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Measuring of OEM Measuring of OEM Software Procurement – A Software Procurement – A

Case StudyCase Study

Petri RuotsalainenPetri Ruotsalainen

Supervisor: Professor Heikki HämmäinenSupervisor: Professor Heikki HämmäinenInstructor: M.Sc. (Tech.), LL.M. Simon Instructor: M.Sc. (Tech.), LL.M. Simon

IndolaIndola

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ContentContent Why this studyWhy this study StudyStudy Study questionsStudy questions ProcurementProcurement Supply chain management (SCM)Supply chain management (SCM) MeasuringMeasuring

Balanced ScorecardBalanced Scorecard OEM softwareOEM software CaseCase

Case companiesCase companies MeasuresMeasures

ConclusionsConclusions Further researchFurther research

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Why this topicWhy this topic I was working for Global SW procurement for I was working for Global SW procurement for

previous summer and had opportunity for thesis previous summer and had opportunity for thesis work.work.

The role of procurement has increased in resent The role of procurement has increased in resent years. Approximately 60% to 80% of organization years. Approximately 60% to 80% of organization expenses come trough procurement, there exists expenses come trough procurement, there exists great potential for organization profitability increase.great potential for organization profitability increase.

Software is complex item to make business with as: Software is complex item to make business with as: the fixed costs are close to zero, and the fixed costs are close to zero, and there is no one right price for software product.there is no one right price for software product.

OEM software has it own characteristics as:OEM software has it own characteristics as: it is part of company own product,it is part of company own product, it has supply chain focus, and it has supply chain focus, and It might have high transition costs.It might have high transition costs.

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StudyStudy I came up with this study topic by my self after few months of planningI came up with this study topic by my self after few months of planning As the topic was quite unique by nature I choose to make a case studyAs the topic was quite unique by nature I choose to make a case study After defining the study questions, I planned to have better focus on After defining the study questions, I planned to have better focus on

theory, to be able to make some recommendations according the case. theory, to be able to make some recommendations according the case. In the beginning I interviewed 7 colleagues to get view of professionals In the beginning I interviewed 7 colleagues to get view of professionals

into this topic.into this topic. After colleague interviews I also had for a moment thoughts of taking After colleague interviews I also had for a moment thoughts of taking

the supplier view in to the study.the supplier view in to the study. I created a company survey to be a base for the case study.I created a company survey to be a base for the case study. I contacted 14 potential companies from which:I contacted 14 potential companies from which:

4 I get an interview4 I get an interview 2 companies from machine industry did not have OEM software in their 2 companies from machine industry did not have OEM software in their

productsproducts 4 did not have process for OEM software procurement4 did not have process for OEM software procurement 4 companies refused to answer the study4 companies refused to answer the study

Questions were emailed before hand and the actual interview Questions were emailed before hand and the actual interview according to survey was carried out face to face.according to survey was carried out face to face.

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Study questionsStudy questions

Study question on the OEM software Study question on the OEM software procurement:procurement:

1.1. How should it be measured?How should it be measured?

2.2. How is it measured and the How is it measured and the reasoning behind it?reasoning behind it?

3.3. How could the measurement of it How could the measurement of it be improved by using the theory be improved by using the theory and frameworks from the literature?and frameworks from the literature?

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Procurement roleProcurement role

Porter value chain: Procurement is part of Porter value chain: Procurement is part of support activities in value chainsupport activities in value chain

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Procurement termsProcurement terms

A. Van Weele the termsA. Van Weele the terms

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Supply Chain Management (SCM)Supply Chain Management (SCM)

SCM has very broad meaning, it consist the SCM has very broad meaning, it consist the whole chain from raw materials to supplier whole chain from raw materials to supplier and supply base management, all the way and supply base management, all the way trough the procurement, production, sales trough the procurement, production, sales and delivery chain to the customer.and delivery chain to the customer.

Procurement as any other subsection of Procurement as any other subsection of supply chain might have negative effect on supply chain might have negative effect on supply chain, when it optimizes too supply chain, when it optimizes too aggressively only its own activities. In the aggressively only its own activities. In the long run it is about total performance of long run it is about total performance of supply chain co-operation, not rival supply chain co-operation, not rival competition of separate supply chain competition of separate supply chain subsections.subsections.

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Measuring 1/4Measuring 1/4

““You get what you measure”. You get what you measure”. ““If you can’t measure, you can’t If you can’t measure, you can’t

control it, if you can’t control it you control it, if you can’t control it you can’t manage/lead it”.can’t manage/lead it”.

““Everything what is measured Everything what is measured improves”, you should be aware that improves”, you should be aware that your measures do not sub optimize your measures do not sub optimize and that they can’t be fooled.and that they can’t be fooled.

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Measuring 2/4Measuring 2/4

Measuring derives from performance Measuring derives from performance management and performance management and performance measurement.measurement.

Measures should be in line with the Measures should be in line with the strategy.strategy.

Traditional measuring has been Traditional measuring has been based on financial measures, which based on financial measures, which drive to short term focus and lagging drive to short term focus and lagging information (the information is about information (the information is about the history).the history).

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Measuring 3/4Measuring 3/4 To get over the problems of traditional measures To get over the problems of traditional measures

there are multiple measuring frameworks availablethere are multiple measuring frameworks available Financial based like:Financial based like:

Economic Value AddedEconomic Value Added Activity Based CostingActivity Based Costing

Or broader measuring systems likeOr broader measuring systems like Balanced ScorecardBalanced Scorecard Performance prismPerformance prism Performance PyramidPerformance Pyramid Tableau de BordTableau de Bord ProMes systemProMes system

On supply chain management there are used On supply chain management there are used structured techniques for complex decision making structured techniques for complex decision making to determine the right kind of measures.to determine the right kind of measures.

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Measuring 4/4Measuring 4/4

The balanced focus is important it The balanced focus is important it means balance betweenmeans balance between Lead and lagLead and lag Effectiveness and efficiencyEffectiveness and efficiency Financial and non-financialFinancial and non-financial Tangible and intangibleTangible and intangible

Balanced Scorecard is good example Balanced Scorecard is good example of balanced focusof balanced focus

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Balanced Scorecard (BSC)Balanced Scorecard (BSC)

The BSC is balanced performance The BSC is balanced performance management tool, in which measuring is in management tool, in which measuring is in key role.key role.

Measures are created from the strategy by Measures are created from the strategy by using strategy map.using strategy map.

BSC has four main areas of measuring:BSC has four main areas of measuring: FinancialFinancial Internal processesInternal processes CustomerCustomer Learning and growthLearning and growth

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BSC and procurementBSC and procurement

BSC is made to manage and measure on BSC is made to manage and measure on the company level, not directly some the company level, not directly some specific sub processes as procurement.specific sub processes as procurement.

BSC can be implemented from down to BSC can be implemented from down to up or up to down in organization up or up to down in organization hierarchy.hierarchy.

In some studies there have been In some studies there have been propositions, to modify BSC to fulfill propositions, to modify BSC to fulfill better the procurement needs, by adding better the procurement needs, by adding extra supplier measurement area.extra supplier measurement area.

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OEM SoftwareOEM Software OEM (Original Equipment Manufacturer) software is OEM (Original Equipment Manufacturer) software is

third party software product which is implemented third party software product which is implemented as a component in to company product.as a component in to company product.

OEM SW is used in large automated systems as OEM SW is used in large automated systems as well as in small devices, also operating systems well as in small devices, also operating systems have usually OEM SW.have usually OEM SW.

Financial measures fit poorly on measuring of Financial measures fit poorly on measuring of procurement as only measures as procurement as only measures as the financial measures are lagging and the financial measures are lagging and measurable realization of hard work done in strategic part measurable realization of hard work done in strategic part

of procurement, depends on the license orders made if of procurement, depends on the license orders made if any.any.

There are no absolute values to compare the financial There are no absolute values to compare the financial achievements to, as software products do not have one achievements to, as software products do not have one right way to evaluate in monetary.right way to evaluate in monetary.

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Case: Company questionsCase: Company questions

How is the field measured?How is the field measured? How well the meters are aligned to How well the meters are aligned to

strategy?strategy? How well the measures are How well the measures are

balanced?balanced? What are the performance indicators What are the performance indicators

that are found most valuable?that are found most valuable?

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Case companiesCase companies

There were four companies to take apart There were four companies to take apart to my interview:to my interview: 3 ITC companies3 ITC companies 1 industrial goods and services1 industrial goods and services

As my questions were related on strategy, As my questions were related on strategy, internal processes and some monetary internal processes and some monetary categorizations, I promised to present the categorizations, I promised to present the companies involved anonymously, companies involved anonymously, otherwise I would not have gotten any otherwise I would not have gotten any interviews.interviews.

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Case companies on more detailCase companies on more detail

Revenue over 500M€Revenue over 500M€ Of average ~500 procurement employees, Of average ~500 procurement employees,

on the average 15 worked for OEM SW on the average 15 worked for OEM SW procurementprocurement

The number of OEM SW suppliers range The number of OEM SW suppliers range from min 5 to 20 two companies with max from min 5 to 20 two companies with max 100-500100-500

OEM spend is under 20% of total product OEM spend is under 20% of total product related SW spend in all companiesrelated SW spend in all companies

On the average 85% of company products On the average 85% of company products have OEM SWhave OEM SW

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Case companies (one/ color) SW Case companies (one/ color) SW and OEM SW in Kraljic matrixand OEM SW in Kraljic matrix

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Case companies according to Case companies according to Weele’s modelWeele’s model

Companies reside between 2 & 6, 4 on the Companies reside between 2 & 6, 4 on the avg.avg.

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Case: Measures 1/3Case: Measures 1/3

According to BSC with added supplier According to BSC with added supplier aspect the measures found to deploy aspect the measures found to deploy it quite evenly.it quite evenly.

If excluding company B with If excluding company B with measures and organization on the measures and organization on the plan level, half of the measures were plan level, half of the measures were financial based.financial based.

Only half of measures were directly Only half of measures were directly related on strategyrelated on strategy

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Case: Measures 2/3Case: Measures 2/3 Companies own most valuable measures:Companies own most valuable measures:

financialfinancial cost of development licensescost of development licenses cost for competence developmentcost for competence development TCO savings (procurement spend running cost -> savings TCO savings (procurement spend running cost -> savings

calculations) calculations) product costproduct cost

customercustomer FFR (field failure rate)FFR (field failure rate)

internal processinternal process Agreement info accuracy in the systemAgreement info accuracy in the system

learning and growthlearning and growth ability balanceability balance development discussion development discussion

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Case: Measures 3/3Case: Measures 3/3 Companies own least valuable measures:Companies own least valuable measures:

financefinance savingssavings fixed production overhead FPOfixed production overhead FPO

In the scale 1(=poor) to 5(exelent) the In the scale 1(=poor) to 5(exelent) the case companies evaluated their case companies evaluated their measuring, resulting average over three measuring, resulting average over three from the organization and procurement from the organization and procurement level and 1,6 from the OEM SW levellevel and 1,6 from the OEM SW level

Two of companies were developing Two of companies were developing measures on OEM SW level as two were measures on OEM SW level as two were quite ok with poor measures.quite ok with poor measures.

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ConclusionsConclusions The case companies had relatively few measures on this The case companies had relatively few measures on this

particular area.particular area. The few number might result little on the fast phase of The few number might result little on the fast phase of

interview, as some measures might not com into mind right interview, as some measures might not com into mind right away. Interviewees were not responsible of most measures away. Interviewees were not responsible of most measures as the were managed higher above in the organization.as the were managed higher above in the organization.

The OEM software procurement seem to lack strategy The OEM software procurement seem to lack strategy although:although: it was said to be the main driver of work, andit was said to be the main driver of work, and Measuring should be based on it.Measuring should be based on it.

Traditional financial measures by them selves do not fit on Traditional financial measures by them selves do not fit on procurement especially OEM SW (lagging and random procurement especially OEM SW (lagging and random vision).vision).

Measuring should have supply chain and balanced focus.Measuring should have supply chain and balanced focus. Measures should be in line with the strategy.Measures should be in line with the strategy. Managing of measures should be regular.Managing of measures should be regular.

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Further researchFurther research Is it more convenient to use some other Is it more convenient to use some other

management system than measuring, in management system than measuring, in complex business environments?complex business environments?

What is the most convenient measurement What is the most convenient measurement system in small business functions? Should the system in small business functions? Should the processes or job descriptions be the guide? processes or job descriptions be the guide?

Does the number of employees affect much on Does the number of employees affect much on profitability of measurement system? What is profitability of measurement system? What is the minimum number of employees required, the minimum number of employees required, when it is still profitable to create detailed when it is still profitable to create detailed measurement system from the scratch?measurement system from the scratch?

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Thank you!Thank you!

Questions?Questions?