I interviewed Jon Hansen, the chief editor of Procurement Insights blog, which has more than 25,000 followers. The topic is change management in the digital age.
Today we're here again with Jon Hansen. Jon is the chief editor of the Procurement Insights blog, which has more than 25,000 followers. Today's topic is change management in the digital age. Jon, thanks for being here today.
It's always a pleasure. You know what I find is amazing is technology because you and I are on opposite sides of the world. You're in China; I'm out of North America; you're in morning; and I'm coming into night. But that's the great equalizer, isn't it?
Yes, and I'm happy to be here with you again today. My first question is regarding change management. Can you talk about whether you think change management is still relevant in the digital age?
It's an interesting question, Dustin, and we had talked a little bit about this in the virtual grain room. Traditionally, when we look at the ERP backend systems, the limitations of the technology caused us to adapt the way in which we operated in the real world to work with the technology. In other words, the technology was the focal point of operation, and so how we did business was centered around making that technology work. Now the challenges with that is they generate — and I talk about this in the paper — is that you had things such as vendor rationalization strategies.
You had the concern with eliminating maverick spend. Those are two of the main things that were elements, if you will, of the process that forced people to change. Because if you look at maverick spend and its traditional breakdown, it's people not buying within the framework of negotiated contracts and would do off-contract spending. With this problem, it really hit me when I was speaking to a large audience of automotive industry people, and the Power Transmission Distribution Association indicated that in the United States, 39% of all purchases were maverick or off-contract.
In Canada, that number ballooned to 79%. Now if you look at that, are we dealing with procurement people who are not inclined to follow rules? Are we dealing with people who are being, I guess, deliberately disobedient to the system? What was the problem there? Why was there that high percentage? And maverick spend, as you know, Dustin, because you've been in the industry a long time, it was one of the biggest problems we often face. The problem that we found out with that is that, in most cases, the buyers, the procurement professionals who had relationships, who knew where the best opportunities were, who knew that some of the contracts that were negotiated weren't necessarily reflecting the best value, especially when you get into indirect MRO materials.
They would buy off-contract because they could get better deals. So change management strategies to try to eliminate maverick spend, change management strategies to rationalize vendor supply bases, all were driven, really, by the technology of the time and not necessarily by the best process or the best potential outcomes. Do you see where I'm going with that, Dustin?
I'm thinking, what's the solution to these types of problems?
Well, the evolution came with the emergence of the digital transformation, the on-demand technology, the software as a service. In the past, e-procurement, especially with the ERP world — and I talked about this the last time we spoke about Gartner's postmodern ERP era and saying that these legacy systems are an anchor as it relates to procurement. The reality is, when you have the emergence of these newer technologies, which could be implemented in weeks as days as opposed to months and years, they were more intuitive to being able to engage more suppliers. They were more intuitive to be able to say, look, we don't have to rationalize supply bases because we can engage suppliers with confidence, with quality, and with certainty.
So what ended up happening is, instead of limiting supply bases, we were able to broaden and onboard suppliers much faster. That means that the buyers now are getting access to the true market. And that's where this digital transformation is so exciting. That was the basis for me saying is change management still relevant in the digital era. Do you see where I'm going here, Dustin?
Do you have any examples or situations you can share regarding the success of this approach?
I'll give you an idea. First of all, we're seeing the success by the implementations of these systems, these new on-demand systems. Once the industry got through the biggest obstacle, how can a system, a SaaS or an on-demand model be put in within weeks and days for a fraction of the cost of these overarching ERP initiatives. I can't go back to my board or my senior management and say "We just spend millions of dollars to implement a solution where now, for a fraction of the cost, we can now put in these solutions." And the pay-by-the-drink approach or the service provider is now bearing the risk rather than the client. So we had to overcome that particular obstacle, and we're seeing it every day now. Most of the new technology you look at is intuitive. It reflects the way we buy and operate and work in the real world.
And I touched on this on my previous paper that we talked about, the four cultures of digital transformation. And because of that, it's now opened up the supply base, so there's faster onboarding. There's quicker engagement. There isn't as much involvement or requirement of involvement in terms of the functional elements of it and thus buying people — professionals, procurement pros — are able to focus on the more strategic elements of their task. So we're already experiencing that now. The successes are seen in the emergences of companies like Zycus, Coupa, Ivalua, and other organizations who themselves are winning business. Ivalua just won a major contract from a giant CGI in Arizona.
Think about that. Five years ago, ten years ago, with the mindset no one ever got hired for buying IBM, that kind of thought or occurrence would be unthinkable. So we're already seeing systems put in place delivering significant savings, being implemented in short periods of time. I'm talking about not the hybrids between the ERP catalog-driven system and an on-demand version. I'm talking about the new, on-demand company. You'll have to check out Ivaluas. You have to look at the Coupas and all those other organizations.
But the key point here is those are the successes we're seeing now. Shorter implementation timelines, immediate results, and with the by-the-drink pricing model. It is the service provider who is taking on the risk. One of the best successes — and the first ones go back to 2007 with the Commonwealth of Virginia and their EVA initiative. They were able to expand their supply base. They had a supply base where they engaged so many thousands of suppliers, but only 20% were actually winning business.
Now I know public sector purchasing certainly has different imperatives than the private sector, but the reality is that you had this 80/20 rule happening. When they implemented the IVA on-demand solution and the risk was born by the service provider, the number of suppliers that signed up to use EVA grew exponentially and the distribution of business amongst those supplier expanded dramatically. What that did is drive better value for the Commonwealth of Virginia and distribute the business more equally throughout the Virginia businesses, which was good for the economy. So those are the kinds of successes, on the foundational level, that this brings in.
In the subject of change meeting, Dustin, because you're again to, again, onboard suppliers quickly, you've got immediate intelligence that can be utilized right away. In the old days, if you wanted technology or you used the ERP system and you went to the back to ask for buying information or data, by the time that data was made available to you, it was already old, and its usefulness had diminished considerably. Now we're dealing with real-time data. We're able to make intelligent decisions, not only in terms of the sourcing of products, the acquisition of products, but even in terms of the payment and methodology of financing of these acquisitions — both the benefit of not just the buyer but the supplier. That's why the change elements that was there in the past is no longer required. You're not going to run into an automotive industry sector where you've got 39% mavericks in one country and 79% in another. Those are huge statistics. You're not going to change buyer habit if it doesn't make sense. Do you see where I'm coming from?
Yeah. I'm thinking about your white paper titled "Is Change Management in the Emerging Digital Era." What would you say is your final recommendations regarding that white paper?
When you talk about change meeting — and remember, change management has shifted from a functional imperative to a cultural imperative. What I mean by that is, with the new technologies that are out there and the ability for them to intuitively reflect the way in which buyer actually operate in the real world, you no longer have to try to change buyer behavior to avoid maverick spend. You no longer have to change buyer behavior through an unrealistic vendor rationalization strategy. You can engage the largest number of supplier available and get the best possible — and I call it "best value deal" and that's a terms that's often used — but best value, which extends to not only what the buyer receives in the way of value but also the suppliers. The change has to come from a cultural standpoint. And the first hurdle, which was the most important for SaaS and on-demand — and I alluded to it earlier, Dustin — is the fact that there was an unwillingness to acknowledge that the emperor had no clothes on.
Basically, these solutions which are now defining and driving the market — and I'll go back to, again, the Zycuses, the Ivaluas, the Coupas and all those — the ones that are now defining the markets were at one time considered bolt-on solutions which are always to an ERP system, which are always considered to be a derogative term. Well, these are now driving the industry. And I will use that example again of how Ivalua beat out CGI for Arizona as well as other areas of business and opportunities. That was unthinkable back then. But the culture had to start to shift by first acknowledging that no one ever got fired for firing IBM, dealing with the big guys only, or the famous FUD — that's another IBM term which was fear, uncertainty, and doubt.
We can deal with these smaller, more mobile companies with technology that reflects the way we work. So that was the first hurdle. Everyone started to say, look, we've got to move out of this range. And when Gartner came out and said we are now in the postmodern ERP era, that was, I think, the important signal that the first obstacle came down.
Now we have to get to the next level of where we look in and say, okay, what is digital transformation? What are the strategies? If you recall from the last discussion we had and the white paper, another one that I'd written about the four cultures, McKinsey talked about a survey of 1650 incumbent companies, and only 20% of them had a progressive digital reinvention strategy, and only 2% had focused on supply chain, despite the fact that the McKinsey's and the another analyst firms and experts and pundits in the industry are saying they have to move in this direction.
That is a cultural change. That is change management now. We're talking about changing senior management perception as to where the industry is going and where it needs to go because the technology is no longer the limitation. Well, thank you, Jon, for sharing today.
Did we cover all the points you wanted to make?
I think we did. This is a discussion point, Dustin, and that's why I call these discussion papers. The whole idea is to instigate. I think that's the best word. "Stimulate" may be another one more subtle, but to instigate discussion, create awareness. It's not a matter of creating consensus or agreement but to cause people to look at things through a different lens, through a different light. And hopefully that's what this paper has done as well as my previous one and hopefully discussions on good shows like yours will help to further that. Again, I'm always open to discussing with you again the further developments. I would absolutely love to be available to you, and I look forward to doing it again.
About Jon W. Hansen
Jon W. Hansen