SPM or Sourcing: Which is the Chicken, and Which is the Egg?

Many companies that are using spend management technology typically have a sourcing solution in place first before they consider implementing a supplier performance management (SPM) solution. There are various reasons for this. Companies often pursue sourcing as a first step to obtain the good return on investment that it provides. Sourcing solutions are a fairly straightforward sell to senior management, as compared to SPM, and since the resources in many purchasing organizations are focused on sourcing, the fit appears to be a logical one. In the case of supplier performance management, the business case seems less clear than for sourcing. With sourcing, you can estimate how much less you might spend on sourcing goods and services with a solution in place; in SPM the return on investment depends entirely on how well you implement the process. (This ROI challenge is also true for sourcing, but is less obvious.) Many companies seem to find SPM more difficult, a subject that I once wrote about for Spend Matters. A lot of companies use the low-hanging fruit argument, as in, "Let's get the ROI for sourcing first, and then move on to SPM."

This progression makes sense to many firms, but I know of two who would not agree with this logic. One is a large manufacturer that actually did implement the SPM module first, and found that it worked well this way; the other is a multi-billion-dollar international-service company that implemented sourcing before SPM, and wished it had done it the other way around.

What are some of the benefits of implementing SPM first? One is that you clarify and develop more robust supplier-performance expectations. Not only is this useful for measuring the performance of current suppliers, but it helps you qualify new suppliers. Without this detailed knowledge, many companies inadvertently onboard, during the sourcing process, suppliers who do not meet performance expectations. Companies also end up with a supply base that contains too many of the wrong suppliers, since they were less clear about what they required when they were focused largely on the sourcing process. With SPM in place, supplier performance can more easily be factored into sourcing decisions. Another benefit is that you can more readily track performance against service level agreements (SLAs), and do something about suppliers who do not meet their SLAs. The company that wished it had done SPM first said that it had to go back to suppliers who had unenforced SLAs and start enforcing them, sometimes exacting financial penalties that these suppliers had never before been asked to pay. It was much more difficult to appear to change the rules midstream with current suppliers than to set expectations with new suppliers.

Both companies have found that suppliers like having clear performance expectations. And both companies have found that with these clear expectations in their SPM systems, suppliers have improved their performance to meet these expectations, thus providing some of the expected ROI and satisfying senior management.

There is no single correct sequence for all companies, but I hope these two examples help unscramble your thoughts on this chicken-and-egg dilemma.