Knowledge is power

Nick Martindale

Accurate, detailed category information is more important than ever. But should you have a research capability in-house or outsource it?

CPO Agenda Autumn 2008 By Nick Martindale

With many commodity prices at record highs and organisations now sourcing from all over the globe, it has never been more important for CPOs and their buyers to be well informed about trends in key categories and supply markets.

'There is a greater need to do more due diligence, not only upfront when establishing a vendor's viability but certainly for key vendors, on an ongoing basis,' says Gavin Herman, executive director at Morgan Stanley. 'To some extent, this is driven by the tougher economic climate that may exist for the vendor and its marketplace and the bigger part that supplier relationship management is now playing.'

Yet at the same time, the pressure on procurement teams has increased as the function moves from tactical to strategic buying and more spend is brought under management, while overall headcount has declined in many companies over the past 15 years. In the busy lives of category managers something, it seems, has to give and often it is the category research that?s not always done as well as it could be.

'The average purchasing person's skills in this area have grown over the past five years but there's still a tendency to do a Google search or to say 'I've been buying this for 20 years; of course I know the market?,' says Alan Day, managing director at State of Flux, one of a number of companies that now offers such services on an outsourced basis and lists Morgan Stanley among its clients. He estimates that the average public company should undertake detailed category research in around 30 top categories at least once a year, with anything between 10 and 50 one-off projects in others.

The advantages of having such up-to-date information on categories are manifold. The most obvious is being better prepared when it comes to supplier negotiations by understanding their cost pressures, financial health and general trends in that market.

'This is needed most where markets are fast-changing and categories are going through tremendous change, as opposed to mature categories where the need for research is much less,' says Gautam Singh, managing director of outsourced provider the Smart Cube.

Information such as this can also serve to check that current suppliers remain the best option, both in terms of price and long-term stability. Herman says:

'Part of your strategy might be to consolidate 300 vendors down to 30. You will probably have good-quality data on the suppliers that you already use and the categories you use them in but, as part of category planning, a buyer needs to keep abreast of who the other main players are and whether you're missing some of them.'

CPOs or senior buyers can glean additional insight into vendors' capabilities, which could result in better prices across several categories. 'If you're a facilities buyer, you might use one vendor for your building management system that might also be used for IT,' says Herman. 'But the buyer who's buying IT may not be aware they're using that vendor in another part of the business. Rather than looking at it category by category, you can look at it by vendor across multiple categories and also take into account holding and subsidiary companies' offerings.'

Better understanding a specific market can also allow CPOs to decide their pricing strategy. Anurag Dixit, vice-president of marketing at Zycus, which started offering outsourced market research in 2007, cites a company that was buying a non-critical product at spot prices but didn't notice the upward price trend in the market. Failing to fix a price when it had the opportunity cost it $10 million. 'That's when organisations realise they need this kind of ongoing analysis and intelligence,' he says.

Having such information can also help in the ongoing battle to justify to internal stakeholders why a certain course of action is required. 'The credibility of procurement with its internal customers is far enhanced when category managers are able to come across not only as experts but also with all the facts and updated market intelligence at their fingertips,' suggests Singh.

External assistance

For those companies that want to move beyond the traditional set-up under which category managers take responsibility for such in-depth information, there are three main options: outsource it to an external provider; set up an in-house or offshored facility; or a combination of the two.

Over the past six years, a number of dedicated providers such as State of Flux, the Smart Cube or Beroe have set themselves up to offer customised research to procurement organisations. 'If you were buying a commodity 15 or 20 years back, the commodity would typically be affected by other companies in a 500-mile radius,' says Vel Dhinagaravel, CEO of Beroe. 'Now it's being affected by companies that are 10,000 or 15,000 miles away and that?s when this information becomes absolutely critical.'

'Information is more critical within spend management and the needs are constantly changing,' adds Ted Kondis, vice-president of consulting for Europe at Ariba, which also offers such services through its Knowledge Program. 'The economy is driving a need to find additional sources and to really understand the raw material make-up of a specific commodity. It's not about running an e-auction, which it was four or five years ago.'

The main attractions of an outsourced provider are that organisations can use these services as and when they need them and that providing such tailored information is a speciality for these companies. Procurement consultancy Efficio has used the Smart Cube to deliver customised research for about 20 clients since 2002.

'Using an outsourced provider frees our consultants to do the more strategic work for clients,' says Alex Klein, a vice-president. 'Equally for the client, their buyer should be focused on negotiating with suppliers or interfacing with the business. They shouldn't be sitting at their desks doing research.?

He even goes as far as to suggest that market intelligence is 'probably the most outsourceable element of the sourcing process.'  It is also normally much cheaper than building an in-house team.

'In most instances there's no real competitive advantage [in doing it in-house],' reckons Jim Abery, vice-president of procurement practice at Capgemini. 'All you're doing is bearing an overhead, whereas other organisations are buying better information.'

Cheaper access

Not all providers, though, offer such customised reports. US-based Denali Intelligence provides low-cost access to hundreds of standard category reports, from steam turbines to glossy paper and cement. John Evans, managing partner, explains: 'We're like a shared service, so our pitch is that it's a lot more cost-effective. We sell reports at a much lower cost than it takes to create them because we hope to sell them to multiple clients.'

Inevitably, though, there can be huge variances in terms of quality of information, particularly as many providers use researchers based in low-cost countries. According to Indy Banerjee, a director at outsourcing consultancy TPI, India, where researchers for the Smart Cube, Zycus and Beroe are based, accounts for 60-70 per cent of the market for outsourced supply intelligence, followed by China with approximately 20 per cent and then the likes of Eastern Europe, Russia and the Philippines.

Banerjee advises organisations to ask potential providers what experience they have in terms of their client base and nature of the work. 'If you find someone who hasn't done it before or who has high attrition or doesn't have rigid knowledge management policies, that would be a definite watch-out to not include that provider in the long list,' he says.

Other companies, meanwhile, have stuck with the in-house route. Since 2006, BP has been developing a dedicated procurement research team for its refining and marketing businesses, based in Chicago. Greg Dyer, market intelligence manager, believes it has given BP a competitive advantage by enabling the company to react to the market faster than competitors, and has even generated additional projects as a direct result of better market information.

'I don't know if an outsourced company could do that; you have to have an in-depth knowledge of our business and categories,' he says. 'The speed and quality of information is much improved versus an external company.'

Other benefits of keeping research in-house, in Dyer's view, include the ability to prioritise some research projects over others and taking analysts into meetings with business stakeholders.

'The increase in the amount of value we've been able to get in the past year has been substantial versus what we had historically seen,' he says.

However, BP also uses external providers for specific projects and Bill Knittle, global procurement director, believes that in time more secondary research may be carried out externally while primary projects remain with the in-house unit. The latter is likely to expand from its current total of six staff, offering services to other procurement departments within the company and taking on people elsewhere in the US and UK.

Intelligent analysis

Back in the mid-1990s, Procter & Gamble (P&G) decided to tackle the intelligence issue by training all of its buyers in industry analysis as one of 12 core competencies. It did look into outsourcing this in the late 1990s but couldn't find a suitable partner. Now it has started pilot projects with large consultancies and smaller specialists with a view to re-evaluating the situation.

Developing its own in-house facility is also a possibility, says Rick Hughes, vice-president of global purchases. 'My leadership team has a different business model of centralising some of this work into a small group of consultants, whether they're P&G born-and-bred or imported from outside, who do nothing but industry, market and supplier analysis.

Maybe that's a different way for us to do that, and even some competitive benchmarking' he says. 'But the other thing you have to keep in mind is that this is part of being a buyer. I don't know if we'll get to a stage where we say it's no longer a core skill.'

Building an in-house team isn't without its drawbacks, though. As Capgemini's Abery warns: 'If you have a fairly mobile labour market it can be a disaster, because the moment an individual walks out of the door so does your knowledge and expertise in that particular area of buying.'

Offshoring research capabilities to countries with lower labour costs is another option, although this is only really viable for companies that already have a captive research centre overseas, says TPI's Banerjee. He estimates that the minimum number of staff needed to justify such a centre is 500, whereas a dedicated procurement team would usually be around 25-30 people. 'But if they already have a centre then the attraction of building that is very high,' he says.

A recent study by TPI suggested that this option was likely to become more popular in the future. 'Companies often prefer to keep processes that include core intellectual property and sensitive data in-house,' it said. 'In an offshore model, they are more likely to use their own subsidiary (or captive) than rely on third-party outsourcers.'

However they choose to go about it, it seems that companies are gradually realising the importance of such information and recognising that over-stretched category managers may not be best placed to deliver it. For example, Phillip Duncan took over as CPO of the pharmaceutical giant Novartis in April and plans to tackle this issue once he has set up a traditional category management structure.

'As we start to employ more global category managers, part of their demand on us will be a good source of intelligence and market information,' he says. 'We can either leave it to them and get there in the end or bring in new processes and systems that will make life easier for them. Whether it's insourced or outsourced, we'll probably do a study in due course and whichever is the appropriate way to go we'll follow.'

Duncan adds: 'In my position as a CPO looking to transform the procurement organisation, it's not the number one priority. But, at a buyer and category manager level, having good data and market intelligence is fundamental to doing the job properly.'


Forewarned is forearmed

When BAE Systems centralised its indirect procurement department in the UK in 2001, it quickly became apparent that detailed category information would be needed across roughly 50 spend categories to make the move a success.

Initially, the analysis was carried out by an in-house team of four graduates who tended to be new recruits. John Champion, head of indirect category management, explains: 'One of the challenges was retention of the team, as in a year or two they would, quite rightly, want to progress and develop their careers.'

Having already outsourced an annual indirect spend of £200 million, including categories such as technical labour and travel, to Xchanging, BAE is not averse to using external providers on the indirect side. So in 2005, it approached the Smart Cube, initially on a 12-month trial, with a view to handling the research.

Over the past two years, it has commissioned reports on over 50 categories, which account for about £350 million a year, as well as a number of specialist areas, including some direct categories. It has also undertaken projects on behalf of Xchanging, which has conducted its own research on the categories it handles for BAE.

One of the main benefits, says Champion, lies in being able to articulate category strategy to internal customers. 'For example, we were telling people two or three years ago that we should be buying forward on electricity and giving the analysis to substantiate these recommendations,' he says.

He admits, though, that there was a 'real learning curve' about working with people from different cultures. 'I understand now how I have to write out the specification clearly for them to be able to produce a good report, effectively working as an interface for them.'

Nick Martindale ( is deputy editor of CPO Agenda