Need: Due Diligence

What is Sourcing Strategy and Procurement?

Strategic sourcing and procurement is a crucial process that aids businesses to balance revenue growth strategies, smart cost containment, sourcing and operations configuration.

“When the economy’s going down, people aren’t making as much money as before,” says Scott Bellinger, BluWave’s co-head of research and operations. “Even if they’re maintaining or increasing their sales, the cost is going up. Every dollar you can capture in a downturn is huge for business.”

The process entails a strategic outlook on possibilities and requires a well-executed implementation to achieve lower total cost and support revenue growth. In essence, the objective is to attain a balance between operational efficiency and financial performance.

“There are companies that are really trying to build out a platform that allows them to be a strategic sourcing provider to large manufacturers,” says one of our BluWave-grade service providers, Don Jenkins* of Supply Chain Management Co. “So they’re going to help them acquire components from around the world from suppliers. They’re going to administer those contracts. They’re going to handle the logistics of any regulatory issues that fall into that.”

CASE STUDY: More Than $14 Million Saved on Resin Procurement for Plastics Company

Strategic sourcing is an integral part of supply chain management that provides a systematic approach to assure timely delivery of goods and services and decrease the risk and costs involved in the supply chain.

Investing in supplier relationships is a key aspect of this process. Let’s look at it in more detail.

READ MORE: What is Commercial Due Diligence?

Examples of Strategic Sourcing

• Outsourcing non-core products or services: A company could contract a vendor or supplier who can deliver products or services within the required time frame and without any delays or issues.

“I think where it gets more proprietary, a little more specialized, I think those areas are less likely to maybe outsourced,” Jenkins says. “Whereas when you look at kind of commodity products and commodity processes, that’s where the outsourcing’s probably more likely to happen.”

• Creating partnerships with suppliers for key products: An organization might opt to centralize all purchases with a single vendor to avoid high delivery fees or fluctuating prices for goods.
• Procuring commodities internationally: A business may identify a supplier or vendor who can provide multiple products or deliveries simultaneously from different regions around the world.

Best Practices for Sourcing Optimization

• Spend analysis: Analyzing the company’s spending patterns to identify areas where costs can be reduced.
• Establishing clear criteria for supplier selection and evaluation: Businesses can use scorecards or other formats to select the suppliers that best meet the company’s needs.
• Negotiating contracts: This step helps organizations achieve the best possible terms and conditions.
• Developing strong relationships: Building long-term relationships ensures a stable and reliable supply of goods and services. Third-party resources with existing supplier relationships are a great way to accelerate this step.

“The businesses are going to want to have strong relationships with those suppliers,” Jenkins says. “They’re going to handle all the logistics-related issues, and they’re going to administer those contracts.”

• Advanced analytics: Identify opportunities for cost savings and supplier performance improvement through data. With the explosive growth of AI tools, this is easier than ever..
• Focusing on total cost of ownership: The initial purchase price should not be the only factor when evaluating suppliers.

READ MORE: How To Analyze Sales Data: Resources, Examples, KPIs

Supply Chain Management Benefits

• Cost savings through economies of scale: By consolidating purchases and leveraging their purchasing power, companies can achieve cost savings through economies of scale.
• Improved efficiency: Strategic sourcing can help improve the efficiency of the procurement process by reducing the time and resources required to identify and evaluate suppliers.

“There’s not a large variance in pricing that exists because of the nature of the commodity product,” Jenkins says. “So you have different areas of the world, potentially, where you can go to get that product, and the magic is just having someone that can organize it, find it, administer the contract, get the logistics set up.”

• Access to expertise and technology: Organizations may access to expertise and technology that they may not have in-house. This can help improve the quality of products and services and reduce costs.
• Improved supplier relationships and performance: Strategic sourcing involves building long-term relationships with suppliers. This can help improve supplier performance and reduce risk.
• Reduced risk: By building strong relationships with suppliers and implementing a supplier relationship management program, companies can reduce the risks associated with their supply chain.
• Increased agility: Businesses that correctly implement strategic sourcing can more quickly respond to changes in the market.

“It’s like ‘What pieces of what we do can we outsource, not have to have our full-time resources committed to this and still get the job done?'” Jenkins says of companies’ approach to strategic sourcing. “In what cases does it make sense to outsource a product or service or process as opposed to trying to do it yourself?”

CASE STUDY: Offshoring Experts Sought To Save Time, Lower PortCo’s Operation Costs

Steps for Implementing Procurement Management

Businesses are concerned with two types of procurement: indirect and direct.

Indirect procurement means cutting costs from anything that’s not core to the business product or service being done. Examples include company cars, postage, travel spend, telecom providers, and pens and pencils, to name a few.

Bellinger says expert third parties are highly motivated to help with this.

“The benefits would be that you can engage a firm that can take out costs of your business for non-core expenditures,” he says. “The beauty of it is these groups work off of a gain-share model, so they have an incentive to help you save money.”

Direct procurement, on the other than, is related to lowering COGS via things like components, manufacturers and resource suppliers.

“As your supplier base continues to raise prices, you want to engage direct procurement groups that can resource your suppliers on a lower cost profile,” Bellinger says.

• Step 1: Assess your current procurement process: This involves analyzing your current procurement process to identify areas for improvement and opportunities for cost savings.
• Step 2: Identify products or services to outsource: This involves identifying the products or services that can be outsourced to achieve cost savings and improve efficiency.
• Step 3: Evaluate potential suppliers: This involves evaluating potential suppliers based on criteria such as cost, quality, reliability, and delivery time.
• Step 4: Negotiate contracts and establish service level agreements: This involves negotiating contracts with suppliers to achieve the best possible terms and conditions, and establishing service level agreements to ensure that suppliers meet the company’s requirements.
• Step 5: Monitor and evaluate supplier performance: This involves monitoring supplier performance to ensure that they are meeting the company’s requirements and taking corrective action if necessary.

Factors to Consider for Strategic Sourcing

• Proprietary technologies and products: Organizations should assess whether outsourcing will compromise their proprietary technologies and products that give them a competitive edge.
• Customer relationships: Firms should also consider the impact on their customer relationships, particularly if they have strong ties.
• Commodity products and processes: Businesses may want to outsource commodity products and processes that do not provide a competitive advantage. This can help them reduce expenses and enhance productivity.
• Cost savings: Enterprises must evaluate the possible cost savings that can be attained through outsourcing.
• Supplier capabilities: Firms should assess the abilities of potential suppliers to ensure that they can meet the company’s requirements.
• Risk management: Organizations must consider the risks associated with outsourcing and take measures to mitigate those risks.

“There are companies that have built up a network of supply sources and a network of transportation solutions to get a product from A to B,” Jenkins says. “If you’re a large manufacturer, and this happens to be a product that you don’t deal with every single day in large quantities, but every once in a while you need it, and when you need it, you need it badly, that is a pretty good candidate for an outsource relationship.”

READ MORE: How To Raise Prices Strategically with Sales Team Buy-In

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The expertly vetted third-party resources in the Business Builders’ Network understand the importance of strategic sourcing to get the most out of your investment.

Tapping into industry-specific service providers who know not only your business, but also your competitors as well as you do can provide a significant advantage.

No matter what objectives your PE firm, portco, private or public company has, our research and operations team will assess your needs and provide a short list of best-fit solutions within a single business day.

*Privacy is important to us. While the source and company name have been changed, these are real quotations from a real service provider in the BluWave Business Builders’ Network.

Technical debt doesn’t always get a good rep, but it’s not black and white, either.

There are both benefits – usually early on – and consequences, which accumulate with time.

As part of their IT due diligence process, many private equity firms take a hard look at the technical debt they might incur. That means it’s just as important for portcos, as well as private and public companies, to understand what they have on their hands before engaging in a potential sale or transaction.

In addition to defining technical debt, let’s look at some examples and types, as well as the pros of cons.

What is Technical Debt?

In software development, technical debt refers to the cost of maintaining a suboptimal or inefficient software system that was developed with an emphasis on speed, rather than quality.

It’s incurred by prioritizing quick results over a more well-designed code, which will mean more work to fix in the future, often with the objective of quick, short-term gains.

While technical debt can be a catalyst for growth, it can also create a challenges for developers and inhibit scalability.

“It allows companies to create software faster, with the understanding that they will slow down software development in the future. Companies will eventually be forced to spend more time fixing the debt than the amount of time it took them to produce the best solution at the beginning,” writes Trey Huffine of freeCodeCamp.

READ MORE: The Power of AI, Data Analytics in IT Due Diligence

Companies may eventually be forced to spend more time fixing technical debt than they did to produce the best solution in the first place. It can also be defined as the cost of reworking a solution caused by choosing an easy yet limited solution. It represents the difference between what was promised and what was delivered in a software product, including shortcuts taken to meet deadlines.

While technical debt is not always bad, many businesses use it to launch ideas quickly as a minimum viable product (MVP) and then rapidly iterate and improve them. It can, however, cost more time, money, and resources over time.

Let’s dig in to more details to better understand how technical debt works.

Technical Debt Types

Technical debt can be classified both based on the type of debt as well as how it’s incurred:

Here are some different types of tech debt:

Design Debt

Due to suboptimal design decisions and architecture choices made during the development process.

Code Debt

Arises from poorly written, inefficient or redundant code.

Documentation Debt

This happens when documentation is incomplete or outdated, which can make it difficult to maintain and update software.

Testing Debt

Due to inadequate testing practices, leading to bugs, and other software issues.

Infrastructure Debt

Results from using outdated or inefficient hardware or software, leading to slower performance and reduced productivity.

People Debt

This happens when the development team lacks skills or experience.

Process Debt

Inefficient or inadequate development processes that can lead to delays, errors, and other issues.

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Here are some different ways technical debt can be incurred:

Deliberate Debt

Incurred intentionally to meet a deadline or achieve a goal.

Inadvertent Debt

From not following best practices, or failing to properly refactor code.

Prudent Debt

Technical debt that is taken on deliberately, with a plan and a clear understanding of the costs and benefits.

Reckless Debt

This arises from taking on technical debt without a clear plan or understanding of the costs and benefits. This is the opposite of prudent debt.

READ MORE: IT Due Diligence Process: Mergers and Acquisitions

Strategic Debt

Taken on to achieve a specific strategic goal, such as entering a new market or taking advantage of a business opportunity.

Tactical Debt

Taken on to achieve a specific tactical goal, such as adding a new feature or improving performance.

Bit Rot Debt

This kind of technical debt arises from neglecting to update and maintain software over time.

Inefficient Code Debt

This happens when inefficient or outdated code is used.

Unintentional Debt

This is incurred for reasons beyond the development team’s control, such as technology changes, regulatory requirements or changes in customer needs.

Technical Debt Examples

Technical debt can be found in all kinds of software development projects. The following are some examples developers may encounter.

Bugs in the Code

When developers work quickly to meet deadlines, they may make mistakes that lead to bugs. These bugs can slow down the software or make it malfunction. If they’re ignored in the interest of meeting deadlines, they’ll continue to accumulate.

Legacy Code

Code that has been written in an older version of a programming language or framework, which can make it difficult to update the software. Updating the software may require extensive code changes, which can result in significant time and effort.

Missing Documentation

Incomplete or outdated documentation can make it difficult for others to understand the code, resulting in additional work later on. Especially if those people are new to the team.

If developers don’t document their code properly, it can be challenging for others to modify later on.

Poorly Refactored Code

When developers take shortcuts to meet deadlines, they may not properly refactor, resulting in code that is not optimized, requiring more work to fix.

Ignoring Quality and Best Practices

This can result in suboptimal code that needs to be reworked, leading to performance problems.

Insufficient Testing and Documentation

Skimping on testing or documentation can make it difficult to maintain or modify the code.

Suboptimal Architecture or Design

Choosing a suboptimal architecture or design can also make for extra work as time goes on. Expect performance problems that slow down software, too.

Short-Term Thinking

Applications built only with the near future in mind eventually means consuming more resources, time, and energy maintaining and rewriting “broken code” rather than developing new ideas.

Procrastination and Compromises

Not fixing bugs when they arise will likely produce technical debt, too.

Benefits of Tech Debt

While technical debt often creates challenges, it has its benefits, too. For example, it can be used to launch an MVP, allowing businesses to gain valuable feedback from users that can be used to improve the product.

Technical debt can also help businesses remain competitive in a fast-paced environment. By prioritizing speed and agility over perfection, you can more quickly adapt to changing markets and customer needs. It can also help reduce development costs, achieving goals in less time with fewer resources.

It is, however, important to consider the long-term costs and benefits. As the technical debt accumulates, it can become increasingly difficult to maintain and update the software, leading to reduced productivity and increased development costs and security vulnerabilities. Let’s go into more detail about the potential consequences.

READ MORE: Comprehensive IT Assessment Interim Leadership Sought

Consequences of Technical Debt

The downside of technical debt can be dire, affecting not only the quality of the software but also the productivity and morale of the development team. Over time it’s increasingly costly to address.

The poor code quality can result in poor performance, bugs and maintenance issues. It can also hinder the ability to introduce new features and functionality, having a negative impact on user experience and revenue generation.

Additionally, technical debt can make it more difficult for development teams to work efficiently, as they must constantly navigate suboptimal code, taking time to understand and fix it.

Tech debt can also impact the development team’s morale. As it accumulates, developers may become demotivated, increasing turnover and making it harder to attract top talent. It can also mar a company’s reputation as negative user reviews roll in, reducing overall trust in the product or service.

It’s crucial to manage technical debt carefully and address it proactively to avoid long-term consequences.

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The BluWave network is full of the best technology resources on the market for private equity, portcos, and independent and public companies.

The expertly vetted service providers ready to help know how to evaluate, utilize and address technical debt in a way that’s aligned with your business’s goals.

“The good providers will help you determine whether a company is making the most of its technology investments,” BluWave Head of Technology Houston Slatton says. “They can also say the products are out-of-date, end-of-life, have security issues, aren’t being used well, aren’t being backed up.”

Regardless of your industry, we can connect you with a niche-specific IT resource in less than one business day after an initial scoping call. Contact our research and operations team today to get started.