Tuesday, 19 April 2011

What is ‘market price’ and how do I know I’ve found it?

I realised recently that this is a term we brandish about quite frequently at various meetings and conversations we have.   Occasionally we get nods of appreciation for the term, but more commonly we receive a look of faint recognition, as if it were a friend last seen in school days wearing braces and ill-fitting clothes.  So, perhaps it might be worth giving our take on the term, just to help freshen up the concept, plus a little advice on how you might seek it.
The Merriam-Webster dictionary provides the following:  “a price actually given in current market dealings".
There are several key words in this definition.  Let’s take the word ‘actually’ for example, for the above sentence can make perfect sense without it, yet the insertion is deliberate.  It adds gravitas to the word ‘price’.  It is not a suggested price or an implied price or even a piece of estimation, but an actual price.
What we would interpret this to mean in the procurement world is that this price is genuinely valid and acceptable.  It has been submitted based on all the specified requirements of quality, technical, commercial, logistical, operational, administrative, health and safety and so forth.   In other words, it is real and it is based on a product or service that meets your needs. 
Another key word is ‘current’.  A market price cannot be so if it is founded upon old or even future information.  It has to be based current facts and information.  If I purchased my property for £200,000 two years ago, I would be misinformed to say it is now worth the same.  And nor could I actually tell now you the market price for it in 6 months time.  If I want to know an accurate figure for my property today, I would consult the market today.  It’s the only way to be certain.
The same applies in procurement.  Where certain prices rely heavily on raw material costs, such as fuel or steel, don’t leave it to the supplier to hedge their bets on raw material price movements as part of their offer to you.  It won’t be a market price if this happens.  Instead, ask them to give you a price based on today’s raw material costs and to provide a raw material index mechanism for future price reviews.  This way no one needs to take a gamble and lose out.  Such a mechanism is fair, open and transparent.  Currency reviews should operate in the same way.
However, what this definition does leave open is that you could receive a number of so-called ‘market prices’.  Which one is the right one?
This is where we would go a step further.  We would classify a market price as, “the best actual price in current market dealings that is sustainable for the required term”.  It is in no one’s interest for the price to be so competitive that it causes a supplier to go out of business or conversely so uncompetitive that it causes the buying company to go bust.  So, put into plain English, we see the market price as being the best price for a product or service, based on current market conditions, that meets your needs and is sustainable for the duration you want.
So, if that is what the market price is, how do we go about finding it?
First you specify your requirements.   Second, you engage the market.  It’s as simple as that.  Think about something like Money Supermarket or Compare the Market.  By filling in your car insurance requirements, you are provided with up to 30 quotes.  The top two or three are usually around the market price level, i.e. the best price, based on current market conditions, that meets your needs and is sustainable for the period you require it.  Beware of spurious prices, the ones that look too good to be true, because usually they are! A bit of due diligence is required just to double-check that the quotes are based on what you require. You don't want to later find out your excess, for example, is ten times more than the next best quote.
For procurement, it is a case of designing a robust RFQ or set of requirements, leaving as little scope for interpretation as possible.  Secondly, you distribute it to your own private market, whereby you should have a plentiful number of capable and interested suppliers. Finally, pick the top two or three bids and carry out that bit of due diligence to make sure everything has been understood and that the quotes are accurate.
The knack is in creating your market.  If you were to approach two suppliers down the road and get prices, would you say that you have approached the market?  No.  If however you approach 10,000 suppliers around the globe, would you say that you need a few more before you know the market?  Also no, you would say you have covered a sufficient number of bases.  Clearly something lies in between.
Thankfully this is where online sourcing technology can greatly help you by keeping everything together in an auditable and controlled manner, allowing you to involve huge numbers of suppliers.  My personal record was a sourcing exercise that involved 1,500 suppliers, of which 140 or so provided prices.  Having completed this, I was particularly confident I had found the market price.
However this is a one-off example.  The practical way to create and involve the market is to:
1) Outline your supplier criteria, such as geography, turnover, accreditations, capabilities etc.
2) Source suppliers using your contacts, your experience, trade shows, associations, sourcing agencies and databases such as Kompass, Hotfrog, Kellysearch, Applegate, Alibaba, TradeIndia and so on,
3) Qualify the suppliers against your criteria, using questionnaires and submitted responses if time permits.
Once done, send out the RFQ or grant the qualified suppliers access to it and simply manage any questions that come back.  Once all the prices are in, carry out the competitive negotiation, be it an e-auction or otherwise, and the market price will be revealed before your very eyes!
About:  Market Dojo provides business-to-business e-auction and e-sourcing software.  Find out more at www.marketdojo.com.  

Monday, 11 April 2011

Gamification – An evolution in software design or just continuing the trend?

Recently there has been an article in Supply Management (issue 6th Jan 2011) and also on the UK Spend Matters blog by Peter Smith (3rd February 2011) touching on the subject of Gamification.

For those unfamiliar with the term, here is the Wikipedia definition:

“Gamification is the use of game play mechanics for non-game, particularly consumer-oriented web and mobile sites, in order to encourage people to adopt the applications. Read More

The gaming industries revenue is measured in tens of billions and it is growing at an almost exponential rate. They are obviously doing something right.

Should the business software world take note and learn from this industry? Is it just a fad? Or is ‘Gamification’ just renaming of existing practices that companies are already engaged with whilst ignoring other elements of the gaming industry such as story telling which are central to games but not so relevant for business applications?

There is quite an academic debate around this issue. This article is not about resolving this but to give a pragmatic viewpoint.

What you can say is that irrespective of the naming convention, it is obvious that the business world has a great deal to learn from the gaming industry. Software in the business world is becoming more useable, functional and can be easily customised, but misses the point if it is trying to learn from the gaming industry.

The primary strength of the gaming industry is around the user experience. There are many other words that could be included here but it is the user experience which seems core to the uptake of their technology. There are many facets which make up the user experience: ease of use, attractive GUI, inbuilt intelligent tutorials, dynamic interfaces, fun to use, reward mechanisms, online communities, challenges, stories, scoring and so on... The list is endless and different applications will focus on different points.

The key is that the user engages with a very complex system easily and effortlessly to become proficient and then is self motivated to continue and progress and share information. It is the user experience which drives this however it is made up. You can’t say this about many (any?) business applications. Although you can certainly see that many modern websites and applications are starting to take on a different look and feel which seems to draw on important aspects of the gaming industry. They have taken on a more fun approach and well as a clearer and easier to use interface. Some nice examples here are Survey Monkey and Value my Stuff whose websites and functionality are laid out in very clear and simple steps.

Obviously business applications are always striving to become more user friendly, and this has been an industry trend for many years. However it seems that they always put functionality first above the user experience. They can continually make the user interface easier but it is by examining other industries such as the gaming sector that will result in an application which people want to use. If more business application started design by looking at the user experience and ultimately engagement first then there would be less multi million pound software implementations where much of the workforce don’t use to their full capability. We have spoken to companies who have Oracle and SAP implementations where they need to bring external consultants in to show them how to use the systems and increase uptake. Forcing users to uptake new technologies by changing processes is one way but wouldn’t it be great if users really wanted to use a new technology?

Gamification, for want of a better word, seems to embody an incremental step change in the way business software applications are designed through the priority given to user experience.
You could just say it is a next level of design, but the word itself embodies a very specific element in the way design strategy is changing and there are other benefits to just user uptake. Games tend to be fun. This is because they are easy to use and encourage engagement. They tend to avoid repetitive tasks and focus on getting back into the thick of it. Thus the advantages of enhancing the user experience through design from the gaming industry in business applications will not just be around the faster uptake of the technology but also other areas such as reduced administration and efficiency.

One just has to look at Apple. It is very impressive how they have put the user experience first and have thus created a loyalty in their user base which continually grows. The IPhone has many little nuances which impress and you can see how it also makes the experience easier and richer. It seems they looked at the market and put the user first before putting in the functionality. (OK, still a good question around flash!)

At Market Dojo we believe the skill is not just around a nice looking GUI, or inbuilt tutorials but much more fundamental. Our philosophy is built around making a software product which people want to use rather than one that they simply can use. It seems this is now the goal of many other upcoming SasS vendors who are new to the market and it is a very interesting time for business applications and their evolution in design.

About:  Market Dojo provides business-to-business e-auction and e-sourcing software.  Find out more at www.marketdojo.com.