I had the chance last week to connect with a fascinating gentleman that I hope to collaborate with in some capacity. This gentleman is pursuing a new type of organization to enable middle market companies to identify, learn and execute on best practices across the functional spectrum -- from sales to HR to procurement. His vision, which appears close to execution reality sometime this quarter, is a true knowledge sharing, network and enablement concept that is as different from models like Vistage and YPO as it is from conference, advisory and publishing companies (e.g., Gartner). Regardless, he asked me the question: is middle market procurement really that different from the challenges that large companies face?

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Spend Matters recently conducted a detailed analysis of Ariba's planned network fee increase, starting in Q3 (September) of this year. You can download a copy of this free eight-page report by clicking here. This report was not underwritten or paid for by any Ariba competitors (or Ariba), sponsors, advertisers or third parties and is being made available through Spend Matters as a means of calling attention to the depth and quality of our new Spend Matters Compass research offerings (all of which are free for download). Spend Matters aims to be seen as the number one procurement/supply chain research and analyst site by the end of 2010 based on the depth and the quality of our research.

In summary, Ariba is increasing supplier network fees in September 2010 by a significant amount. One supplier group (higher spend/dollar volume, lower transaction volume) will be most impacted in particular, with the cost to process invoices potentially exceeding $100 per invoice in certain cases. Specifically, Ariba is raising network fees to 15.5 basis points (.155%) for suppliers meeting new, lower transacting volume thresholds, meaning more suppliers will be impacted. This represents a 55% price increase from the previous 10 basis point cost (e.g., a $100 invoice would incur a 15.5 cent versus 10 cent fee).

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What Will 2008 Bring in the Metals Markets? Earlier today, Lisa Reisman and Stuart Burns penned a thoughtful and lengthy post over on Metal Miner offering up their predictions for the metals markets in 2008. Among the metals categories they take their crystal ball to, the two examine where steel, stainless, nickel, aluminum, copper and zinc prices might be headed to on a global basis. In the same article, they also tackle the impact of a falling dollar and rising oil prices on global metals sourcing. What are some the assumptions driving the forecasts they present in their post? According to the metals blogging dynamic duo, “In the face of a slowing US economy, a mixed position for the European economies and a still strong Asian market, it is a particularly tough call this year to judge where prices will go. Our call is the US will teeter on recession. Europe though restricted by high ECB interest rates will still enjoy some (if reduced) growth providing the Euro/US Dollar exchange rate does not strangle exports. Asia in general and China in particular are still enjoying robust growth. China may well drop from the double digit growth of the last 5 years to high single digit figures but that is still a very significant driver for the world economy and particularly the world metal markets.”

Reading Stuart and Lisa reminds me about how much domain knowledge really counts in analyzing and covering specific commodities markets. Call me biased -- yes, I am married to one of the authors -- but relative to the price alerts and regurgitated crap that only mildly passes for journalism that the trades put out on metals, there's no substitute for the type of coverage that only true industry experience can bring to the table. Seriously, do we really want to know that the sky is falling and copper is up today, or do we care about why and where it might go tomorrow -- and what to do about it from a sourcing and trading perspective?

- Jason Busch

During Ariba's remarks on their call with Wall Street analysts announcing the Procuri deal last week, I counted the word "middle-market" in their presentation and Q/A at least half a dozen times. Clearly, Ariba is putting quite a bit of stock in pursuing this market opportunity. Personally, having had significant experience working with and talking to middle market procurement organizations in the past few years, I can tell you first hand that Ariba -- and everyone else for that matter -- is going to have a tough hurdle to overcome if they want to achieve their goals. Why is the middle market challenging? They're the classic software reasons: long sales cycles with smaller rewards, limited budgets, and customers who demand just as much from their solutions providers as larger organizations. But they're also unique reasons to procurement that make the middle market especially difficult to pursue.

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Last week as MFG.com's Fusion tour swung through Chicago, I had the chance to catch a presentation and panel discussion led by MFG's AJ Sweatt that offered up advice on helping smaller direct materials suppliers to better market themselves to procurement organizations. AJ -- who also happens to play a mean guitar -- is an absolutely gifted public speaker and one that you should seek out. If you take one part preacher, a second part politician and a third part manufacturing pundit and you gently shake the cocktail sifter, that's AJ. The man is absolutely dangerous with a microphone, and is probably the best speaker I've heard in the past year.

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While many would argue that North America has been the king of the middle market -- after all, the US was built primarily on small, regional businesses -- it appears likely that this title is likely to move to China or India as enterprising, young businesses flourish in these markets thanks to regional and global demand. Therefore, it's not surprising that you'd encounter sage advice for such organizations in local periodicals in these countries. Out of India, Business Express has sage advice for middle market organizations that need to hop on the supply chain bandwagon.

In the piece, the author argues that small and medium sized businesses are "often are not large enough to justify centralised organisations for supply chain management ... The result is a focus on individual facilities and, therefore, on a decentralised supply chain organisation." In addition, "SMEs often don’t have personnel who have knowledge of sophisticated supply chain strategy and operations. Most of them recruit people with strong operational distribution and logistics skills rather than those with a broader supply chain perspective and experience."

This results in organizations that create processes "site by site with an emphasis on internal local efficiency ... [often lacking] detailed process documentation." While these observations are coming out of a rapidly developing Indian manufacturing marketplace, I'd argue they hold for most similar organizations in North America and Europe -- not to mention China -- as well. Without question, the middle market is a different supply chain animal worldwide, and talent and skill sets typically lag those of larger companies.

- Jason Busch

Earlier in the week, I had the chance to attend a gathering that my wife's consulting firm, Aptium Global, hosted for small and middle market private equity firms and bankers in Chicago at the University Club. The event, also attended by fellow blogger Michael Lamoureux -- who happened to be in town visiting -- discussed ten ways that investors can drive EBITDA improvement in their portfolio companies. Lisa Reisman started the discussion and was joined by two fellow speakers. The first was Mark Pruitt of the Energy Resources Center of the University of Illinois, a non-profit consultancy focused on energy cost reduction strategies. The second was Ara Surenian, a middle market lean and operational expert, who serves as President of Cadent Resources. Each presented real-world examples of cost reduction and EBITDA improvement in small and middle market organizations.

I'll leave the case study write-up and analysis to Michael -- and I'll link to them when he posts on his blog -- but what struck me most from the interactions I had during this event as well as other recent discussions with financial types is how private equity firms are getting more operationally oriented -- or at the least, working with advisors, consultants and operators who are. And this type of thinking is going down to the lower middle-market as well (even for firms with investments in companies with as little as $10 million in revenue).

In fact, even for a company at this level, it's sometimes possible to have a huge EBITDA impact merely by targeting a handful of category sourcing or lean initiatives, increasing valuations by as much as 1.5x-3x depending on given industry multiples. Even though many investors are not lean or direct materials sourcing experts, they get it. And they’re increasingly bringing in operational experts -- often ahead of new sales and marketing staff -- to help create new value.

Another interesting learning from this small to middle market segment is that within manufacturing, especially, direct materials cost reduction efforts -- either sourcing or inventory based, or both -- can have a disproportionate impact on overall profitability because so much of COGs and working capital is typically tied up in only a handful of categories. This is in contrast to larger organizations that typically have much more fragmented spend, even on the direct materials side, because they're producing a greater number of SKUs, part categories, and / or finished products. In addition, indirect and services sourcing in small and middle market manufacturing is often a much shorter cost reduction lever to pull than it is in larger companies. This is because overhead is typically a lower percentage of overall spend than it is in larger organizatons.

- Jason Busch

Lisa Reisman is middle markets editor of Spend Matters and our resident direct materials and global sourcing Spend Management expert. In full disclosure, Lisa is married to the editor of Spend Matters, Jason Busch.

There might not be too many lessons but a few laughs never hurt anyone. I'm wondering what Borat might say to software vendors who are seeking to deploy spend management solutions to the lower middle/middle market.

Again, for reference sake, we consider the lower middle market under $200m in revenues, the middle middle market $200-499m in revenues and anything over $500m as the larger middle market.

So Borat has been in the US for a little while and stumbles across SpendMatters ...

Borat: What kind of dog is this?

SpendMatters: It's SRM (Supplier Relationship Management).

Borat: Is it a cat in a hat?

SpendMatters: No ... it's an advanced sourcing tool used to monitor supplier performance.

It never ceases to amaze me how many software vendors announce their intent to go after the "middle market". We know why they say it -- they need to grow and the middle market affords them an "untapped opportunity". Though there are certainly some exceptions, Borat's first question, "What kind of dog is this?", is probably a more accurate question reflective of how middle market companies think of SRM technologies.

Seriously, these are companies that don't even regularly use supplier scorecards, or if they do, they might deploy them quarterly or yearly at best. That is not to say the middle market doesn’t need technology -- it does -- but software vendors really don’t know how to position their solutions for this market.

Borat: Spend Visibility! I no find you attractive anymore! ... NOT!

SpendMatters:OK, let's take the case of Spend Visibility (which is certainly no Pamela Anderson, although most lower middle market companies badly need it). My question is simple. Which vendor’s solution is most likely to meet the needs of this market? The answer: virtually no one's. And that's because middle market companies will never "outsource" the data to a third party who runs it through their UNSPSC taxonomy for a fixed fee per line item. The winning Spend Visibility tool for this market will be a very simple do-it-yourself model with a very low subscription fee for unlimited use. Always on – to be used anytime.

Outside of visibility, there are some very interesting solutions from sourcing vendors like Apexon with their APQP and PPAP automation solution. I believe that lower middle market companies would most definitely benefit from these types of applications, particularly when they are offered at $80/month per user. Providers like MFG.com also understand the middle market. Their "free" tools and supplier search capabilities make a lot of sense for manufacturers, particularly for categories such as machinings, fabricated parts and castings.

Borat: These are very niiice ... very niiice -- make sexy!

Lisa Reisman is Managing Director and Co-Founder of the Direct Materials Sourcing Advisory Firm, Aptium Global.

Lisa Reisman is middle markets editor of Spend Matters and our resident direct materials and global sourcing Spend Management expert. In full disclosure, Lisa is married to the editor of Spend Matters, Jason Busch.

I've often made presentations showing the "risks" of low cost country sourcing. These presentations contain pictures of containers sliding into harbors, cranes crashed, and cargo ships overturned. We add a few comments and the audience is always laughing. But today, when I saw this lead story on CNN showing the impact of the listing MSC Napoli near the shores of southwestern England, I had a very different feeling. I couldn't help but run a calculation that ran like this, "I'm a mid-sized manufacturer ordering one container a month of XYZ product and my container has gone overboard." For a mid to large sized company, this is certainly a hiccup but to a smaller firm that only orders a container a month, all sorts of problems ensue.

Risk management and scenario planning is not just for big firms. Firms of all sizes should have a contingency plan in place for precisely these types of disasters. Folks that source 80% of their requirements from low cost suppliers (often offshore) and 20% domestically are at a strategic advantage to firms that have made the shift to 100% offshore. I bet any manufacturer that has been sourcing offshore for 5 years or more has at least one “missing container story". Hopefully, none of you have any merchandize on this vessel.

Lisa Reisman is Managing Director and Co-Founder of the Direct Materials Sourcing Advisory Firm, Aptium Global.