Utilizing an Intelligent Filtering Platform to Enhance Contract Performance White Paper

Ottawa, Canada
2009

Utilizing an
Intelligent
Filtering Platform
to Enhance
Contract
Performance
White Paper

A Knowledge Leadership
Publication By
Procurement Insights Author
Jon Hansen

Utilizing an Intelligent Filtering Platform to Enhance Contract Performance

Table of Contents

EXECUTIVE SUMMARY: CONTRACT MISALIGNMENT . . . ..........................................2
GLEICHER’S FORMULA.. ……….. ………………………………………. . . . . ……………4
THE ROOTS OF NON-COMPLIANCE? . . . ............................................................................5
THE OTHER SIDE OF THE NON-COMPLIANCE COIN......................................................6
WHEN NON-COMPLIANCE IS JUSTIFIED............................................................................7
WHAT IS THE SOURCEX INTELLIGENT FILTERING PLATFORM? . . . ......................9
A FINAL POINT ……………………………. ….………………………….. …………………10
INTERNAL COMPLIANCE AND SUPPLY BASE SYNCHRONIZATION . . . .................12
ABOUT STRATEGIC RELATIONSHIPS SOLUTIONS INC. . . . .......................................13

Appendices

APPENDIX A ...............................................................................................................................15

1


Executive Summary: Contract Misalignment and Non-
Compliance

A 2004 automotive study by the Power Transmission Distributors
Association (PTDA) found that of the 45 percent of their membership’s
U.S.-based customers who have contracted vendors, 33 percent of all
purchases were from non-contract suppliers. In Canada, the number of off-
contract purchasing reached a staggering 79 percent.

If results such as the ones referenced above were the exception to the rule,
then one might not be sufficiently alarmed to question the viability of
current contracting methodology. However, and as demonstrated by the
continually high rate of supply chain/e-procurement initiative failures of
which contract creation and compliance management is a core element, the
PTDA result is not an exception but the rule.

The premise behind a purchasing contract is of course simple, even with the
most complex acquisitions. Specifically, contract management or
administration can be summarized “as the process of systematically and
efficiently managing contract creating, execution, and analysis for the
purpose of maximizing financial and operational performance and
minimizing risk.”

These are certainly reasonable objectives which form the basis for a sound
procurement practice model. Especially in an increasingly globalized
market in which multiple supply chains and foreign or international sources
of supply extend relationships beyond a traditional regionalized supply base
or cluster. In fact a 2007 study found that one of the primary driving forces
behind improved contract management is the mitigation of risk.

So while the merits for pursuing an effective contracting process within the
modern supply practice is not in dispute, why then do organizations
“continue to use inefficient, labor intensive contract processes.” And even
with the introduction of “automated” contract management systems that
include the utilization of the overly simplistic MS Office products Word and
Excel to what one source called “home grown, rudimentary web tools” like
ACT! or Microsoft Share Point to the purportedly comprehensive ERP-
based offerings from traditional licensing model giants Oracle and SAP, the
high rate of initiative failure persists across all platforms.

2


Referencing the automotive industry once again, you merely have to point to
the failed Covisint initiative to see that neither purported technological
superiority or the corresponding level of stakeholder resources and expertise
is a guarantee for success.

This again begs the question, if as industry experts claim, effective contract
management which includes the entire contract life-cycle, “from
identification of a need, through negotiation, agreement, monitoring, and
close-out,” is so critical, then why do the majority of programs struggle with
non-compliance and stakeholder resistance?

Based on extensive research it is our position that contract creation and
compliance isn’t a simple matter of picking the right clause from a buffet of
legalese, nor is it an exercise that originates with the simple automation of
an antiquated RFx process that fails to engage what has become a largely
cynical supply base.

To be effective, the contract life-cycle management process must be based
upon true market intelligence which is subsequently filtered through a
dynamic and perpetually expansive integration mechanism that
simultaneously links the diverse attributes of contract stakeholder
capabilities and interests.

The purpose of this paper is to delve into the core elements of how effective
contract performance is realized through the utilization of emerging
process-centric technologies developed by organizations such as Strategic
Relationships Solutions Inc. (SRS Inc.) and in particular their SourceX
contract life-cycle management solution.

3


Gleicher’s Formula

“Gleicher’s Formula “illustrates that the combination of organizational
dissatisfaction, vision for the future and the possibility of immediate, tactical
action must be stronger than the resistance within the organization in order
for meaningful changes to occur . . .

. . . a resistance to change is often referred to as the cost of change. It is
then subdivided into the economic cost of change (monetary cost) and the
psychological cost of change. What this tries to demonstrate is that even if
the monetary cost of change is low, the change will still not occur should the
psychological resistance of employees be at a high level and vice versa.”

From Wikipedia
Formula for Change Article
With References to: Beckhard, R (1969) and Smith, A. (1998)

4


The Roots of Non-Compliance?
I have written extensively about the many factors that lead to non-
compliance. A good segment of my findings were based on research that
was funded by the Government of Canada’s Scientific Research and
Experimental Development (SR&ED) program which centered on the
identification of two primary commodity characteristics, historic flat-line
and dynamic flux, the latter of which is not conducive to a contractual
purchasing agreement.

What was interesting about the identification of the two commodity classes
is that they helped to expose the misalignement of contract utilization in the
procurement process. Specifically, there was mainstream acceptance that
the broad application of a contract creation/compliance management
program could be applied across an entire enterprise’s spend and achieve
significant savings.

Referencing once again past research on commodity characteristics and their
impact on proper spend alignment here is a brief overview of the difference.
between a historic flat-line and dynamic flux commodity.

A historic flat-line commodity is characterized by a static price performance
where there are minimal cost fluctuations over an extended period of time.
It is further accentuated by a “narrow” floor to ceiling price chasm.

Direct Materials and “specialty” products including scientific and medical
equipment commonly exhibit historic flat-line characteristics. (It is
important to note that there are no absolutes and therefore temporary
exceptions or what I refer to as circumstantial spikes can occur from time-to-
time. One example is from the mid-nineties with computer memory chips.
Taiwan is a primary source for memory chips, so when that country exerted
its independence from China, the Chinese Government decided to conduct
missile practice over the tiny island. Memory prices, albeit for a relatively
short time, went through the roof. This is the exception or spike to which I
had referred. That said the findings which lead to the classification of a
particular commodity are based over an extended period of time.)

Usually accounting for 80 percent of an organization’s entire spend and 10
percent of its procurement cycle time, historic flat-line commodities are best
served by a centrally negotiated contract.

5


Besides providing an ability to leverage volume discounts, contracts that are
structured around this classification of commodity ensure consistent levels
of quality, reliable delivery and the required level of collaboration between
stakeholders of what is usually a complex acquisition.

The Other Side of the Non-Compliance Coin
Gliecher’s Formula, and in particular the observation that “even if monetary
cost of change is low, the change will still not occur should the
psychological resistance of employees be at a high level and vice versa” is
noteworthy.

This suggests that even with financial data supporting a contract’s creation,
non-compliance can be a matter of buyer (and even supplier) resistance for a
variety or reasons.

In the case of buyer resistance, which can and in many instances is a
significant issue with increasingly decentralized supply chain practices, there
are a number of factors that lead to non-compliance.

In a 2007 article I wrote titled Double Marginalization and the Decentralized
Supply Chain, I made reference to a Robert Schenk paper regarding the
characteristics of a “downward sloping demand curve” which occurs when a
“buyer must expend time and effort to discover the prices or characteristics
of a product (or service).” I concluded that the prospect of making this level
of expenditure usually means that “once the buyer has picked a seller – even
a non-contracted supplier – they will stay with that supplier as long as they
find the exchange satisfactory.”

And while there are certainly instances when resistance on the part of the
buyer is justified (the circumstances for which we will cover in the next
section), generally speaking commodities that consistently demonstrate
historic flat-line characteristics are best served through the creation of a
contract.

Non-compliance in this instance is counter-productive on a variety of levels
including financially as buyer unwillingness to transition from existing
supplier relationships under the downward sloping demand curve scenario
almost always fuels “supplier motivation to increase prices.” An interesting
side note is that a misaligned contract, that is a contract that is created for the

6


procurement of dynamic flux commodites has the same effect, that being a
substantial premium over market price.

In the latter instance, giant retailer Best Buy paid a 23 percent premium over
market price on products that were analyzed through a market verification
exercise. The Department of National Defence in Canada paid a premium of
157 percent over market price under a multi-year contract.

The key according to Gleicher is to “isolate the actual problem areas of
change and develop unique strategies specifically designed to resolve the
correct form of resistance.

A key component of a change strategy should center on the process and
technological expertise that is provided by SRS Inc. and their SourceX
platform.

Leveraging the unique and totally indigenous expertise within the SRS
organization, SourceX creates and then verifies contract utilization and
performance through dynamic data capture points and an intuitive user
interface that truly simplifies the procurement process at the operational (re
buyer) level.

In essence, by addressing the very real buyer concerns that are associated
with the downward sloping demand curve, SourceX removes an important
barrier to adoption and ultimate compliance.

When Non-Compliance is Justified
While commodities displaying a historic flat-line tendancy are ideally suited
to being procured through a centrally negotiated (and managed) contract,
commodities that demonstrate a dynamic flux characteristic are ill suited to
this type of purchasing mechanism.

A dynamic flux commodity is characterized by a dramatic and consistent
fluctuation in cost that is mirrored by a steady downward price trend over an
extended period of time. The unstable price performance is accentuated by a
wide (usually significant) floor to ceiling price chasm.

Indirect Materials and in particular MRO products commonly exhibit
dynamic flux tendancies. On average commodities that are classified as
being dynamic flux account for approximately 20 percent of an

7


organization’s overall spend, and 90 percent of its procurement cycle time.
Individual commodities within the Indirect Material ORM classification tend
to exhibit both dynamic flux and historic flat-line characteristics.

The reason that the identification of commodity characteristics is an
important breakthrough in spend analysis is that prior to their discovery, the
ability to accurately forecast pricing performance was a major factor in
process and technological misalignment.

This ultimately resulted in what is referred to as a “pull through” strategy
where the same processes and related technologies utilized for historic flat-
line (Direct Materials) procurement were also being utilized for dynamic
flux (Indirect Materials) acquisitions.

The difference between the two classifications is significant as the perceived
volume discount savings associated with Direct Material purchasing were all
but negated within a very short period of time, sometimes as little as a few
days. This is what fueled buyer resistance to comply with centrally
negotiated contracts in that they could usually pick-up the phone and with a
single call obtain a substantially lower price from the local supplier than
they would from the enterprise-wide contract.

Under these circumstances, achieving buyer compliance is a virtual
impossibility as demonstrated by the PTDA study numbers regarding the
high level of off-contract purchasing. Ultimately, off-contract purchasing
undermines the entire procurement process as suppliers who take the time
and inccur the expense of becoming an approved source through a
negotiated contract rarely realize the promised revenue.

This is where the SourceX solution shines, as it simplifies the complexity of
today’s diverse supply practice through an intelligent interface that both
measures contract compliance while simultaneously confirming the veracity
of individual agreements through a real-market verification process.

In reality, what SRS’ SourceX technology delivers is an adaptable platform
that ensures the on-going, real-time best value performance of contractual
spend by identifying and removing barriers to adoption. In short,
compliance is not an issue when the organization’s purchasing mechanism is
properly aligned with its spend. This includes the proper management of the
entire contract life-cycle from the identification of a need, through
negotiation, agreement, monitoring, and close out.

8


The results speak for themselves in the form of increased contract
compliance rates, a reduction in revenue leakage and an overall
improvement in contract life-cycle management (CLM) performance
through significantly reduced cycle times.

Ultimately, what SourceX has done, is remove the need for the front-line
buyer to expend the time and resources to “research” all elements of a best
value purchase. Based on Schenk’s paper and the effects of the downward
sloping demand curve, this was a significant obstacle to overcome in terms
of contract compliance and performance. And the SourceX Intelligent
Filtering Platform successfully removes that barrier by creating sustainable
stakeholder confidence in the contract life-cycle management process.

What is the SourceX Intelligent Filtering Platform?

The SourceX Intelligent Filtering Platform can be summed-up in a simple
statement . . . it is complexity simplified.

Structured around the Software as a Service (SaaS) or On-Demand model, in
which clients have the option of self-hosting or hosting the service through
an external service provider, the innovative force behind the SourceX
platform is Strategic Relationships Solutions Inc. (SRS Inc.), who has been
in existence since 1999.

Leveraging the organization’s extensive knowledge and expertise in the area
of “complex multi-stakeholder projects and programs,” the ability of the
SourceX platform to seamlessly “integrate functional views for the complete
team,” involved in the “sourcing and management of the acquisition
process,” is an essential element of a sound and adaptable procurement
practice.

Referencing the SRS organization’s indigenous Knowledge Library Module,
the SourceX Intelligent Filtering Platform drives sustainable, “best-value”
decision making at all levels of the enterprise. This in turn substantially
shortens the sourcing cost timeline while ensuring that organizational “Best
Practices” (including contract compliance) are adhered to on a consistent
basis.

9


Referred to as the “Next Generation Sourcing Service,” SourceX focuses on
several key sourcing and relationship management functional objectives
including;

 structured process and automation for RFP planning, evaluation, bid
preparation, contract and service management
 incorporation of knowledge, expertise, content and embedded best
practices processes
 reduced procurement and management costs
 reduced risk for bidders (suppliers)
 shortened procurement cycle times
 provision of an intuitive and secure web-based platform
 accessibility to an integrated User Group Forum and related support
services

Collectively, the SourceX Intelligent Filtering Platform is a sustainable,
intuitive sourcing mechanism that is always gathering and synthesizing data
– in essence learning with each transaction, the best way to maintain process
integrity in a rapidly evolving and increasingly complex global enterprise
supply chain practice.

A Final Point

As the migration of traditional ERP-centric license model vendors such as
Ariba continues, it is important to remember that the SaaS or on-demand
world is more than a simple pricing model.

The evolution of on-demand solutions by organizations like SRS Inc. is
based upon an approach spanning many, many years in which adaptability
within the framework of a synchronized versus sequential architecture is the
key characteristic of a dynamic platform such as SourceX.

Therefore, it is important to realize that SaaS or on-demand organizations
are technologically more seasoned to deliver sustainable results on a cost
efficient basis within a significantly shorter time period than traditional
license model vendors.

10


While the “leading” or “cutting” edge moniker usually assigned to SaaS
organizations has often been equated with an increased risk from a less
experienced vendor, in the SaaS world it is in fact a symbol of proven
excellence.

11


Internal Compliance and Supply Base Synchronization

How important is effective internal collaboration and compliance? Just ask a candy company in the
U.S. mid-west. As the manufacturer of a number of leading brands, the organization grew
dramatically in a very short period of time through a serious of acquisitions. Unfortunately, an
extemporal supply base was a by-product of the transactions leaving the acquiring company with a
highly suspicious, deeply segmented group of suppliers.

The biggest challenge as expressed by a senior procurement manager from the parent organization
was convincing the former suppliers of the acquired companies that becoming part of the larger pool
would expose them to opportunities for increased sales.

The suppliers did not buy the “increased opportunity” mantra and as a result, the transition process
was challenging as the supply base remained deeply segmented.

What is worth noting is that the degree of collaboration between the different purchasing organizations
was not clearly established from the beginning. This only served to fuel rather than douse the internal
divisional fires resulting in both a practical and operational lack of cohesiveness and ultimately an
effective consolidation of spend across the entire enterprise.

The end result was a “territorial” struggle that manifested itself in a divided supply base which
ultimately had a significant impact on program (and contract) compliance.

12


About Strategic Relationships Solutions Inc.
Strategic Soultions Relationships Inc. (“SRS”)
(http://www.srscan.com/Default.aspx) is a knowledge-based, customer-
focused, strategic services and relationship management firm specializing in
achieving results for clients through sustainable business relationships.

SRS was established in 1999 with the vision of enabling clients to succeed in
the execution of their organizational strategies so that they might achieve the
desired outcomes and benefits of their efforts while mitigating the structural
risks that so often imperil complex multi-stakeholder projects and programs.
Since then, SRS has become a trusted partner of choice to many Government
organizations, Health Sector organizations and Global 500 companies for
innovative business transformation, strategic management and alignment
services, strategic sourcing, collaboration management and sustained benefit
realization.

On the cutting edge of professional management consulting services and
solutions such as SourceX, SRS focuses its strengths and depth of
experience on organizations and sectors that are taking a leadership role in
modernizing the way they do business and how they provide services to their
clients and/or stakeholders. From vision and strategy development, project
feasibility analysis and strategic project management, to sourcing and
managing strategic partnerships, SRS provides you with the best people, best
tools and proven processes to help you achieve your expected outcome.

© Procurement Insights 2008-2009

13


About the Author

Jon Hansen has studied and written extensively about e-Procurement and the
changing face of procurement around the globe. In addition to being a
highly acclaimed international speaker, his Procurement Insights Blog
reaches 300,000 syndicated subscribers each month worldwide, and is
currently available in several languages. He has written more than 200
articles and papers on subjects ranging from supply chain optimization and
the utilization of agent-based modeling in the software development process
to the evolution of sustainable purchasing practices and the impact of
traditional ERP-centric implementation methodologies on the high rate of
supply chain initiative failures. Funded by the Government of Canada’s
Scientific Research and Experimental Development (SR&ED) program Mr.
Hansen’s work in both identifying the existence of Commodity
Characteristics as well as defining and recording their impact on “best
value” purchasing practices represented a seminal breakthrough that led to
the establishment of new theories surrounding the practical utilization of
synchronized platforms in achieving sustainable coordinated savings and
overall process efficiencies.

Other white papers by Jon Hansen:

The Greening of Procurement: How Social Consciousness is Re-Shaping
Procurement Practices

Preserving Supply Base Integrity During an Economic Downturn

Yes Virginia! A Profile in Excellence

Riding the Crest of a New Wave: How the Original SaaS Companies Have
Gained the Upper Hand

Using Business Process Mapping as a Communication Facilitator in the
Global Enterprise

To obtain copies of the above referenced white papers, or to inquire about
Jon’s availability to speak at your next conference or seminar contact
Jennifer Cameron at jenncameron@sympatico.ca, or 819-986-8953.

14


Utilizing an Intelligent
Filtering Platform to
Enhance Contract
Performance
White Paper
Appendices

15


APPENDIX A

Pages 2, 3 (Contract Life-Cycle Management);
http://en.wikipedia.org/wiki/Contract_management#cite_note-1, Wikipedia
(April 17, 2009)

Page 4 (Gleicher’s Formula Reference);
http://en.wikipedia.org/wiki/Change_management_(people), Formula for
Change Article - with References to: Beckhard, R (1969) and Smith, A.
(1998) Wikipedia (April 17, 2009)

Page 5 (Scientific Research & Experimental Development “SR&ED”
Program Reference); http://www.cra-arc.gc.ca/sred/

Page 5 (Historic Flat-Line/Dynamic Flux Reference);
http://procureinsights.wordpress.com/2007/07/04/dangerous-supply-chain-
myths-part-7/, Dangerous Supply Chain Myths (Part 7), Procurement
Insights (July 4, 2007)

Page 6 (Double Marginalization Reference);
http://procureinsights.wordpress.com/2007/08/09/double-marginalization-
and-the-decentralized-supply-chain/, Double Marginalization and the
Decentralized Supply Chain, Procurement Insights (August 9, 2007)

16

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