This is the first of three articles that explore the risks and opportunities for supply chain and procurement leaders during a downturn economy.
Jim Bureau, CEO, JAGGAER
Many wise words issued from the mouth or the pen of Jack Welch, former Chairman and CEO of General Electric, but the quote for which he is probably best known is, “Never miss out on an opportunity like a good recession.” Back in the fall of 2008, when everyone was forced to acknowledge that the coming downturn would be brutal, he argued that business leaders should focus on their cost structures, reduce debt, and take care of their best employees. He also advised business leaders to communicate as often as possible about their vision and take advantage of investment opportunities as they arise.
While Mr. Welch’s legacy might now be the subject of some controversy, let’s hold onto that thought, because once again, we are staring down a recession. The causes of today’s economic downturn are of course, very different. In 2008 the trigger was easy money that was poorly invested in speculative finance. Today we face the twin evils of galloping inflation and economic slowdown, made worse by geopolitical factors. But once again, this presents an opportunity as business leaders are compelled to rationalize cost structures while looking after employees and, I would add, their best suppliers.
Yet there is a difference between managing costs and simply cutting costs. Leading academic and business executive Bill George said, “A lot of [General Electric] leaders were thought to be business geniuses. But they were just cost cutters. And you can’t cost cut your way to prosperity.” To become more efficient, you need to invest. And to win a reputation for quality, you need to invest. This is truer today than ever, as consumers are better informed and less willing to buy from companies that cut corners, for example by outsourcing operations to countries with weak labor laws that allow the exploitation of children.
So, the question remains, if an impending recession presents an opportunity, what is it? And can we draw lessons from the past to ensure we capitalize on those opportunities?
The dot.com bubble and ensuing crash in 2000, represent the closest approximation to the dynamism we’re witnessing in today’s world. Supply chain and procurement professionals have never faced so many significant challenges, and all at once, like they have over the past three years. Today’s business leaders have had to grapple with supply constraints, skyrocketing transportation costs, supply chain disruptions, inflation, ESG mandates, digital transformation and a global talent shortage.
The mid-to-late nineties saw comparable business volatility.
Between 1995 and March 2000, the Nasdaq rose by 400%, as investors contemplated the potential for entirely new business models spawned by the Internet. eCommerce-focused companies began popping up left and right, as financial institutions and retail investors alike recognized significant opportunities amidst transformational change. There were so many unknowns at the time, but there was so much money, chasing what everyone knew to be a massive opportunity, that it became irrational.
As we all know, the bubble burst in 2000. Hundreds of companies went out of business – mostly startups, but also some well-established firms. Yet, the groundwork had been laid for what we now know as modern eCommerce. Two companies in particular began their steady ascent during this period: Amazon and eBay. Why did they succeed where companies like CDNow and boo.com crashed and burned?
First, both companies put themselves at the hub of a vast network of customers and suppliers. They made doing business completely frictionless and easy. Not just for shoppers. eBay in particular has focused efforts on extending the frictionless network to millions of sellers so that they can focus on sourcing, fulfilling sales and growing their businesses.
Second, these two companies harnessed the power of artificial intelligence. Most famously, Amazon pioneered product recommendations. But today AI touches every experience within eBay, anticipating the needs and wants of both buyers and sellers and making the platform more accessible to everyone. Increasingly, AI has become the key to serving up the best experiences across the entire eCommerce spectrum. In addition, AI makes commerce measurable – you can see what works and what doesn’t.
Third, these two companies offered a service that is truly comprehensive. From books, Amazon soon became known as “The Everything Store”. And eBay extended this convenience to millions of items that you cannot even find in traditional stores! It became a global trading post. Most famously, much of its early growth and technological progress was driven by people around the world looking to complete their collections of Beanie Babies.
And fourth, these platforms are amazingly extensible into all kinds of other technologies, services and ventures. Even Amazon Web Services started life as an extension to the eCommerce platform, offering retailers the opportunity to build their own online stores. And eBay uses APIs to enable its developer ecosystem to rapidly create and integrate extensions to the core platform, including partner sites.
In short, eCommerce fundamentally changed the B2C model, delivering transformational value to the consumer buying experience and the broader economy. But has the B2B model changed markedly over the same 25-year period? Not yet, but the process has started.
Over the past decade, we’ve seen an incredible upsurge in eCommerce activity by traditional brick-and-mortar companies like Walmart, Home Depot, and Coop Italia, a process that was accelerated by the pandemic. According to Forbes magazine, “In 2020, over two billion people purchased goods or services online. Global e-commerce retail sales surpassed $4.2 trillion in 2020, accounting for 17.8% of all global retail sales – up from 7.4% in 2015. That share is projected to be 21% in 2022 and 24.5% by 2025.” There is plenty of scope for this to expand further; although in theory, we live in a global marketplace, the reality is that international trade involves a lot of additional costs, including import duties and non-tariff barriers such as local standards and regulations.
But the significant challenges enterprises have faced over the past three years, coupled now with a downturn economy, will drive a fundamental shift in B2B commerce as dramatic as the eCommerce revolution did to the B2C world.
Direct procurement will take the lead
Some obstacles must be overcome. The act of buying components such as microchips for an automobile is rather more complex than buying consumer goods. For one thing, there are more stakeholders, and for another, the cost of getting it wrong can be enormous. In the worst-case scenario, it could lead to the recall of hundreds of thousands of vehicles.
But the similarities between B2C and direct procurement are greater. Enterprise buyers and suppliers have an interest in achieving the frictionless execution of transactions that we now take for granted as consumers. Enterprise buyers and suppliers have an interest in greater agility to respond to disruptions to supply chains and black swan events. This can only be achieved with greater market intelligence. Both buyers and suppliers have an interest in a comprehensive commercial platform – so that every transaction can be executed in the same place. And both buyers and suppliers of B2B goods and services have an interest in a transactional platform that can be extended through simple plug-ins to other systems and applications.
Traditional B2C companies are now selling physical items such as groceries, electronics, furnishings, and household goods online. They are really not so different from traditional B2B suppliers of direct goods and materials. Many of them leverage automation and AI technology to better fulfill online grocery orders. Their customers enjoy pickup and delivery options, and the retailer continues to expand its autonomous fulfillment facilities.
Autonomous Commerce takes things a step further. That’s to say, on the buyer side AI is also used to monitor markets to identify the best direct procurement options from a network of suppliers, based on minimizing price and risk while considering goals and constraints such as supplier certifications (for quality, diversification standards etc.). Fulfillment of orders on the supplier side can then proceed autonomously.
For this reason, I believe direct, rather than indirect procurement will take the lead in Autonomous Commerce. In addition, direct procurement has top-line revenue implications for companies which is critically important in a downturn market. With indirect procurement, by contrast, there tends to be less pressure and the obstacles are greater, especially when it comes to services such as marketing, facilities management, or legal services. These categories will, however, follow in time.
What is it going to take for the fundamental B2B operating model to catch up with the uber-efficient B2C model? In a word: Pressure. The current B2B model, already pushed to the brink by supply constraints, supply chain disruptions, inflation, ESG mandates, talent shortage, etc., is going to buckle during a recession.
Organizations that are already experimenting with Autonomous Commerce will fully embrace it and they will emerge from the current economic downturn leaner, fitter and stronger. And the performance improvements they realize will quickly force the hands of the laggards. It will be a case of adopt or perish, just as it was during the eCommerce revolution.