The Art and Science of Sourcing and Procurement in 2024

Megan: Today, my guest is David Pennino. David is the president and chief executive officer of LogicSource as well as a founding partner of the firm and a member of the board of directors. Given the strength of the team he has built around him, David focuses all of his efforts on three imperatives. One, is corporate strategy, including category and footprint expansion. Two, product and service marketing and positioning. Three, client service and new client acquisition.

David has over 20 years of experience in the services and outsourcing industry, including roles as a senior executive at Williams Lea Group, Scient, and Gartner. David received a Bachelor of Arts from Franklin & Marshall College. David has been married to his wife Elizabeth for 23 years and lives in Charleston, South Carolina with their four daughters. David, thank you very much for joining me on today's episode.

David: Thank you for having me. I really appreciate the opportunity.

Megan: Yes, today, we'll learn about you, of course, but we'll also learn about indirect procurement and why you can't fire your way to growth and what CFOs and companies should be doing to counteract inflation, which as we all know is crazy at the moment. I'm really looking forward to our discussion, so let's get started.

David: Great.

Megan: As always, let's start with you and your story as to how you got to where you are today.

David: Sure. Well, a very, very brief background. I grew up in Connecticut, actually, where our companies are headquartered. Professionally, I started my career at Gartner, one of the largest IT advisory firms or I think the largest IT advisory firm in the world. I became fascinated with how one might build a very large-scale, tech-enabled services business. I thought buying things, put simply, was an interesting place to do that.

A lot of economies of scale in the area that corporations and enterprises weren't very good at. I wanted to go build a company to help organizations buy more efficiently, which ultimately helped them fund growth initiatives and keep people employed, and so on and so forth. Today, we are over 310 jobs in the town I grew up in, and growing like a weed and supporting about 50 marquee brands and driving profit improvement for them.

Megan: That's amazing, so let's talk about your organization. It's called LogicSource, so what is it that you guys do?

David: LogicSource has two main business units. Under the LogicSource brand, we have a professional services business where we are a utility for sourcing and procurement. I use that word very deliberately. There's a lot of advice in the market in the form of consulting as it pertains to profit improvement or performance improvement. We wanted to do something different, which was really having an execution-based offering, so not just advice but actually following through and delivering on advice.

We built a utility to help organizations buy better and drive profit improvement. We've organized that business in a very simple delivery structure, which we call for you or with you. Our clients that want to be really good at indirect procurement can do it with us. We can help them with more resources, more tools, more data, and more spend leverage, and help their internal teams do more, buy better, increase their frequency in the market, and drive profit improvement. We have clients that don't want to do it internally and we do it for them.

We become their sourcing and procurement department and run the whole function for them. It's about half and half in terms of our clients where we help internal procurement teams do their job and others where we actually run the function for our clients. Then our second business unit, which is under our OneMarket, O-N-E Market, brand, is our software business. We have a five-module SaaS software stack that we've owned for 13 years, but we've, in earnest, been out in the market directly selling software for a couple of years now.

Frankly, when we looked out in the marketplace at the software that was available, we were left wanting. We felt that it was over-engineered, overpriced, and candidly built by people that weren't operators and didn't really know procurement. We built a by-practitioners-for-practitioners software toolset under our OneMarket brand. Those were our two primary business units all focused on sourcing and procuring goods and services that enable companies to be in business every day.

Megan: That's really cool, so you started with the procurement services, realized what was missing in the software, and then developed that?

David: Correct, our software business was more captive at first. We used it to provide the services. Now, we still do that, but we also sell standalone.

Megan: Okay, so let's talk about what your ideal client looks like.

David: Sure, so we've been at this for about 13 years. Our clients range from brands like Lululemon and Tractor Supply and Wiley and McGraw Hill and Titleist and Ocean Spray and-

Megan: They're all big names.

David: -WellSpan Health. We have clients in retail. We have clients in financial services. We have clients in health care and consumer-packaged goods. I'd say what they all have in common is they provide goods and services. They sell goods and services through the internet or physical space for both consumers. That means they spend a lot of money on physical space, marketing, distribution, logistics, IT, corporate services, et cetera. In our business, spending is what's interesting and they all spend money on similar things.

Take media, for example. If you're buying TV time for a knee replacement or yoga pants or a golf ball, it's still the same media buy. We can provide economies of scale across multiple industries by being good at business-to-consumer sourcing and procurement. That's kind of the world we live in. Our clients range from $1 billion to $70 billion in revenue and spending that ranges from a couple of hundred million a year to several billion a year in terms of spend under management.

Megan: What are your proudest achievements since founding LogicSource?

David: For me, it's interesting. It has changed over the years as a founder. I started this company when I was 35. I just turned 49. What I would've said to you at 35, 36, and 37 would probably be different than what I'd say today. Today, I get a real kick out of how many jobs we've created and how many people feed their families by being a part of our family here at LogicSource. That's really fun for me.

Being in a building that was abandoned when I was a kid in Connecticut that's now a thriving headquarters of our company as well as some other really great growth companies in Connecticut is really fun for me. Opening offices in other environments like Charleston, South Carolina, and having employees all over the country in Canada is really fun. I'd say today, my most proud attribute is this, all those people that work for us and get great benefits, and 401(k) matching and all that stuff because we created this company.

Megan: Yes, sounds like you built an amazing business. Just curious. You had an idea to start up a service or an offering or a company. How did you go about doing that? What steps did you take to make your idea a reality?

David: I've been incredibly fortunate. I've had amazing mentors throughout my whole career. I've been very, very lucky in that regard. I worked for Manny Fernandez at Gartner, who was a legendary leader and visionary. I had the opportunity to work for Bob Howe and Steve McCatty at Scient. These are the guys that ran IBM Global Services and founded IBM Global Services. I had a great mentor in Justin Barton at Williams Lea back in the day.

I've had these great mentors. One of them, when I built my business plan, I wanted to do this, Michael Fleisher, who was the chairman of Warner Music Group at the time, just recently retired as CFO of Wayfair. I sat down with Michael and said, "I wanted to start this business." He said, "How can I help?" I said, "You can do three things. You could be a customer, you could be on my board, and you could invest."

He said, "I'll do two of the three. I'll be on your board and I'll be a customer." He did both of those, but I invest through Bain Capital, "I'll walk you into Bain." He introduced me to Jeff Schwartz at Bain Capital Ventures. Jeff took a meeting with me. A couple of meetings in, he funded us to start the business from absolute scratch. Then we bought our software business from a private equity firm out in St. Louis, a guy named Doug Morris and his partners.

Those guys were really great friends and partners who helped us start this thing up. We were just really fortunate to have those kinds of relationships where people introduced us to top-tier firms. I don't know if this is a fact, but I think I'm right. I don't think Bain Capital Ventures has ever funded anything at that point in '09 from pure scratch. It was a fun journey. It's been very hard since then, but we're still here.

Megan: Yes. Well, it sounds like you guys are thriving. [clears throat] Sorry. You're passionate about helping organizations to buy better, which you have been helping companies do for the past 20 years. How has your approach evolved in the last 20 years?

David: Life keeps throwing us some curve balls.

Megan: It's coming faster and faster. [chuckles]

David: I actually just spoke at an event where I said, "Our business is good, and a good economy is better and worse." It's interesting in shifting sands, which is where we've been lately. In really good times, a lot of what we're doing is driving efficiency to fund growth, new initiatives, pivoting off of a current business and expanding, "Store of the Future" for our retail clients like Big Lots, or opening up the men's line for Lulu. How do we create cash to go do that by freeing up capital?

In good times, that's the kind of stuff we do. Then you get into a COVID-type environment where everybody was trying their best to stay open, or they were an essential business and they had to stay open and they had to keep their employees safe. Then supply chain crisis hits and inflation hits. It's constantly evolving. At the core, it's all the same stuff. How do we partner with them to help them drive a culture of efficiency?

How do we make their budgets go further? Find more innovative supply partners that can do more so that they can either keep people employed or fund growth or fund innovation or not hit their debt covenants in a bad way and things of that nature. The tools and the process stay the same. The application of the results changes, depending on the economic environment.

Megan: How is LogicSource currently reinventing sourcing and procurement?

David: We think that it's a date myself. When I started at Gartner, there wasn't a CIO. There was an MIS director. They pushed around an AV cart. They had screwdrivers in their pocket. They went down when they got to the elevator, not up, and they worked on the mainframe. At one point, they gave the screwdrivers to Xerox and they gave the mainframe to IBM. They went upstairs. They put a suit on. They started talking about innovation and omnichannel and security. They became the CIO and they became a competitive differentiator.

Technology is clearly a competitive differentiator for corporate America and for most enterprises. Sourcing and procurement are still stuck in the Dark Ages. The mere fact it's still called procurement gives one the sense that somebody's made a strategic decision and procurement are just executing on that buy. We're really in the spend management business, so we're trying to elevate the role of sourcing and procurement. Our job is to help manage the company's money, make budgets go further, and fuel innovation. It's not just to procure something. We're trying to elevate that and it's working.

If you look at the salaries for sourcing and procurement professionals, and the titles where they're reporting in the enterprise, the last two, or three years have been an incredible period of growth for sourcing and procurement. Not just corporations that have started and grown, but also the individuals that have chosen this as their career path. In fact, I was at my daughter's college orientation a couple of months ago. They said the top five majors that didn't exist when I went to college and perhaps when I went to college, number one was the supply chain.

Megan: Yes, I believe it. A company that does sourcing and procurement well, what can they expect to save versus a company that does not do it well?

David: The stuff that we do, the math on this is about a consumer-facing business. If you're a hospital system, if you're a consumer-packaged goods company, a retailer, an e-tailer of retail financial services, or insurance, you're going to spend about 20% of revenue on the stuff that we focus on. Marketing, IT facilities, distribution, logistics, corporate services, et cetera, so about 20% of revenue. If you're a $1 billion company, you're going to spend about $200 million on this stuff. You should be able to save between 5% and 14% on that if you're doing this right.

Megan: Wow.

David: If you don't have this function, that number could go up. Now, you have to adjust for markets. Right now, we're seeing some of that inflation coming back. You have to index that. During the really high inflationary periods, you had some headwinds. Even in those environments, we were still saving 5% to 14% with inflation. We're talking big numbers.

Megan: Yes, definitely. Really big numbers. What are some practical steps a company can take in 2022 to buy better?

David: I think the first thing, it's like any problem you have to get past the denial stage. I think corporations have to embrace sourcing and procurement leaders and departments as key executives in the organization. Your head of sourcing and procurement should have a C in front of their title. There should be a chief procurement officer and a chief sourcing officer. They should report to the CFO of the organization. They should be partners in driving a culture of efficiency. They should have tools.

If you can't see what you buy, who you buy it from, how much you pay for it, who buys it, and why you buy it, you can't manage it. You have to have smart source-to-pay solutions from a SaaS software perspective. You have to have smart data analytics. You have to have your contracts automated, scanned, coded, and tagged so you know when there are auto-renewals and things like that you can source through. There are just those blocking and tackling. You have to look at this as a key function of the organization.

You have to empower them because most procurement departments we meet are on a journey to gain influence instead of being supported top-down. I think those are some of the biggest things. You have to have top-down support. You have to have the right people in place. You have to have the system so that you can manage it. You have to have an ecosystem of suppliers. You have to have the domain expertise for all the categories you're sourcing so that when your business units come to you for support, you're ready and you deliver them a result.

Megan: Speaking of which, once you have these tools in place, how do you encourage employees to actually use them and not just go out and purchase something on Amazon?

David: It's all about leadership. I think that our clients that have really gotten great at this have had a top-down approach to say to their colleagues and their employees, "Folks, our job is to--" especially in these dark times we're all sailing into, we want to keep people employed. We want to keep great benefits and great 401(k)s and all this other stuff. To do that, we have to be efficient. A top-down approach from leadership saying, "We're going to do this."

I can't tell you having grown up in sales, how many phone calls you get in Q4 saying, "Hey, I still have a budget. What can you sell me so I don't lose the budget?" That is a red flag that your culture is not efficient, right? If somebody's worried about blowing money so that they don't lose it in next year's budget, you have a top-down leadership challenge. These folks should be thinking about, "How do I drive profit improvement for my corporation? Not only can I achieve my bonus, but can I work for a healthy, stable company that continues to grow?" That's all about leadership.

Megan: You may have touched on this, but what is the value of indirect procurement to a CEO or a CFO?

David: One of our CEOs, I thought, said this really well. I met with him, spent a couple of hours in his office, and he said, "I got to tell you. When I started this conversation, a friend asked him to meet with me." He did a favor to his friend. When we were done with the conversation, he kicked his executive assistant out twice and kept talking. At the end of the conversation, he said, "I got to tell you. When I took this meeting, I thought indirect procurement is life priority 99."

He said, "but having spent an hour and a half, an hour and 45 minutes with you, I realized I'm right. It is priority 99, but it'll fund priorities 1 through 5. I don't want my team doing it because my scarce and valuable resources need to go focus on priorities 1 through 20. I want you to go do this so that you can fund those priorities for us." I think that's the way CEOs should look at this. This is a specialty skill. It is very hard to justify the domain expertise you would need internally to do this really well.

Results here dropped directly to the bottom line in funds. Survival for some companies. Innovation and growth for others. It's critical. Find partners that can come do this for you and accelerate your journey into the space and free up that money. To use a gold mining analogy, this is gold lying in the riverbed. Get somebody that knows how to go pan it so that you can benefit from that return.

Megan: Yes, it's just there for the taking.

David: Correct.

Megan: What are some common misconceptions about procurement?

David: Procurement has a brand challenge. I think that if we did a brand awareness study on procurement and-- if we walk through Dreamforce last week, Salesforce is a large event, and just grabbed the microphone and walked up to people and said, "Hey what do you think of procurement?" If we went out to an Apple conference, a Gartner conference, "Hey, what do you think of procurement," I think we find that suppliers to the enterprise find procurement frustrating. They can be viewed as the chief "no" officer, an extension of legal.

"You're going to slow down my process." A lot of business executives, chief marketing officers, and CIOs feel like procurement doesn't understand their business. They're just there to beat suppliers about the head. I think that's what's so daunting for CEOs and CFOs. It's very hard to build the domain expertise to truly do category management well, which is why partners make a lot of sense that we only exist to help an indirect procurement. That domain expertise is absolutely critical and can help overcome the brand challenge procurement has.

Megan: I'm just curious. Do your customers pay based on savings or are it just a flat rate?

David: Gain shares and savings-based programs are a recipe for a very difficult marriage. We look at it as, "The money we save is your money." It's the company's money, not ours. The amount of effort it goes to drive $20 million in savings versus $5 million, $50 million versus $15 million depending on the category and workload. We get a fixed fee for the work we do. We have quite toothy clauses that make sure that we have to deliver our economic value or we see real pain in the form of rebating back, but we don't like to do gain-share deals and things of that nature because everybody ends up in a fight over who did what. It's hard to budget to gain a share as well and CFOs need to budget.

Megan: As you look back on the last two and a half years, how has the pandemic affected the sourcing and procurement industry?

David: You never want to say a pandemic was a good thing, so I'm trying to use my words carefully. Let's just say it definitely elevated sourcing and procurement because companies didn't have a choice. One, they had to buy things they never bought before like PPE, and glass screens for registers. They had to keep their employees safe. They needed somebody that can go buy all that stuff and a lot of it was hard to get.

Sourcing and procurement had an opportunity to show how good they were by going to get things that were difficult to get and keep an employee safe, so it elevated them a bit. We had to try to drive efficiency to keep people employed and weather a pretty severe economic hit that most companies took, restaurants that weren't open, retailers that couldn't open, et cetera. Again, sourcing and procurement had an opportunity to show their value by negotiating better deals, leases, and all these sorts of things.

Then we had a supply chain crisis. We couldn't get things. Again, sourcing and procurement had an opportunity to show, "Hey, we can help you get things. We can negotiate this." I think it's been good to elevate. We see it in salaries for sourcing and procurement professionals. We see it in the valuations of sourcing and procurement companies. I think in general, it turbocharged what was probably going to happen anyways, which was elevating the role.

I don't think it finished the job. I think there are a lot of organizations that still don't value their sourcing and procurement professionals. I think there are a lot of organizations where high-potential employees don't go into procurement. I think that will continue to change. I think the leaders in corporate America will look at high-potential voices going into those functions and the laggards will regret not doing that.

Megan: Along those lines, where do you see the future of the industry going?

David: It's interesting. I think you will see more and more players getting into this space. I've noticed of late, every consulting firm has a performance improvement practice because the space is hot. I think you'll see the continual entry of new software players because there have been big market caps for some of the early entrants. I think data isn't yet a power player in sourcing and procurement, but I think it will be really soon.

I think you'll see us do some big things in data because there are some really smart things you can do with AI to do immediate benchmarks and drive the first day of value much quicker, leveraging data the way you might in the stock exchange or bonds, et cetera. We're buying things and the prices and the markets move. I think you'll see the industry gets smarter on how they leverage data and the way other industries have. I think you'll continue to see salaries push up. I think you'll see competition for those jobs as more and more companies realize we really need this function within the enterprise.

Megan: Do you find that procurement is just something that people think about in bad times, whereas in good times, it's problem 99 like that one CEO said?

David: I think that really successful companies are always thinking about it. I think it's a fool's errand to not focus on good and bad. I think about it in the context of wealth management. In bad times, managing your hard-earned savings is critical, so you lose as little as possible. In boom times, smart investors try to maximize their returns, not just rest on whatever the Dow and the S&P 500 are doing.

I think of it in the money management or wealth management context. You want to outperform in great times and you want to outperform the lows in low times. You always have to manage your money. I think it's the same in indirect procurement. We manage the company's money. In great times, let's make more than everybody else. In bad times, let's lose more than everybody else.

Megan: Yes, that's great advice. As we look at those who have achieved unicorn status within the procurement space, what do you think we can learn from them?

David: I think there have been players like Coupa and Ivalua and others that are in the software space that have achieved billion-plus market caps. I think they tell us that the market is hot. Any industry that starts to see north of $1 billion valuations for companies that have lower revenue, that's a white-hot space. I will say, it's interesting though.

I think they all have to keep their eye on customer satisfaction because there are a lot of companies that have cropped up during the last 10 years or so as procurement started to mature that have achieved big market caps and our advertising in Yankee Stadium and doing these big things, but their customers are not implementing the technology effectively and not getting the full value of the technology. I think that you can get drunk with the market cap and forget that your customers need to be happier that they'll come back on you.

Megan: As you look internally, what is maybe one or two of the biggest challenges that you and your teams are facing this quarter?

David: I'm sorry. Would you mind repeating that one?

Megan: Sure. As you look internally, what are one or two of the biggest challenges that you and your teams are facing, let's say, for the remainder of 2022?

David: Yes, I'd say there are two key things. I think the supply chain crisis is chilling out a little bit. I think there was a lot of inflation that was legitimate and there was an awful lot of price gouging. I think the price gouging will be illuminated and those that played those games will be in pain going forward. I think the two biggest challenges would be, we need the economy to pick a direction because CFOs and constant sand-shifting under their feet is not a good combination. If it's going to be good, great. If it's going to be bad, fine.

It's constantly changing that, I think, creates indecision that is damaging to any of these decisions, whether it's picking a new supplier, negotiating a new partner, or trying to draw initiatives like cost takeout. We need some stability here. I think that our biggest challenge is getting CFOs to pick a direction and stick with it. The economy keeps getting them in a position of second-guessing themselves. I think the second thing is that this talent will continue in this space to be hard.

I think there are those that believe the great war on talent will continue even in a recession. I don't necessarily agree with that in a lot of job functions. I think in sourcing and procurement, talent is going to continue to be difficult because there aren't enough great category managers, and great sourcing and procurement negotiators out there. Companies will continue to see resignations and people going to find more flexible work environments and more fun and more money.

Megan: Lastly, what advice do you have for CEOs who are looking to drive or even CFOs looking to drive strategic value to grow profitability?

David: I would say, have the initiative to profit mine in the field of indirect procurement. There's a lot of money here. It's not just rate-based savings and negotiating better pricing, there are a lot of process improvement opportunities. There are a lot of value engineering and specification-rationalization opportunities. This is a very rich area if they don't have an initiative here, they should. I would also say having been a consultant, consulting is not the right model. Consultants lovingly don't buy anything and they don't do anything.

When you're looking to drive efficiency in indirect procurement, don't start by writing a check to a consultant. Get folks that can actually execute and actually bring spend leverage and relationships and volume to the party. Make them show you their nickel before you write a check. I would say one of your strategic imperatives as a CFO has to be, how are we going to take 5% to 15% out of indirect procurement in 2023 and how do we start right now? Because by the time we do the analysis, January 1 is upon us.

Megan: Great advice. David, thank you so much for being my guest today.

David: It was awesome. Thank you so much for having me.

Megan: I've really enjoyed speaking with you and hearing about all of your experiences. I wish you and LogicSource all the best. Sounds like you guys are both providing a lot of value. To all of our listeners, please tune in next week. Until then, take care.