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Supplier Governance: The Prodigal Processes
This article by Claude Marais was originally published in the March 2017 edition of SIG’s newsletter Inside Sourcing.
After years of treating supplier governance as a stepchild, and a corresponding lack of technology development in this space, corporations have started demanding supplier governance tools to increase control, automate effort, improve relations and reduce spending. Technology suppliers unprepared for these demands are scrambling to catch up.
This article explores the changing demands of corporations and the public sector in supplier governance technology and the current state of technology market.
Software suppliers historically focused on goods where contract governance is not a key component. It made sense at the time because the majority spend by major corporations was on goods. Supplier governance was immature, so technology companies focused on procurement and pre-contracting activities with little or no emphasis on what happened after the contract was signed. It just made good business sense to the technology providers. Contract repositories were considered graveyards where you labeled and buried the contracts, hopefully never to look at them again.
Over time, however, services, including GaaS (Goods-as-a-Service), grew from 19% of the approximately $4 trillion aggregate Fortune 500 sourcing spend in 1994 to 56% of approx. $6 trillion in 2013 (see below). Software suppliers, for the most part, kept their focus on pre-contracting and procurement while niche players started to fill the gaps – not as holistic solutions, but to address functional needs such as contract management (Apttus, SharePoint), risk management (Hiperos, MetricStream) or performance management (ServiceNow, Remedy).
Ironically, three major technology gaps remained. Relationship management, management of supplier-customer interactions, and an integrated solution tying these isolated functions into a single, coherent, integrated system to eliminate information silos within the organization.
In the meantime a slow but real awakening started in the back offices of major corporations and government organizations. Industry groups such as SIG, IACCM and IAOP gave rise to a more sophisticated supplier management cadre worldwide. And while the supplier management organizations were not necessarily in a position to acquire software to automate, improve and drive efficiencies in these typically highly understaffed organizations, they sensitized senior executives in their organizations to the magnitude of the opportunities in this area.
Risk management, a key focus since 2008 in some industries enjoyed the limelight until recently when they discovered that a technology overlay for risk management cannot be effective without robust underlying technology to manage the underlying contracts, performance, and relationships. The silver bullet touted by risk management software companies simply did not deliver the expected results thus pushing organizations, especially in the financial services industry, to rethink their approach to risk management and the use of technology to achieve their objectives. So, now the focus in these industries is turning back to the underlying capabilities of contract, performance, financial and relationship management integrated with a risk management solution.
Increased workload, increased performance risk, the recognition of the continued growth of services procurement, and the potential for achieving significant efficiency and value gains through strong supplier management is changing the status quo. Progressive organizations are focusing on putting the right technology in place to achieve their goals in supplier management. They are looking for, and demanding from the technology community, much more integrated and sophisticated technology solutions with deep functionality that can be deployed as full-service standalone solutions, but can also easily integrate with the rest of the software suites across the enterprise.
Impact of this evolution
While virtually every function in the enterprise became automated, supplier governance remained the prodigal processes in the organization. Just like uncle Howard (we all have one in our families) who refuses to turn on a computer while the rest of the baby boomers became not only tech savvy, but for the most part relatively sophisticated users of technology. Until recently. When it hit them…
And the technology companies were asleep at the wheel. Unaware of the developing needs amongst their customers, their focus remained on procurement and pre-contracting; they never saw the awakening of this new trend.
Fortunately, the free market system will always allow companies and individuals with vision to fill the gaps in the market. Over the past few years we saw two significant trends in the industry – i) Industry experts, frustrated with the state of technology in this space, joined forces with entrepreneurs and venture capitalists to address the void, and ii) all new SaaS solutions no longer come out of Silicon Valley. Some entrepreneurs recognized a shift in know-how as more companies obtained their consulting and back-office expertise from India.
To quote from Forbes’ recent article, Why Indian SaaS Startups Are Set To Rule The World, published on January 23, 2017:
According to a joint research report by Google and U.S. VC firm Accel Partners, by 2025, India is likely to become a $10 billion revenue industry with 8% share of the global SaaS market. The growth witnessed by local startups like Zoho, Freshdesk, KiSSFLOW, Chargebee and SirionLabs in the past few years makes the India SaaS story an even more compelling one. Tracxn, a startup intelligence and market research platform, states that since 2010 more than $1.484 billion has been poured into Indian SaaS companies. And just 22 days into 2017, seven more companies have already been funded.
State of the Technology
While still mostly fragmented, technology companies recently realized the need for more robust, complete, integrated supplier management solutions. So the natural thing happened, they all started claiming that they have these capabilities in peripheral functions that are “alternative facts” at best. For example, the fact that one can dump a number of contract documents into a digital file folder without any hierarchical structure or ability to extract and maintain obligations does not a contract management system make. And companies that are trying to retrofit new capabilities onto old technology platforms won’t do the trick. Caveat emptor – make sure you test the details before you buy.
Fortunately there are companies that set out to do it right, and do it right from the start. Such companies, equipped with deep industry experience, technical know-how and funding, have developed fully integrated, functionally competent SaaS solutions.
To quote Spend Matters from a recent article:
As businesses, we are increasingly buying outcomes rather than widgets or labor. Yet in many ways, the general market for procurement technology still reflects a world in which we source, procure, contract and manage supplier relationships based on models that track to underlying SKUs or hourly bill rates rather than partnership-based outcomes. There are a few technology providers working to change this paradigm…managing all aspects of complex supplier relationships after a negotiation has taken place, starting with contract authoring and proceeding to steady-state performance, relationship and risk management.
How do you identify these companies? They are relatively new, SaaS based companies utilizing the latest in technology, they have deep functional expertise imbedded in their organizations, their products have depth and breadth of functionality, and technology is their core business, not peripheral to their main business.
In conclusion, we see that the software suppliers that are doing it right not only focus on an integrated solution to ensure efficiencies are gained between corporate organizations, but they address the major area of inefficiency – that between the customer and the supplier, head-on. Because customers and suppliers have the same need for the same information, and the majority of the dialogues between customers and suppliers are always about “whose data is correct”, rather than performance, this will be the big game changer in supplier-customer relationships in the years to come, not only from an efficiency perspective, but also from a relationship perspective that will benefit both customers and suppliers.