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Dana Gardner: Hello, and welcome to a special BriefingsDirect podcast, coming to
you on-location from the Ariba LIVE 2010 Conference in Orlando. I'm Dana Gardner, Principal Analyst at Interarbor Solutions.This podcast is a presentation of a May 25 stage-based panel event on the implications of cloud computing for procurement, supply-chain management, and a host of other business functions. For those of you unable to attend the actual conference, please now listen to this lively and informative panel by a group of noted industry analysts.
Here is the moderator of our discussion, Tim Minahan, Chief Marketing Officer at Ariba.
Tim Minahan: When discussing heady topics like the cloud, procurement, and finance, and
looking at the future of business-to-business (B2B) commerce, we thought it important for you to hear from the experts. So, we have assembled a panel of the leading analysts, folks that you turn to to benchmark your performance, uncover best practices, and make IT buying decisions.I'd like to welcome our panelists now: Mickey North Rizza from AMR Research (a Gartner company), Chris Sawchuk from The Hackett Group, Robert Mahowald from IDC, and Bruce Guptill from Saugatuck Technology. Welcome, all.
Let's spend a little more time introducing ourselves. We'll start down here, ladies first. Mickey North Rizza of AMR Research, tell everyone a little bit about yourself and what areas you cover at AMR.
Mickey North Rizza: Hi, everybody, thanks for attending today. We're looking forward to this panel discussion with you. I cover the sourcing and procurement area from the AMR Research, or what we call the AMR Supply Chain Leader, side of Gartner. I've been there four-and-a-half years, almost five, and prior to that, I spent 23 years in the line of business of sourcing and procurement across many industries. So thanks, Tim, for having me today.
Minahan: Thanks for being here. Robert.
Robert Mahowald: I'm Robert Mahowald from IDC and I'm happy to be here today. I've been at IDC for about 12 years. Before that, I worked for the federal government, doing sourcing of applications and building technology simulations for the Department of Defense.
At IDC, most analysts are functional analysts. They do collaboration, supply chain, or enterprise resource planning (ERP). I am part of a group at IDC that does software business solutions. We look across the board at pricing, licensing, delivery models, and other aspects of operationalizing software for customers.
Minahan: Chris.
Chris Sawchuk: I'm Chris Sawchuk. Good morning. I'm a managing director and Global Procurement Practice Leader at The Hackett Group, a strategic advisory firm. We do a lot of work around research and advisory services, as well as benchmarking of functional performance, not only in procurement, but other areas as well.
Minahan: Bruce, welcome.
Disruptive technology
Bruce Guptill: Thank you, Tim. Good morning, everybody. I'm glad to be here. Saugatuck
Technology is a research consultancy that looks only at disruptive technology influence and how it changes the way vendors and user companies do business. I've been with the company for about eight years. Prior to that, I was a VP and research director at Gartner with electronic commerce, benchmarking, looking at the return on IT, and of course total cost of ownership (TCO) -- all the fun financial things.I go back in the business to a different century, an earlier decade, where I started out in the channel, trying to help people find out how to buy and sell technology and get the most value out of it.
Minahan: The global economy really does seem to be finally emerging from this recession. I
know it's a bit slower in Europe, but companies have really taken a lot of costs out of their business. They're taking cost out in the form of reducing infrastructure, letting headcount go, and reducing IT investments. Many CEOs and CIOs have signaled, "We're not going to hire a lot of that back. We're really focused on automating our processes and driving up productivity."As we enter this "new normal," how do you see operating IT models changing over the next few years? Bruce, maybe we'll start with you.
Guptill: The first thing is to figure out how to handle this cloud thing. It's the single most disruptive influence that we've seen in not just IT, but how IT is bought, used, paid for, and how that affects how everybody does business. So how is it accounted for? Who has responsibility for managing what aspects?
If you have some of it on-premise and some of it out in the cloud, who is responsible? How is it managed? How is that budgeted for?
If you have some of it on-premise and some of it out in the cloud, who is responsible? How is it managed? How is that budgeted for? It changes the way we operate as a business, because it changes the way we spend, the way we buy, and the way we manage. It's very, very disruptive, and policies and practices really haven’t caught up yet to the reality, and we're not getting a breather. The change is accelerating.
Minahan: True, very true. Chris, what are you seeing out there?
Sawchuk: Well, there are a couple of things. I'm going to answer the question from two perspectives and I'm going to share some insights with you from some key issue studies that we've done, both with procurement executives as well as IT executives.
From an IT standpoint, when we look at what has happened to operating budgets over the last year, the IT budget has been cut pretty significantly. As we look further, the expectation is that it will come back slightly. So, there is a real cost control focus from an IT perspective.
The other thing is that we asked these IT executives, "What's top of mind as you are looking out into 2010 and a bit beyond?" They told us two things. Number one, in a most cited area. was that they were going to manage demand and dealing with the demand for IT services within their organizations better.
Second, was driving more agility into the way they actually deliver those services back to the organization. So, from an IT standpoint, it's around continued cost control, demand, and agility.
Declining costs
When you look at it from a procurement standpoint and you look at operating budgets, over the last 15 years, the cost of procurement as a percent of spend, which you can relate to the operating budget, has declined about 23 percent overall. It's even a little bit greater for world class organizations.
More importantly, when you look at these world-class organizations, they actually invest in technology 29 percent more on a per procurement full-time equivalent (FTE) basis. This has actually been one of the drivers of the efficiency gains that they have been able to deliver over the last decade and a half.
Now, when we ask the procurement executives what are they focused on going into 2010 from a technology standpoint, the number one area is just utilizing better the technology investments that they have already made -- digesting them. So, it's a lot of the basics -- cleaning up our master data and just getting more utilization on our eProcurement, eSourcing types of tools in the organization.
But there are a couple of emerging trends that are occurring in the most progressive procurement organizations, in three areas. One is around collaborative technologies. Why is it so difficult to do this in business, when it's so easy with Facebook and all that type of stuff in the non-business type of world? It's not just externally that this applies, but internally as well.
The cloud offers a way to do that a lot more quickly, for less cost, in a way that is still as secure and authenticated as it would be in my IT shop.
Number two, around better management of the knowledge and intelligence across the organization, structured, unstructured, internal, and external types of information.
And lastly, driving more agility into the procurement service delivery model, which includes the technology tools.
Minahan: So, new operating models would be more agile and operate and generate more productivity?
Sawchuk: Absolutely. Yeah.
Minahan: Robert.
Mahowald: We can see that, for the last 10 years or so, we have seen lines of business start to
get more acclimated using software-as-a-service (SaaS) services. Some of those lessons are how those services are delivered and filtered back to IT.Virtualization, automation, and standardization are finding their ways into our IT departments and they're finding ways to do things like reduce the number of physical assets they spend their time counting, and keep them up and running, and rely more and more on external services that can safely provide the functionality that their users require.
And the typical scenario is that, if I am in the line of business and I want to build an application, or I need to have access to an IT service, I've got to go to my IT team. It can often be long and time-consuming to get that thing spun up and tested, kick all the tires, and get it up and running in the environment that is being used.
The cloud offers a way to do that a lot more quickly, for less cost, in a way that is still as secure and authenticated as it would be in my IT shop, and probably done in a way that is much, much more service enabled, for the ultimate constituency I want to serve, my user, the internal user. So, it's a big opportunity.
Minahan: So, looking at alternative delivery models to drive better results at a lower cost. Mickey.
Pent up demand
North Rizza: Basically, what we're seeing is that companies have a lot of pent up demand over
the last couple of years. They haven't been able to change some of their business processes and automate them the way they would like to. What they've been doing is standing back, trying to get more out of their ERP systems or basic business processes. They've had to make a lot of cuts and they're not getting everything they need. What we're finding now is that spending is starting to pick up.We're also finding that companies are looking for alternative deployment models. They're starting to say, "What can I do above and beyond just the technology application? Where else can I look for services and other opportunities that are, one, going to quickly drive value to my line of business buyer, because those are the folks that do the business day in and day out? They're the ones that need to make a difference. And finally, how do I do it quickly, without a lot of disruption, very flexible, and a great investment, but a really quick return on that investment?"
Minahan: So, real value. Chris, let's go back to you. One of the areas that you focus on quite a bit is connecting that physical supply chain to the financial supply chain. So, in aligning procurement and finance, what good examples have you seen where, not only are the functions of procurement in accounts payable (AP) being better aligned, but the concept of developing a strategy around working capital management being applied as well?
Sawchuk: Tim, one of the best ways to answer this question is first to understand that as procurement organizations, we need to evolve our value proposition back to the organizations that we support. And, evolve it past the spend cost savings, our traditional value that we've been delivering, to such things as total cost, shaping the demand, which we have been involved with quite a bit over the last 24 months, and ultimately, value management, and getting ourselves much better aligned with the overall top-line objectives of the enterprise itself.
That traditional value proposition has been challenged over the last several years. We see that spend cost savings as a percent of spend have been declining across the board, with the exception of the last year, where most of us have record returns in terms of our savings back to the organizations. But there is a maturing of the sourcing execution processes. We can’t save ourselves to zero. So, we have to evolve. And, one of the ways we evolve is to augment the value that we're delivering back to organizations, with such things as working capital and getting ourselves to support those types of objectives.
So the question is, are we misaligned or do we feel that we have done everything we can over the last 18-24 months and there’s nothing more to do?
Over the last 18-24 months, most of us have been involved in that kind of thing. We pushed out our terms with the suppliers. We have freed up some cash for our organizations. But, the real question is, did you actually do this in a way and build capabilities in your organizations to sustain those working capital improvements in the long-term?
Why we ask this question and what’s alarming to us is that when we asked CFOs in the broader enterprise, coming into 2010, what was the number one area of focus for them, it was cash. When we asked the same question to the procurement executives and community, it was cost. Cash was number 10. So the question is, are we misaligned or do we feel that we have done everything we can over the last 18-24 months and there’s nothing more to do?
When you look at this, procurement and the data as just being cost focused are fading. We've got to get much more balanced in the way we actually deliver our value, not just cost, but also working capital and other areas as well.
You wanted some examples of what these world-class organizations do around working capital and how they do it well. Number one, they measure it. They bring visibility to it. They put it on their scorecards. They have cash conversions, cycle time matrix, DPO, DIO, etc.
Number two, they manage it and the source-to-settle, purchase-to-pay process.
Number three, they create collaborative communities with procurement, with the business, finance, and treasury, around working capital strategies and objectives.
And, fourth, they actually compensate. We see organizations out there where some of the procurement folks and these folks on these collaborative communities are compensating. Up to one-third of their compensation is based on their achievement of working capital objectives.
Minahan: So, getting better aligned, collaborating better, and then, obviously, that important one of aligning incentives to make sure everyone is growing.
Robert, we talked a little bit before about this new normal, with folks operating leaner and looking at more variable operating models, and this has carried through to IT decisions and how companies are making that. How are companies leveraging the cloud to drive maximum efficiency and effectiveness across all business processes?
Reducing fixed costs
Mahowald: It’s true. If you look at your typical organization and the task of IT portfolio management, all of us, in the last couple of years especially, have been struggling to reduce fixed costs as much as possible, just like we do in our government and in our families. If we could take some of those fixed costs out of our budget and introduce some variables that are based on choices that we can make, that ultimately helps us out as organizations and helps us control our spend.
In many IT organizations, as much as 55 percent of the budget is spent on keeping systems running, and that involves paying for the ongoing license and maintenance and support of software and hardware and all the power pipe cost that it takes to run an IT center.
The ability to reduce some of those costs by outsourcing them in lower-cost subscription models that are operating costs is an enormously helpful transition for many customers. CIOs that we talk to are excited about introducing cloud services and also what we call naked compute services or offsite storage to improve the efficiency of certain applications that are widely used in the organization or offsite development platforms, where they can actually build applications.
It’s a major activity for many IT organizations to build new applications, objects, and customizations on-site. If they can offshore that and not have to pay application licenses or infrastructure cost, that’s a big help to them in lowering their fixed-cost structure. Ultimately, it's a big help to make IT organizations much more lean and responsive to their needs.
Minahan: Let's shift gears a little bit. With all due respect to the technology analysts on the panel, the cloud is not all about technology. It's about a new way of operating. We're seeing more and more organizations embrace what you at Saugatuck call "business process utility." Can you define this term a little bit for us, Bruce, and explain how solutions are helping businesses, not only lower their technology cost, but manage their business process?
Why can’t that be delivered and used as a service, as a utility, cloud-based or otherwise?
Guptill: There are a lot of problems that we have to solve by hiring or by buying and adding to what we have. That’s the traditional way we've done it. If we have a new line of business, if we have new regulatory requirements, if we have new reporting needs, we buy something to address that need. We buy people, technology, or services, or we train somebody to put everything together.
Business process utilities is actually a term that’s been around for quite a while. We started using it internally about six, seven, eight years ago as part of a series of projects to help some of the larger IT providers understand what could we do with this whole idea of what used to be called utility computing and what we now know as the cloud.
Our idea was that if you can take the software and put it in the cloud, and if you can take the hardware and the infrastructure service, the IT, and put it in the cloud and take advantage of that, we have all these vendors -- let's take Ariba for an example -- that have these terrific technologies, applications, and the expertise to use them. Why can’t that be delivered and used as a service, as a utility, cloud-based or otherwise?
Then, we have the business logic, we have the software, the applications, the functionality, and the technology, to make it happen. We can do that as an as-needed, on-demand, or subscription basis. It removes a lot of the fixed cost that we've been talking about. It reduces our reliance on fixed assets or fixed cost for what could be cyclical or temporary needs in terms of functionality. It's basically outsourcing business tasks, business functions, or business processes to the cloud. It's "cloud temping" basically.
Over time, these things start from very simple, straightforward, and standardized capabilities, similar to what SaaS, or infrastructure as a service (IaaS) started as, but we are seeing them start to evolve into more configurable or more customizable capabilities.
Pool of functionality
So that we can now -- it's just starting now, but will be much more over the course of the next four or five years -- take advantage of a large pool of business functionality that we don’t want to buy. It's not just a technology. It's not just a software. But it's the business tasks that we don’t want to buy, we don’t want to train, and we don’t want on our books. We can rent those as we need them, and when the work is done, they retire back to the cloud.
Minahan: It's not just about business application delivery, but business-process transformation. Raise your hands. Who here still gets paid by paper check? That's a type of service. It's great to see that trend going on in the market.
Now, Mickey, you recently conducted a study of companies that are using cloud-based solutions to improve collaboration and efficiency across their supply chain. What were some of the key findings from that study?
North Rizza: We found that 96 percent of those in the study are using cloud-based solutions, but out of that 96 percent, 46 percent are geared into a hybrid cloud solution. And by hybrid we mean that they're actually using cloud technology applications. They're optimizing those against their IT on-premise investments, and further, they're extending the capabilities into cloud services technology. So they're looking at the whole gamut.
When it's executed well and done well, it allows you to execute on your working capital and supplier payment types of strategies.
The second part of that is the next leading area, and that’s 41 percent around a private cloud. The difference there is that they're looking at technology capabilities from the cloud and they're putting that with their ERP or on-premise IT investments, but they're not necessarily extending those capabilities.
So, while we see this as a big area, and companies keep going down this path, one of the things we also find is that it really means a sharper focus on master data management (MDM), your business process, how that’s orchestrated, both inside the enterprise and externally into your trading partners, and understanding your governance structure. We'll see more and more of that come out, as time goes on here.
Minahan: There's that issue of master data management yet again.
Chris, let's shift to you again. Considering what Mickey said and what Bruce said, how are companies considering cloud and network-based solutions to apply to their collaborative finance areas? How are they using it to speed invoicing and payment and even help in their working capital management strategies?
Sawchuk: The first thing, and you've heard a lot of it, is that technology is an enabler. It enables a purchase-to-pay process to be more efficient and more effective, and along with some other practices around process design and then process management. But, when it's executed well and done well, it allows you to execute on your working capital and supplier payment types of strategies.
Faster, easier access
We've been talking about the cloud. How does it help here? First of all, and you've heard a lot about this, cloud gives you much faster, easier, and more economical access to technology solutions. Now that you're connected, you can -- to your point Tim -- speed the transactions across your supply base, etc.
More importantly, it gives you much more predictability in your ability to execute. For example, a lot of us say we moved our terms. We moved our terms from 45 to 60 days. When we do that, the suppliers say, "When we were on 45, you couldn't pay me on time. You moved it to 60. Can you pay me now on time?" It gives you some predictability in the execution. That's important to them.
Number two is, if you negotiate early pay discounts, you have the ability to execute and take advantage of those kinds of things that you have in your commercial agreement.
The cloud also does a couple of things. It certainly brings much more visibility to the overall activities that are occurring across the entire source-to-settle process. But also, once you are connected in this whole cloud environment, it certainly gives you access to intelligent services that exist out there. I'm talking about working capital, things like information about the financial health of your suppliers, their historical performance, the cost of capital, etc.
That kind of collision between outside the cloud and inside the organization is going to change and it could change business pretty dramatically.
Minahan: So getting the paper out, improving the visibility, automating that process, gives you the ability now to make intelligent decisions about how to manage your cash?
Sawchuk: Absolutely.
Minahan: Robert, we heard a little bit about this today. In the personal commerce world, companies like Amazon and eBay have really begun to blur those lines between applications and community. This seems to be continuing into the business world.
IDC has been looking at network-based models and solutions and applications for a while. Where are these models most appropriate -- for internal applications and business processes, for external -- and how do you see companies evolving their use of these network-based models?
Mahowald: It's a good question. We've been seeing blurring for a long time. If we think about what we do as business users, when we go into the office, we sit down at our desk and we have got a combination of IT-delivered applications and services on the one side. Then, we can turn the to other side, go to the web, and get the other things that we need most often -- search, consumer commerce, buying, and all kinds of things that aren't given to us by IT. At some point, cloud forces the way we have always been doing things to collide with the way things perhaps should be done.
We talked about lower cost, leaner IT organizations, because they are able to source outside of the organization, and get lower cost services. We think that kind of collision between outside the cloud and inside the organization is going to change and it could change business pretty dramatically.
Where business happens
Another thing is that, when you've got solutions that are brought in by business users -- maybe it's a salesforce.com or some other SaaS application -- it's important to them, and it's important for them, to get agility and speed to that functionality, but there are going to be many places where you are going to be brought outside of your organization, because that's where business happens.
Whether it's in a commerce cloud or another forum or marketplace for the exchange of products, you will be forced there essentially to do business, to maintain your presence in the game, see that transparency, and have it help your business. We think that's probably the most likely place for that collision to occur.
Minahan: So, possibly you need to collaborate with folks outside your company, predominantly.
Speaking of outside your company, Mickey, in your study around how supply chain organizations are using the cloud, you really had some very interesting findings about perception or perceived benefits versus actual benefits. In fact, what was interesting about it is that folks were achieving greater benefits than they initially expected. Can you discuss some of the major areas where they were getting the most value?
There are going to be many places where you are going to be brought outside of your organization, because that's where business happens.
North Rizza: Absolutely. One of the things we're finding is that companies really want some great benefits from these investments, but because of the last 30 years of not achieving everything that they really set their sights on, they have really stood back and said, "You know what? I'm not going to achieve everything that I need."
When we did our study, we looked across between 12 and 15 categories. We found that those that actually deployed cloud solutions, technologies, and services and put them out there, found anywhere from 5-7 percent difference in greater value, just by deploying, versus those that are thinking about it or trying to get into the mode of, "We want to go down that path and we are thinking about that investment process."
What were the benefits? It's really interesting. The first is that they were able to drive more revenue. Understandably, if we get those cloud-based solutions, we're going to drive more revenue. If you think about that gap from 5-9 percent, that’s huge, on a revenue standpoint.
Two other points: the cost-to-serve model. They're able to look at what their costs are, what are costing to serve from the enterprise, all the way through their trading partners, all the way back out into where the demand cycle begins, from a supply chain perspective. They get more savings, and those two go hand in hand. Then lastly, it's around that business cycle time improvement aspect.
Minahan: So, increasing revenues, reducing operating cost, and speeding the whole process overall. That’s great.
Different reality
Bruce, let's end with you. There's been a lot of talk about the cloud today, and lot of perceptions out there, that it's an all or nothing, it's a rip and replace. This makes companies somewhat nervous, but your research, as you stated before, shows a different reality going on out there, where the folks are looking at cloud-based solutions.
Guptill: If we wrap up what everybody on the panel has been talking about, let me take it from this angle. We've researched, interviewed, and surveyed a little over 7,000 executives worldwide -- finance, procurement, HR, IT, line of business -- over the last six or seven years about what it is that they want to do with cloud IT, whether it's SaaS or IaaS, platform as a service (PaaS) or whatever. In every single case so far, they're using it to add to what they have. It's filling in the gaps. It's enabling better efficiencies, better cost. It's delivering benefits that they could not get earlier cost effectively.
When you think about it, that’s the pattern of IT investment over the last 50- 60 years. It's very, very rare that we replace what we have with whatever new is coming in. There's all this hype about new stuff is coming and it's going to change everything. It's going to get rid of this. We are going to dump that.
Within four to five years, by year end 2015, more than 50 percent of new IT spending will be in the cloud for the first time.
In reality, almost every new IT that comes in, works inside, next to, or on top of what we already have. And as we learn how to use it over time, it may slowly displace some of what we have, but there is a tremendous amount of COBOL still out there, for example.
Minahan: On the green screen.
Guptill: Oh, there are [plenty] working in back rooms. The net of it is that is that we get more benefit. So we have to decide what we want to get from the cloud, versus what we get and what we have on-premise?
Our latest survey research, which we are just in the process of publishing right now, very strongly indicates that within four to five years, by year end 2015, more than 50 percent of new IT spending will be in the cloud for the first time. That’s within four or five years. But, that means that about 50 percent, or a little less than half, is still going to be on-premise, so that stuff is not going away.
So, over time, what's going to happen is that we have a series of decisions to make. What costs are we trying to control? How are we going to change our purchasing, procurement, management, payment, relationship management, and so on?
Then, as our traditional on-premise systems, not all of them, but as each one comes up, as they reach the end of their useful life, what do we do? Because traditionally, we would add to them, we would just build out around them, until they take over the entire data center, or we would outsource. Now, we have a combination. We can put some in the cloud and some on-premise.
Those are the decisions that we're going to have to face, as we go ahead. What goes out there? What stays in here? What goes in between? The stuff has to be made to work together. Who has that responsibility? What's it going to cost? How is that going to be budgeted? And how are we going to manage all this?
Minahan: So, governance is going to become increasingly important. Well, good. We heard a lot of great things today, challenging you to extend your physical supply chain and your management of that, to leverage and improve your financial supply chain, and improve your working capital management.
We heard about the benefits that you can get through improved business processes, efficiency, and lower cost structures to the cloud, and then most importantly, we also just heard that it's not an all or nothing. It's an extension of your existing IT investments.
Gardner: And thanks to Tim Minahan, Chief Marketing Officer at Ariba. You've been listening to a May 25, stage-based panel event on the implications of cloud computing for procurement and supply chain management and other business functions.
Thanks to this panel of analysts for sharing their recent research findings. This discussion comes to you as a special sponsored BriefingsDirect podcast from the Ariba LIVE 2010 Conference in Orlando.
Thanks for listening, and come back next time.
Listen to the podcast. Find it on iTunes/iPod and Podcast.com. Download the transcript. Sponsor: Ariba.
Transcript of a BriefingsDirect podcast from a live Ariba panel discussion on how cloud-based models offer new benefits and efficiencies to B2B commerce. Copyright Interarbor Solutions, LLC, 2005-2010. All rights reserved.
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