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back to index backASIAtalk March,  2006

Our Take: Analyzing Aberdeen’s Take on Middle Market Sourcing

This is the first in a series of essays that I'll be writing on the state of Spend Management in the middle market. Since "middle market" is one of those loosely defined phrases, we’ll take a moment to plug in our simplified definition based on sales revenues. Upper Middle Market firms have revenues from $500m–$1b. Middle Market firms have revenues of $251m–$499m and Lower Middle Market firms have revenues of $10–250m. But numbers alone are boring. Perhaps what is most exciting about the Middle Market these days is the fact that everyone seems to have taken notice. When it comes to Spend Management, I believe that there are huge opportunities in the Middle Market for vendors, analysts, consultants and most important, Middle Market companies!

For example, Aberdeen Group just published a report titled Strategic Sourcing in the Mid-Market Boom: The Echo Boom in Supply Management. I believe that it is a solid analysis of the state of the Middle Market. Aberdeen hits the mark when they discuss the reasons why companies deploy sourcing programs and the hindrances to adoption and success. Aberdeen also strikes gold when they talk about the lack of formal sourcing procedures in the Middle Market, the lack of specific commodity skills, the insufficient systems and the various approaches Best In Class companies have taken to improve their sourcing success.

Enough praise. I still take issue with a few areas the study overlooks. What the analysis does not take into consideration are the nuances of direct materials sourcing practices across the range of "Middle Market" companies. Lower Middle Market firms, for example, look and feel very different from their Middle Market and Upper Market brethren. How are they different? Well for one, purchasing or using sourcing "systems" is probably priority 847 on their list of strategic initiatives. These companies are busy handling day to day purchasing transactions and while "systems" would be a nice to have, deep sourcing know-how and commodity expertise are more sorely needed. The complexity of the part data is also much simpler by comparison. Where an Upper Middle Market company may need to conduct a spend analysis for tens or hundreds of thousands of part line items across multiple disparate systems, Lower Middle Market firms may only have 10,000-20,000 part line items coming from one or possibly two systems (in some cases, "system" is an exaggeration—the data might come from a rusting old AS-400 box behind an ashtray in the smoking room).

In other words, it's often times easier to gather data from smaller organizations, but virtually all lack the skills, procedures and sourcing sophistication of larger middle market firms. "Putting out fires" is a way of life for most small and Lower Middle Market companies. In fact, one company that I have worked with processed 32 purchase orders a day with only 1 FTE. You can be sure this firm is not conducting regular spend analyses, applying an 80/20 rule to categories to strategically source or even using basic eRFX or reverse auction capability.

Speaking of reverse auctions, I have found that many Lower Middle Market firms are hostile to the notion. And I don't entirely understand why. Most Lower Middle Market firms still have tremendous savings opportunity because they have rarely introduced any competition into the sourcing process in the past. I'd say that in 90% of cases, their incumbent suppliers are taking advantage of their ignorance when it comes to benchmark pricing. This is a shame, because it has been my observation that Lower Middle Market firms typically have anywhere from 3-5 categories that are large enough to source using competitive negotiation technology (e.g., reverse auctions, optimization, etc.). Perhaps the greatest irony is that Lower Middle Market firms are only now beginning to take advantage of these approaches, despite the fact that their customers, Fortune 500 firms, have been requiring them to participate for years. And don't ever tell me that small organizations can't use reverse auctions. I've personally run reverse auctions for a $5 million industrial company with great results, and received little or no push back from their suppliers.

It's my view that the majority of Middle Market firms are still in the womb when it comes to procurement. In other words, there's an entire world of opportunity out there. The good news is that a few early adopters are beginning to realize results. And with Aberdeen covering the middle market opportunity, company interest will only increase. But a few third-party analyst reports can't hit on all the nuances of the area. As I've seen first hand, sourcing in the Middle Market is a different animal all together. In future essays, I’ll continue to discuss why.

Participate in Aptium Global’s Lean Sourcing Diagnostic Survey” and receive a customized report outlining cost savings opportunities.   To participate, register by clicking here.

Source: Aptium Global - GAI

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