ADDITIONAL PRAISE FOR STRATEGIC SOURCING IN THE NEW ECONOMY

ADDITIONAL PRAISE FOR STRATEGIC SOURCING IN THE NEW ECONOMY Trust me when I tell you that after reading this book, you will be able to empty much of your bookshelf. This is truly the only sourcing book you need (until they write the next one). Dawn Tiura, President and CEO, Sourcing Industry Group This book creates the new gold standard for helping Procurement and IT get on the same page with regards to how to contract for complex services. Tony Greenberg, CEO, RampRate Strategic Sourcing in the New Economy does a great job in linking sourcing theory to practice. A must-read for all sourcing professionals seeking to co-create value with their suppliers. Frank Rozemeijer, NEVI Professor of Purchasing and Supply Chain Management, Maastricht University, The Netherlands Since no single sourcing model works in all situations, it has become vital to understand your options and architect the optimal relationship that gives you the best shot at meeting your desired business outcomes. That s exactly what makes this book indispensable; it provides the foundation necessary to succeed on the job today and in the decades to come. In fact, Strategic Sourcing in the New Economy is one of the most comprehensive, best-written, and valuable books available for sourcing and procurement professionals. I wholeheartedly and unreservedly recommend it. Lawrence Kane, International Association for Outsourcing Professionals COP-GOV, Senior Leader, ITI Strategy and Sourcing With the rapid evolution and globalization of commerce, strategic sourcing has never been more critical to sustainable value creation. If you are a supply chain professional or supercharged sourcing is key to your organization s success, Strategic Sourcing in the New Economy is a pragmatic, enjoyable must-read! Terry Haas, CEO, The Harvard Drug Group

Modern procurement leaders need to build a new mindset and capability to co-create value with their suppliers in order to survive and then thrive. This book welcomes us into this new reality of the collaborative economy and shows us how to take advantage of the exciting opportunities it offers. Mark Perera, Founder, Procurement Leaders and & Old St Lowest price is not the same as lowest cost or even value; companies that buy on best value are more profitable than companies that do not. Strategic Sourcing in the New Economy lays a fantastic framework for how buyers and suppliers can unlock hidden value. Alrik Danielson, President and CEO, SKF Labs Procurement s true value is its fundamental role in strategic sourcing which is inextricable from the business of helping leadership achieve the organization s strategic goals and objectives. Robert Gleason, Commonwealth of Virginia, Department of General Services, Division of Purchases and Supply This book is a must-read for procurement officials who want to take their practice far beyond the way things always have been done. It is chock full of actionable ideas, information, and insights drawn from extensive research. Yet, as I read the book, I felt as if I were sitting around a table having a stimulating conversation with the authors. Stephen B. Gordon, PhD, FNIGP, CPPO, Professor of Practice, Strome College of Business, Old Dominion University This book heralds the new era of procurement as a creator of enterprise value and provides a roadmap for traveling this transformation journey. The authors provide a compelling history of how and why we have arrived at this point, discuss how the time is ripe for change, and how it is finally time for procurement executives to seize a seat at the table! Rob Handfield, PhD, Bank of America Professor of Supply Chain Management, NC State University

This book is, literally, a game changer. Brilliantly, it shows why and how we must choose different games to play than the traditional ones with our suppliers, customers, and business partners if we want to realize the enormous value potential residing in the new, networked economy. David Frydlinger, Attorney at Law, Partner, Lindahl Law Firm We all understand that collaboration delivers better results. The problem is how and when to do it. This book offers a practical roadmap... So read it and get started on a journey that is critical to your business and your career. Tim Cummins, President, International Association for Contract and Commercial Management This book is a very interesting read for practitioners of the outsourcing industry. I sincerely wish this book will spur more out-of-the-box thinking on integrating Vested principles on contracts, leading to many more win-win relationships. Bala Pandalangat, President and CEO, Centre for Outsourcing Research and Education (CORE) This book offers tremendous value to all sourcing professionals, from the analyst to the CPO. It guides you through the journey and proves that sustainable relationships based on outcomes will create the value we all so desire. Tim Cronin, Vice President and Chief Procurement Officer, GuideWell In this newest book, Kate and her team continue to push the envelope on changing the way we ve historically done business in the public sector. Their studies and conclusions are an inspirational guidepost for professionals who are passionate about changing the supplier relationship model. Rick Grimm, CPPO, CPPB, FCIPS, CEO, National Institute of Governmental Purchasing Relationships remain paramount to successful procurement outcomes. The examples in Strategic Sourcing in the New Economy hit home,

make you think, and suggest behaviors to increase the probability of success! Rick Blasgen, President and CEO, Council of Supply Chain Management Professionals This book provides a meaningful how-to for procurement managers and their corporate-level bosses to understand and implement a new model for engaging key suppliers and deriving the maximum value from strategic relationships. Ted Stank, PhD, Bruce Chair of Excellence at Global Supply Chain Institute, University of Tennessee This excellent book paves the way to modern sourcing for the new century. Strategic Sourcing in the New Economy s groundbreaking Sourcing Business Models will become a standard for all mature sourcing organizations in the future. Andreas Takacs, Silf, Swedish National Association of Purchasing and Logistics Strategic Sourcing in the New Economy points the way to the future of modern procurement. Anna Bjärkerud, Founder and Managing Director, e-business guide This sixth book by Vitasek and her colleagues provides strategic sourcing with a much-needed and well-deserved revitalization that will allow organizations to continue meeting executive team expectations and seizing the opportunities presented by changing dynamics in the market. Kelly Barner, Managing Editor, Buyers Meeting Point Strategic Sourcing in the New Economy is a must-read for every procurement specialist. Ideas are new, fresh, inspiring. It is an extremely valuable practical guide on building a collaborative environment, critical in unlocking value for both client and supplier. Piotr Polak, CEO, Chartered Institute of Cooperation Since form follows function, the intent of the deal should determine how agreements are structured. Selecting the appropriate Sourcing Business Model produces agreements that are much better aligned

with business intent, relationships that generate sustainable value, and transition more smoothly to steady-state governance. Mike Beals, Founder, Governance Academy, Vice President, Governance at HfS Research There are many books on the market which talk about supply chain or procurement transformation. All good... but all theoretical. This guide moves the supply chain practitioner into the realm of how to and can do with each of the transformation steps broken down into easy-to-comprehend phases of work, with plenty of practical examples and best practices from leading organizations. Philip Molnar, Chief Supply Chain Officer, Findis Group As Strategic Sourcing in the New Economy correctly points out, the overuse of power in managing the continuum of buyer/supplier relationships diminishes the effectiveness of many of these relationships and results in the destruction of potential value. Moving to a best-value orientation represents the future of procurement. Kenneth J. Petersen, PhD, Dean, College of Business and Economics, Professor of Supply Chain Management, Boise State University Strategic Sourcing in the New Economy foretells the future of strategic sourcing business models for today s fast-paced and unpredictable economy. It should be mandatory reading for chief procurement officers and C-level executives who want to thrive and not perish in the new economy. Steve Symmes, Consultant and Advisor (Vested Certified Deal Architect)

Strategic Sourcing in the New Economy

STRATEGIC SOURCING IN THE NEW ECONOMY Harnessing the Potential of Sourcing Business Models for Modern Procurement Bonnie Keith, Kate Vitasek, Karl Manrodt, and Jeanne Kling

STRATEGIC SOURCING IN THE NEW ECONOMY Copyright Bonnie Keith, Kate Vitasek, Karl Manrodt, and Jeanne Kling 2016 Softcover reprint of the hardcover 1st edition 2016 978-1-137-55218-1 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission. In accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6-10 Kirby Street, London EC1N 8TS. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. First published 2016 by PALGRAVE MACMILLAN The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire, RG21 6XS. Palgrave Macmillan in the US is a division of Nature America, Inc., One New York Plaza, Suite 4500, New York, NY 10004-1562. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. ISBN 978-1-349-57329-5 E-PDF ISBN: 978-1-137-55220-4 DOI: 10.1007/978-1-137-55220-4 Distribution in the UK, Europe and the rest of the world is by Palgrave Macmillan, a division of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Library of Congress Cataloging-in-Publication Data Keith, Bonnie. Strategic sourcing in the new economy : harnessing the potential of sourcing business models for modern procurement / Bonnie Keith, Kate Vitasek, Karl Manrodt, and Jeanne Kling. pages cm Includes bibliographical references and index. 1. Industrial procurement Management. 2. Strategic planning. 3. Organizational change. I. Title. HD39.5.K45 2015 658.792 dc23 2015013624 A catalogue record of the book is available from the British Library.

We would like to dedicate this book to all of the individuals and organizations that have the courage to embrace strategic sourcing in the new economy.

CONTENTS List of Illustrations Foreword xv xvii Introduction 1 PART I 11 Chapter 1. The 800-Pound Gorilla Has Left the Building 13 Chapter 2. The Only Person Who Likes Change Is a Wet Baby 39 PART II 49 Chapter 3. Sourcing Is a Continuum 51 Chapter 4. Trekking through Transactions 73 Chapter 5. Embracing Codependency: Enhancing Success 91 Chapter 6. Vested: A Brave New World 133 Chapter 7. Investment-Based Sourcing Models 159 Chapter 8. Selecting the Right Sourcing Business Model for Your Situation 189 PART III 219 Chapter 9. Considerations for Crossing the Continuum 221 PART IV 305 Chapter 10. Maturity Meets Modality 307

xiv STRATEGIC SOURCING IN THE NEW ECONOMY Chapter 11. There s No Such Thing as Half Trust 323 Chapter 12. Getting to We 339 Conclusion 359 Acknowledgments 361 Appendix 365 Notes 397 Glossary 421 Index 441

ILLUSTRATIONS TABLES 5.1 Microsoft Comparisons of Approved Preferred and Approved Premier Supplier Requirements 97 8.1 Business Model Mapping Attributes: Level of Supplier Integration/Interface 194 8.2 Completed Business Model Map: Relationship Model (Contract Research Organization Example) 197 8.3 Business Model Mapping Attribute: Potential Efficiency Gains 202 8.4 Completed Business Model Map: Economic Model (Contract Research Organization Example) 203 9.1 Risk Likelihood 250 9.2 Severity of Risk 250 9.3 Attributes that Impact Fixed-Price versus Cost Reimbursement Decision 274 9.4 High-Level Overview of Governance Roles 280 10.1 Sample Maturity Model Assessment Questions 321 FIGURES 1.1 Adaptation of the Kraljic Matrix 26 3.1 Sourcing Continuum 56 3.2 Sourcing Continuum Framework 67 3.3 Five Foundational Areas of Each Sourcing Business Model 70 4.1 Sourcing Continuum: Basic Provider Model 74 4.2 Summary Structure: Basic Provider Model 78 4.3 Sourcing Continuum: Approved Provider 80

xvi STRATEGIC SOURCING IN THE NEW ECONOMY 4.4 Summary Structure: Approved Provider Model 84 5.1 Sourcing Continuum: Preferred Provider Model 93 5.2 Summary Structure: Preferred Provider Model 99 5.3 Sourcing Continuum: Performance-Based Model 105 5.4 Summary Structure: Performance-Based Model 117 6.1 Sourcing Continuum: Vested Model 141 6.2 Summary Structure: Vested Model 148 7.1 Sourcing Continuum: Shared Services Model 162 7.2 Summary Structure: Investment Services Model 169 7.3 Sourcing Continuum: Equity Partnership 173 8.1 Sourcing Business Model Matrix 205 8.2 Sourcing Business Models in Context 206 8.3 Business Model Diagnostic Resource Example 209 9.1 Four Cornerstones Framework/20 Sourcing Considerations 223 9.2 Example of High-Level Cost Bar 238 9.3 Total Cost of Ownership 247 9.4 Risk Assessment 251 9.5 Balanced Exchange 255 9.6 Unbalanced Exchange 256 9.7 Governance Framework 278 9.8 Merck Collaborative Scoring Model for New Projects 290 10.1 Strategic Sourcing Maturity Levels 313 11.1 CaT Buyer View of Self and Supplier View of Buyer: Compatible 329 11.2 CaT Buyer View of Self and Supplier View of Buyer: Identification of Gaps 330

FOREWORD As a seasoned professional who has been deeply committed to the sourcing industry for the last 20 years, I was skeptical that another sourcing book could say anything that hadn t already been said. However, knowing Kate quite well and recently getting to know Bonnie made me curious and optimistic at the same time. From the very beginning, Strategic Sourcing in the New Economy: Harnessing the Potential of Sourcing Business Models for Modern Procurement drew me in... deeper and deeper. It reads like a novel, so full of case studies, points in history, and real-life examples that I couldn t put it down. And then I read it again. I thought I was an expert in sourcing until I read this book. After all, I managed large-scale strategic sourcing projects for 15 years, ran a niche supply chain consultancy, have been the CEO of SIG for the last eight years, and am constantly exposed to the best and brightest minds in sourcing. Surely that gave me as much insight as some of the most experienced professionals in the industry. And yet I learned so many things when I first read this book that I read it again, picking up a few more nuances I d missed the first time. While I intuitively knew how to create Vested relationships, I had never connected all the dots to meld that concept with sourcing methodology as well as to articulate the subtle differences in the Sourcing Business Models. People who know me well know that I am fairly opinionated and passionate about sourcing. I have shared my views widely that the Office of the CPO should have a seat equal to that of the CFO and COO. During the 2008 recession, companies turned to procurement as a place to hunker down and lead the company in shaving costs. Now things have shifted. No longer is procurement seen as tactical it is a strategic part of the company that not only has cost-cutting goals

xviii STRATEGIC SOURCING IN THE NEW ECONOMY but also has revenue-generating expectations. Who else in a company besides the CEO has relationships and insights into every line of business? I can answer that in two words... no one. I recently read something on a LinkedIn profile of a colleague in the industry that summed it up rather succinctly: I am not a roadblock. I am your partner. I am a strategic asset. I minimize your risk. I save you money. I think creatively. I source tactfully. I love the art of the deal. I drive value and success. I am a Procurement Professional. This book helps showcase this very well... it creates a mindset shift that will help many people understand the incredible strategic impact that we as procurement professionals have on our organizations. Trust me when I tell you that after reading this book, you will be able to empty much of your bookshelf. This is truly the only sourcing book you need (until the authors write the next one). It is so compelling that it is a required book for SIG University certification at the Executive/CPO level. Strategic Sourcing in the New Economy so skillfully references the application of the process to the various business situations you will encounter and offers such great tools you can download and use right away that you will want to make this required reading for all your staff. This book provides you with everything you need to demonstrate the complex strategic advantage that sourcing can bring to your company. Truly. I am humbled to write the foreword for this book. Kate, Bonnie, Jeanne, and Karl have done the industry proud and set the bar very high. I hope you enjoy this book as much as I have... and utilize it as a professional reference for years to come. Humbly, Dawn Tiura President and CEO SIG, the Original Executive Sourcing Network