makes no sense. Yet, as we wrote previously, this is precisely what current business processes do.

“Procurement in the contemporary context is both complicated and complex. Most companies have evolved complicated bureaucracies around procurement, requiring systems to implement the rules, with administrative organizations to enforce them.”

The FT discusses an additional layer of complexity: the existence of middlemen. These are powerful nodes in the ecosystem that may consolidate functions or appear to simplify its management.

They make two interesting points, both of which the Pandemic disruption appears to confirm.

First, the lack of transparency and the difficulty in analyzing these supply ecosystems has perverse consequences. Buyers seem to outsource responsibility to the layers in their system, ostensibly to the middlemen. But really, it’s an evasion of responsibility.

“Middlemen make it possible for us to ‘buy goods made on the other side of the world, build a diversified investment portfolio, order groceries from the comfort of our couch,’ she writes. But this connective power is ‘undermining accountability’ by creating so much separation between buyers and sellers that it’s impossible to tally the real cost of convenience and low prices.”

When everyone is responsible, no one is responsible.

Are there real savings? Or are buyers just assuming hidden risks?

A more nuanced second point in the FT article is that the opacity embedded in these supplier ecosystems is a potential source of market failure.

Not everyone has the same picture.

“… information asymmetries make it difficult for market participants to have a shared understanding of what’s being bought and sold (another thing that [Adam] Smith believed was a pre-requisite for well-functioning markets).”

Market failure leads to an inefficient distribution of resources. Efficiency is the principal justification for procurement bureaucracy, even as it has evolved to create the conditions for its own failure.

The result now is the real economy equivalent of financial volatility: price volatility, with growing swings between fears of inflation and of deflationary spirals.

Welcome to the 21^st Century.

We built EdgeworthBox to be a set of tools, data, and community that help B2B buyers and B2B suppliers. It’s built as a way to deal with the supplier ecosystem as it is. Buyers get to buy the right solution, from the right supplier, at the right price. Suppliers see a shorter sales cycle, lower transactions costs, and superior customer fits. You can see more in this short video.

The first mile of the supply chain is sourcing. This is a process to identify the right solution from the right supplier at the right price.

Once we have completed this step, we must negotiate a contract and evaluate subsequent performance.

Companies purchase goods and services to solve problems. Reverse auctions in the form of “Requests for Proposal” or “Requests for Quotation” are the most common way to source solutions.

Reverse auctions emerged as a business process to combat “waste, fraud, and abuse.” By convincing multiple suppliers to compete, the buyer can see competition on price and competition on solution. This ensures that they pay fair value for the optimal result.

At least that’s what the theory says.

In truth, reverse auctions often fail.

A failed auction is one in which the buyer fails to pay fair value for the optimal result because of insufficient competition on price and solution. In a failed auction, the best outcome isn’t an option. It’s not on the menu. In a failed auction, the best price is unavailable.

Bureaucracy is the primary reason reverse auctions in a sourcing context fail.

Bureaucracy slows the decision-making process. Bureaucracy imposes costs on suppliers for which they receive inadequate compensation. Bureaucracy shifts risk to suppliers.

Bureaucracy puts up walls between the buyer and the suppliers making it more difficult for one to understand the needs and constraints of the other.

Bureaucracy chases away suppliers.

Bureaucracy, for all its intent to protect the buyer, ends up hurting the buyer by limiting competition far more than it protects the buyer from bad actors.

It’s even worse when we consider downstream functions.

Bureaucracy takes up so much time and resources that it weakens vendor monitoring and contract performance management. It could be the case that a supplier passes the sourcing gauntlet only to fail to live up to its promises. It often is. Is the buyer paying enough attention to performance? Does the buyer know if they actually obtained value for money?

Of course, there are ways to mitigate bureaucracy, at least in theory.

In theory, ERP systems standardize operations, automate repetition, streamline processes, and promote internal collaboration. These systems contain modules for sourcing and procurement. Often, these are standalone solutions the ERP vendor bolted on.

Rarely do they obtain this Weberian fantasy of administrative perfection.

The best we can say about ERP systems is that they are the single source of truth for corporate data, the repository of everything, the general ledger of execution.

In practice, they are painful to implement. They require extensive training. They are still difficult to use. They are costly to carry, typically with subscription fees.

The only people who use procurement ERP modules and source-to-pay systems are the procurement staff. These systems do not promote internal collaboration; they kill it. How many people from the C-Suite or from product are spending time in the ERP sourcing module? How many of them even have seat licenses?

Most current ERP and S2P systems bake bureaucracy into their code. Use these systems at your peril, buyers. It blocks the information flow between buyer and supplier.

Engineers program systems based on a set of assumptions. In the case of ERP and S2P systems, these assumptions span the business process.

When you buy an ERP or S2P system, you are buying the assumptions the engineers encoded. You are outsourcing the decision-making process, in a sense. You have given up some measure of control over the purchasing outcomes you obtain.

Too often in these setups, the potential for collaboration and innovation and convergence on mutually beneficial outcomes diminishes significantly.

The most common alternative to an ERP system is the combination of email and spreadsheets. Using these tools is akin to running a procurement process manually.

With email and spreadsheets, we can be certain that there is no so-called “data lake” of structured, pre-processed, and timely data on which to base our decisions. Instead, there are loosely-connected “data pools” of varying quality, consistency, and temporal relevance. People aren’t sharing data, at least not at scale. Nobody is building analytic tools with data stranded in email and spreadsheets.

Email and spreadsheets is where data goes to die. It is where data lies dark and fallow.

The more bureaucratic the process, the more likely it is that we are under-utilizing this valuable intelligence, even as we alienate our supplier base.

The most insidious consequence of bureaucracy is the imposition of an adversarial tone to the conversation between buyer and suppliers.

It is bad enough that each side operates with incomplete information about the other, making assumptions about needs or capacity and capabilities.

Treating suppliers as competitors in negotiation makes things worse. Doing so increases risk.

During the Pandemic, when supplies tightened, vendors gave preferential access to customers who had been collaborative partners in the pre-crisis period. People who treated them badly when times were good got what they got.

Bureaucracy is the enemy.

Ironically, only technology can provide release.

A system or a platform that does not encode these assumptions or suffer these constraints is the only way out.

The ideal approach would focus on three things: data, collaboration, and simplicity.

Data needs structure, accessibility, and utility in providing market intelligence. It needs to be something that people want to use because they need it to make better decisions.

Collaboration means that buyers and suppliers work together to dissolve assumptions. Buyers get the best solution for their problem. Suppliers sell to customers who will be long-term partners, confident that the buyer will be happy with the product they purchase.

Simplicity means that buyers and suppliers are attracted to one another. Simplicity eliminates friction.

This is what we have built at EdgeworthBox and this is why we have built it. At EdgeworthBox, we believe that bureaucracy is the enemy of progress and efficiency. We focus on overcoming bureaucracy with data, collaboration, and simplicity. We decided to go after sourcing first based on our experiences as a supplier. Our sourcing platform delivers tools, data, and community that drive better purchasing and faster sales.

With EdgeworthBox, buyers control the process.

Come join us. Buyers and suppliers get free access to tools, data, and community. Buyers pay small fees for hosting and executing RFPs and RFQs, fees that are more than compensated by the lower transactions costs and lower opportunity costs from purchasing the right solution from the from the right supplier at the right price. We’ll even help you find suppliers. You can see more in this short video.

Or, if you’re curious, let’s set up a time to speak.

Contact Us

The Wall Street Journal had a light-hearted piece to mark the New Year in which they asked Chief Information Officers about buzzwords they would like to see fade away.

Here’s the CIO of Cardinal Health, Brian Rice, on “digital transformation”:

“We’ve struggled with that one ourselves, like, what does ‘digital’ mean? What does ‘transformation’ mean? What does ‘digital transformation’ mean? So, I think trying to find a better way to describe that would benefit us all.”

The phrase has lost all meaning. It is like when you repeat a word over and over again.

It’s a useless word jumble in that everything today is ‘digital’ and everything is also ‘transformation.’ It is a cliché to point out that we live in a world of change characterized by 1s and 0s.

It is the kind of claptrap that management consultants perpetrate in the name of driving certain, locked-in revenue for themselves upfront, even as the benefits only occasionally  and coincidentally appear to arrive post-implementation.

The argument goes something like this, here in a procurement context. Fully deploy digital tools and realize big operational savings. Take the Big Leap. Spend less on your procurement organization while improving outcomes to obtain the mythical Win/Win.

“Through full deployment of digital tools, typical procurement organizations can reduce operational costs by up to 45 per cent, achieving efficiency levels below those of today’s world class procurement organizations while at the same time enabling them to improve effectiveness and customer experience, according to new research from Hackett Group, Inc.

“World-class procurement organizations, which spend 22 per cent less than their peers, can also reduce costs by additional 33 per cent with comprehensive digital transformation, according to the research.”

Yet, success in these and other similar projects remains elusive.

“Last year alone, companies poured $1.3 trillion into transformation initiatives – 70% of which was wasted on failed programs at companies like GE, Ford, and Procter & Gamble. Among those that didn’t fail, only 16% saw improvements in their performance and ability to sustain change over the long haul. Even for digital-first industries like tech, media, and telecom, only 26% saw success.

“The truth is, people aren’t the problem; it’s the organization’s failure to communicate effectively with its people that sets them up for digital transformation from the start.”

It’s no wonder that these kinds of projects are disappointing, especially in procurement.

“Despite recognising digital technologies, their impact and imminent uses, few organisations appear to be progressing at the rate their c-suites consider necessary for achieving overall goals. Indeed, in the majority of areas, the level of impact has declined and the forecast application of recent technologies is low … The level and speed of digitalisation across procurement functions is lower than expected and needed.”

The argument that “digital transformation” initiatives fail because of communications is only partially.

These projects fail because they are overly broad and because they emphasize the digital over the transformation.

Digital transformation too often translates to “high risk, low reward.”

Another source of failure is the disappointment with the outcomes of prior projects. Here is Elouise Epstein from A.T. Kearney:

“While the potential advantages of digitalisation are well understood, many organizations are finding their programmes are not delivering the anticipated benefits because of deficiencies in previous technology offerings. Critically, these inhibited adoption.”

Nowhere is this truer than procurement.

“One of my overriding arguments – and it’s not really that shocking a finding – is that, historically, most procurement technology has been horrible. If not the actual functionality, it’s certainly the adoption, and it’s certainly the return on investment (ROI) that is horrible. And procurement technology has nothing to do with being digital. So, over the last few years, many organisations have been severely impaired having overpaid for technology that has vastly under-delivered, she says.” [Emphasis added.]

Effective change, especially for small and medium-sized organizations (even those housed within a larger enterprise context), is focused and limited in remodeling business processes. Given the way we work today, any such restructuring will use digital tools inevitably. My nomination for the replacement of “digital transformation” as meaningless jargon? “Business process evolution.”

How do you judge a good procurement transformation project? It must be in the context of the ultimate goal of procurement: to provide value at a strategic level to its internal business unit customers. Procurement is a service organization. It is as good as the business users think it is.

Epstein is unambiguously correct when she says that cost savings aren’t anything more than table stakes:

“Procurement needs to throw cost savings out the window. Just get cost savings digitised and move on. The days are numbered for the CPO [Chief Procurement Officer] who has a focus solely on cost savings.” [Emphasis added.]

How should we evaluate procurement’s performance?

Does Procurement Help the Business Generate Cash?

The best way to talk about creating value is to think about cash. If the business is creating a benefit for its customers, then they will pay for it. Procurement should be critical to increasing the delivered value and to retaining as much of what the customer pays in the form of free cash flow.

Does procurement help the business create this benefit for the customer? Do they provide valuable intelligence to marketing and product? Do they help the business deliver that benefit cost-effectively? Is the company purchasing the right things from the right suppliers at the right price?

Does the Business Include Procurement in Important Decisions?

One sign of procurement’s contribution to value and cash generation is the willingness and urgency of procurement’s inclusion in key decisions.

Do business units and the c-suite see procurement as tactical or strategic?

Does Procurement Accelerate Cycle Times?

Another way to help the firm generate cash is to accelerate cycle times. Can procurement assist product to accelerate the delivery cycle? What does this mean for working capital?

Does Procurement Reduce Risk?

Covid has reminded people who had forgotten about the risk in supply chains.

Is procurement managing this risk well? Or are they taking risk for marginal cost savings?

Does Procurement Help the Firm Compete?

Does the c-suite think of their procurement department as something that gives the firm a sustainable competitive advantage? Does procurement have better relationships with suppliers so that the firm can get preferential access to constrained supplies when times are tight, for example?

Does Procurement Promote Collaboration, Internally and Externally?

How frequently does procurement engage other members of the firm? What tools do they use? What metrics about collaboration do these tools give us? Does procurement share structured data with the rest of the organization that leads to insight and inference?

Does Procurement Help the Firm Meet Its ESG Goals?

How does procurement source from startups and from diverse suppliers, most of which are small and mid-sized businesses? How does procurement contribute to the firm’s environmental sustainability?

Put these all together and we can see why “digital transformation” in procurement has failed. Overly broad projects focused on the wrong things. It employed ham-fisted technology that costs far too much money to implement and operate, destroying any chance of a return on investment.

The best kind of restructuring is evolutionary, with low up-front costs, and demonstrable improvement in the strategic contribution. Emphasis on the return. De-emphasis on the investment.

This is what we have built with EdgeworthBox.

EdgeworthBox is a platform designed to get the most out of sourcing.

It’s an exchange with tools for hosting structured procurement data; standardizing and simplifying onboarding and RFx; and speeding up the sourcing process.

EdgeworthBox has little to no implementation and training cost. Buyers and suppliers alike access the tools, data, and community for free. Buyers pay a small transaction fee each time use EdgeworthBox to host a reverse auction like an RFP or RFQ. There is no risky commitment.

Our approach increases the quantity and the quality of responses buyers receive. Sellers like the simplicity and exposure to potential customers with the right product-solution fit.

Contact Us