Change is constant. “Change is inevitable (except from a vending machine).”* But in this new year, this new decade, we find that many things have not changed. We are still in the midst of a global downturn, still rocked by uncertainty, and the credit markets are still relatively tight. Resources are still, and perhaps forever, constrained. Oh yeah, the pressure to deliver fiscal year savings remains very intense (still!).
Certainly many things have changed. Two big items that will impact the CPO and procurement department: (1) the budgeting process in the “new normal” will be much more deliberate and more strictly managed; and, (2) many of the “easy” savings opportunities that existed in the aftermath of the commodity bubble bursting in mid-2008 are no longer available.
Undaunted, I’ve pulled together a quick list of categories to source in 2010. As a point of reference, my background includes a number of years dedicated to directly managing sourcing projects that totaled, in aggregate, more than $500 million dollars. The projects ranged across a wide number of direct and indirect (including services) categories for many large, mostly Fortune 500 companies, including nine of the current Dow 30. Despite the direct sourcing experience, I consider myself more of a sourcing generalist or process guy than category specialist (I also developed the sourcing processes for many of these same clients). Undaunted still, I offer my list of categories to source in 2010:
- Business Travel – I will be sitting on a panel at the NBTA’s Master Program in D.C. in a couple of weeks that will be focused on business travel procurement. That procurement will become more involved in what, for many enterprises, is one of its largest controllable categories of spend is inevitable. For those sourcing and procurement teams that have not focused on sourcing business travel, the hotel category is a great place to start. For those procurement and travel teams that have been aggressively sourcing the travel sub-categories, an opportunity may yet exist to leverage what you have done with transient spend with your strategic meetings program. And with an influx of new hotels coming online this year, experienced teams may be able to re-source this category and achieve superior results.
- Contingent Labor – I’m not a big believer in the accuracy of jobs reports (I think they are designed to understate), but I do believe that we have entered some type of “New Normal” economic cycle that plays to the strengths of the procurement group. One result of this new economic reality is that enterprises will be more cautious in their hiring practices and continue with temporary workers for a longer period before hiring full-timers. Contingent or temporary labor is a classic, high-margin, fragmented business that is frankly a great category to source in good times and in bad. Many of the companies I worked with in the past had dozens of staffing firms charging staffing markup rates that were well above market (some staffing firms were so aggressive that they were charging different rates to different managers at the same location) before new contracts were sourced. When sourcing this category, make sure to get markup rates by job class or type (admin, light industrial, etc.) and negotiate rates that decline as each worker-type passes different tenure dates (since the cost of administering an on-going contractor is much less than the costs during the initial screening and on-boarding phase). This presentation (which I found by random search) discusses the process that USC followed as they moved from 52 different staffing companies to a single MSP relationship with Guidant Group and saved $2 million or 17%. USC’s current markup rates seem high to me on a national basis (on a regional basis too), so I do not recommend using them as a benchmark, especially if you are a non-CA based enterprise.
- Suppliers doing business in Euros, contracts based in Euros – Okay sometimes I cheat a little bit. This is obviously not a category to source, but rather, a consideration for enterprises when they look at recent and/or upcoming bids received from European-based suppliers. The Euro, which luckily for me hit an all-time high against the dollar during my last European vacation (June 2008), has dropped by more than 10% since then. This means that some of the European bidders that were recently not competitive (even from the lower-cost Eastern European countries) have become more competitive on a relative basis over the past 18 months. I believe that this trend continues and the Euro will continue to erode against the dollar, even if a Greek tragedy can be avoided, making the bidders from these areas much more competitive than they have been in recent years.
- Metals – The often overly-aggressive price increases that were broadly rolled out in 2007 and early 2008 for many metals have not reverted to pricing that reflects current market dynamics. There continue to be good opportunities to source and re-source these materials (even if bids were taken in 2009). Copper, one of the few metals that has maintained its pricing during the downturn, appears to be poised for a big drop this year according to some financial analysts.
- Employee Benefits – No matter what Washington ultimately does or does not do with (or to) the healthcare industry, in the near-term, the cost of employee benefits (which have far outpaced inflation and other price-based indices over the past decade) to the enterprise and employee[i] will continue to rise. No longer a “sacred cow,” this category, with many potential providers offering a largely commoditized service (although hospital/doctor networks are not necessarily a commodity), that has never been sourced by most enterprises is worth a look. Sourcing this category may take a while to socialize with executives and may meet resistance in HR, so I suggest getting the ball rolling on this category now, so that the plans rolled out at the end of your fiscal year can be impacted.
- BPO services – Michael Treacy once told me that “all work will migrate to where it is done best.” In his estimation, imports and productivity improvements have played a much more significant role in job displacement in the US and Europe than outsourcing has to date, and I agree. But the impact of outsourcing is growing and I believe that many of the positions that have been lost over the past two years have been lost forever or at least lost to another part of the world. The recommendation here is for procurement leaders to become directly involved in the discussion and decision-making process around BPO services. Procurement departments that can (a) develop and maintain an expertise in the different outsourcing models that exist, (b) build and manage the financial models that can help determine if an area should be outsourced, and (c) become BPO SLA-management experts will add huge value to the enterprise now and in future years.
- Printers and Print Cartridges – The consolidation of print, copy, and fax capabilities into multi-function devices (MFDs) has helped lower the total cost of ownership of these devices. A stagnant economy means these machines will be out of favor for some time and that consolidation in this market among suppliers may counter-intuitively, help drive significant price decreases in your sourcing process. Other recommendations with this category are to utilize demand management strategies that are designed to lower your “cost-per-click” and to source remanufactured print cartridges which are cost effective and ‘greener’ than buying new. Buyers should also be wary of unnecessary cartridge replacement that the State of California estimates cost it $1.5 million last year.
- and also 9 and 10 – Facilities, Janitorial, Construction Services – Sourcing these categories is simply a play on all of the trouble that has been brewing in the Commercial Real Estate Market. When space goes vacant and rents go south, building maintenance and upkeep is one of the first places that owners look to cut corners, especially with billions in mortgage balloon payments due over the next few years. There is and will continue to be slack in demand for these services, but do your diligence. Bankruptcy risk is still a concern for some of the smaller local and regional providers, but the shakeout that has occurred in different US regions has strengthened many of the survivors, relative to their positions 12 months ago.
The hazards of compiling a list like the one above are many, and the suitability of each category for sourcing in 2010 will be unique to each reader’s enterprise, region, and relative sourcing maturity. Said differently, I think these categories have great potential for many sourcing teams in 2010, but actual results may vary. I hope this has gotten some sourcing juices flowing, but if you still haven’t found what (category) you’re looking for or if there is interest in CPO Rising taking a deeper dive into any of these or other categories (which could include bringing experts in to discuss specific category strategies), please let me know with a comment or email.
[i] Employees should spend time understanding the total cost of their health care plans. While my health care premiums have increased by almost 15% since 2008, a much larger potential cost burden that I face is the increased co-pays for medical visits, hospital visits, prescriptions, and higher deductibles.