Indirect procurement leads to direct confusion

One of my favourite bloggers, having recently attended an ‘indirect’ procurement event, questioned the terms direct and indirect procurement and whether it is necessary to differentiate the two or if  they should both should simply be termed ‘procurement’.  This is something I have been thinking about for a while now because I too am not convinced that differentiating ‘indirect’ and ‘direct’ spend is either helpful or meaningful. 

We can see this when we look at how the terms are used in different industries.  For example, a retailer will see the things it buys to sell onto its customers as direct procurement, but the IT services it buys to support its business as indirect procurement. However, the same IT services are likely to be classed as direct procurement for a bank while the hotel next door would see them as an example of indirect procurement.    

Confused yet? Probably.  So let us go back a step and try and define the two terms. 

Direct procurement is generally considered as being concerned with the core business of the organization buying the goods or services while indirect procurement is concerned with the supporting functions of the business – buying the goods and services that have to be bought to ‘make everything else work’. 

So instead of indirect and direct procurement should we now be making a more operational distinction and be talking about core function and non-core function procurement?  I’m not so sure because this throws up the same inconsistencies as direct and indirect since the same goods and services could be classified in either category depending on the industry.  For any classification to be useful and taken seriously it needs to be consistent and mean the same thing to all audiences.  

For any classification to be useful and taken seriously it needs to be consistent and mean the same thing to all audiences. 

Another helpful criterion for a classification model is that it is necessary in the first place and I would suggest that this is not the case with indirect and direct purchasing.  When thinking about why these terms came into being the cynic in me feels it’s largely because someone cleverer than me saw some money to be made.  Unsurprisingly most organisations pay most attention to the goods and services that are the core of their business so by identifying an area in a business where there has been little attention you can bring focus to it for the first time and make money from the ‘new idea’ – in this case indirect procurement.   The facts of running a business are that if it needs something in order to function the business makes a decision. The questions are simple “Do we do this ourselves?” or “Do do we buy it from someone else?” If it’s the latter, then the “thing” is already being bought so is there really a need to create a new classification and end up with two separate terms for things we buy? 

As you can gather by now I am not a fan of the terms direct and indirect, they mean nothing in my opinion and worse still they introduce potential confusion because the terms mean different things to different people. 

As I mentioned earlier, any classification model needs to consistent so if we do want to differentiate  we need a simple system and for me it doesn’t need to be any more complicated than  “stuff you can touch”  i.e. goods  and  “stuff you can’t touch” i.e.  services.  This has the benefit of being easy to understand and potentially useful since they are bought and sold in different ways. 

For me it doesn’t need to be any more complicated than  “stuff you can touch”  i.e. goods  and  “stuff you can’t touch” i.e.  services. 

When buying goods, you are buying something physical -  boxes of beans, bags of sugar, car bulbs. They can be specified very well and you can physically touch them and see real examples of the work of the company you are buying from. When buying services you can still specify them very well but in my experience people find it harder to specify services then they do goods. For example,  how do you specify when a floor in a supermarket, or a telephone on a desk is clean?  Yes , of course you can take up references from other existing clients, but how do you know their standards for the services they buy are the same as yours?   This is why a classification of ‘goods’ and ‘services’ could be useful because buying services is harder and requires different skills and techniques.  There is a great term used in service selling which is “selling the invisible” because that is what service salespeople are doing. They are selling you something you cannot physically touch or see in real terms. Often you are buying the salesperson and their credibility, not the service their organization provides.  As buyers we need to be aware of this so that we ensure the services we pay for do what we want them to do.  

I think it’s time to get back to basics in the world of procurement, or is it sourcing or buying we should be calling it?  Let’s stop calling it direct and indirect; let’s talk about goods or services.  That’s something I can truly see as being different from each other. 


It's not what you know but who to know

Another week and another list of ‘who to know’ has been published but for once it’s actually quite a useful one.

What makes Spend Matters' list better than most is that while it collected information in the traditional way  - demos, questionnaires, interviews and the like – it draws the final list from its consultants’ opinions as to whether the provider meets a single criterion  - ‘is this company worth knowing about?’
The fact that the single criterion is, intentionally, loosely defined means it relies on their consultants' abilities to process the information they collected, including  the vital intangibles, and come to an answer.  The wisdom of the crowd is well understood it makes the list much more useful than some other more high profile ‘tick box’ reports that exist.  We know from experience that if you don’t tick all the correct boxes you don’t get on the list or in the report despite being best in class for the other criteria or, in our case, being the first company ever to score the maximum five out of five for optimisation capabilities.  

Clearly, we are pleased to be included as one of Spend Matters' “Providers to Know” and of course we feel we should be there knowing the very satisfied clients we have, our technology and the impressive growth we have been recording in the last few years. 

But in addition, we are equally proud that there are a number of our customers on the list as well.   AT Kearney and McKinsey are two pure consulting firms that make the list and are big users of our technology.  We have worked with them for some time and see them as partners in our quest to introduce advanced supply chain and sourcing optimisation into the world. Their mix of sourcing and supply chain expertise, matched with our technology, provides a powerful and compelling solution for companies who want to enlist the help of consultants in their sourcing and supply chain endeavours.  Their clients seem to agree and we see this from the significant growth in the projects and engagements we have been involved in with these two clients. 

One other interesting thing about the list is that another of our partners, a company that could be viewed as a competitor by some, is included in their own right. Although my honour (and a non-disclosure agreement!) prevents me from naming them here, it is very nice seeing them make the list knowing our software complements their sourcing suite so their customers benefit from world class optimisation. 

I do realise history is written by the winners and understand our opinion of the list's credibility may be influenced by our appearance on it, but I do think Spend Matters' approach of choosing to be your 'well informed friend' puts them in a strong position and is much more useful to sourcing professionals.

As Jason Busch of Spend Matters puts it, 

 “It is critical to us to make the 50/50 both approachable and something of substance. We collectively think there’s a real racket in the list and awards business that says nothing about whether or not a provider deserves a closer look on a pragmatic and intellectual basis. As such, there’s no cost to “winning.” Who needs another cheesy paperweight engraved with SMAT50 (that would be “Spend Matters Almanac Top 50”) or a sales pitch to sponsor an awards dinner with gross wine and awkward small talk?”
My personal view is that life is too short for 'gross wine' and it's not obligatory at these things, but I do agree wholeheartedly with his sentiment. 



New recruits on both sides of the Atlantic

Continuing our 'stellar' 2013 and to help us ensure 2014 is just as good (if not better), we have made two new senior appointments - a Sales Director for North America and a new Strategic Sourcing Consultant in Europe.

Mark Maxwell joins as Sales Director, North America and Ian Milligan joins as a Strategic Sourcing Consultant in Europe and it is fantastic for me to be able to welcome them to the company. 

Mark becomes Trade Extensions’ first dedicated Sales Director, North America and the new role is key to growing this market along the lines we saw in Europe last year.  And Ian's 25+ years experience will be invaluable as we look to generate momentum on both sides of the Atlantic in order to maintain our phenomenal growth which saw us increase revenue during 2013 by 53% - the signs are already looking good for 2014 with year-on-year sales growth greater than 50%.

We are always looking for good people to join in our success so if you think a career in Trade Extensions could be for you, have a look at our 'Jobs' page on our website.




Revenue up 53% during 2013 

The impressive growth Trade Extensions has experienced over the last few years continues and during 2013 it increased revenue by 53%. New customers accounted for 25% of the company’s revenue and consistent growth means the company has doubled in size since 2008.  

Alongside new customers, Trade Extensions retained and developed existing clients with 40% of existing businesses increasing their spend by at least a half.  It means USD$1 billion of spend is allocated through Trade Extensions' TESS™  platform each week by some of the world’s leading companies and Trade Extensions, CEO, Garry Mansell said,

As companies see the benefits of using the platform they identify additional areas where it can be used and TESS™ is becoming intrinsic to their day-to-day operations.

2013 was also the year Trade Extensions handled its largest project to date – a €7 billion project sourcing all the elements involved in a constructing a large European gas pipeline.

Trade Extensions growth is set to continue during 2014 and the first quarter of this year is up 27% in terms of revenue compared with the same period in 2013.

The full news release can be read here.


From sourcing to business transformation

In the last six months we’ve identified a trend among advanced users of our sourcing platform who are using the software to eliminate the boundaries between sourcing and supply and transform their daily operations. 

Companies who have become familiar using the technology for bid collection and analysis now realise that the software can be configured to solve any constraint driven challenge and they are using the platform to enhance their decision making on a daily basis. For example, one customer is using the platform to define the manufacturing process of its products stage by stage.  This customer has numerous manufacturing sites of its own and access to more manufacturing equipment through approved external suppliers.  Each piece of manufacturing equipment has been qualified by the company to perform a certain operation so the challenge is to optimise the manufacturing process to ensure each product goes through the correct number of processes using only qualified equipment while taking into account the various costs – raw material, production, transport, warehousing, inventory etc, etc.  It’s a simple concept but and it is made more complex by introducing further constraints.  For example, it is possible to increase the number of operations performed by each piece of equipment but this qualification process costs time and money and there is qualification budget that cannot be exceeded.

To identify the most appropriate route for each product through the manufacturing process to use, the manufacturer optimises its production based on monthly demand forecasts for each product and per market.  It is complex system but the Trade Extensions platform can optimise the data quickly so the business determines its day-to-day operations based on the optimum solution.  And because the data is continually updated it essentially creates a dynamic model of the supply chain on which further analysis can be carried out. For example ‘what happens if there is natural disaster that completely closes site Y’ or ‘what happens if there is a 15% wage increase in China?’.  In fact if the data is handled in the correct way, there are no limits on the ‘what if?’ questions companies can ask so they can see the impact of any proposed changes before implementation. Trade Extensions, CEO, Garry Mansell said,

The trend for using the platform as a day-to-day business system highlights the creativity of our customers and the flexibility of the software.  We have always said the platform can be configured to optimise any constraint based challenge and this is shown in the exciting ways our customers are now using it to transform their day-to-day operations.

The flexibility of the platform in the way it can be configured to solve challenges outside sourcing is highlighted further in the way the platform can handle data from any source.  It means Trade Extensions customers are able to upload any amount of data, in any format, from any system and the platform’s world-class optimisation and reporting tools provide the tools that enhance decision making. Mansell said,

Sourcing remains our core business but some of our customers are now capitalising on a key differentiator we have which is the flexibility and scaleability of our software.  The types of projects we are now working on would have been impossible twelve months ago but the continual improvements we are making to the platform mean they are transforming our customers’ businesses.  

For more information how Trade Extensions can transform your business in terms of sourcing and  Beyond SourcingTM then please contact Joe Critchley, VP Sales and Business Development for more information -here.