This week, my former student Vel Dhinagaravel, and founder/CEO of supply market intelligence company Beroe, came to my class to speak. Listening to him reminded me of the fun we had starting up the first ever company to produce supply market intelligence focused on the procurement space. Today, Beroe is the most successful procurement intelligence company, and continues to lead the pack in this space. Here is a summary of how it all got started, in Vel’s own words!
I started at GM India after my undergraduate degree was completed in mechanical engineering. A week in, the head of logistics procurement quit – and I became the new head of logistics procurement, managing over 300 truck movements. I learned that to manage logistics you have to manage relationships with people in the supply chain, and I also learned that there is an informal network of relationships that had to be managed in the supply chain… this was in 2002. By then, I had became interested enough in supply chain that I wanted to study it more formally, and decided to pursue a graduate degree in the United States.
I learned about a program at NC State and this guy, Rob Handfield, that had started something called the SCRC…I think I sent him 27 emails before he responded. I came over as a student, and we started working on a lot of projects, including the supply chain simulation, now used in Rob’s Supply Chain Relationships class. Underlying the tool, it is sophisticated in terms of the algorithms we built. We began to work with a lot of companies who were interested in building external market intelligence in the markets they were working in, including companies like Shell, Valeant, GSK, Cardinal Health, and others. NC State has strong linkages to companies in the supply chain space and we started to work full time together.
One of the things I decided early in my career is that I never wanted a formal job! I liked working on different things, and so working with Rob involved always working on new and emerging problems. In 2005 a large software company gave us a project: They wanted to enter the ERP space but the cost for an end to end tool would be enormous, and involved too much risk. So their idea was to start by developing a tool for procurement, and this would offer a way for them to eventually get into finance. Also, procurement is a nerve center for companies, and is connected to other companies that could help them build their platform out.
They hired Rob and I to go out and speak to about 50 companies and gauge their interest in investing in a new enterprise program focused on procurement. What we found was that in the top ten things companies wanted, a procurement ERP system was NOT in their top 10. The number one thing they talked about as a challenge was that they believed that procurement didn’t understand the supply markets as well as the suppliers. Procurement has to go out and get the best possible price, and need to understand the market dynamics better then suppliers. But the heads of procurement said they weren’t confident their markets were well understood. We dug deeper – and found that procurement executives wanted data to help compare how much they were spending to market information, in order to understand their supply markets.
Think about it for a moment: Major companies spend a lot of money buying cans, logistics, marketing services, whatever, spending billion of dollars. But how much do they spend on understanding supply markets and dynamics? We went to figure out how much they were spending – and contrasted it with how much suppliers were spending to understand their customer markets. We went to 50 companies, and asked them: What is the ratio that procurement was spending on intelligence vs. what suppliers are spending on market information? We were astounded to discover that the ratio was 1 to 105. The same results applied to different regions and different industries markets. In effect, we discovered that at that time procurement was a backwater when it came to understanding markets – but it has evolved a great deal since then. At the time, however, we told ourselves that if procurement was spending $1 to the $105 that suppliers were spending, there were massive gaps in knowledge that could lead to massive savings for companies!
We did find one chemical company, Englehard that really understood this gap, and they were a forward thinker, and wanted to hire analysts and focus on market information. Rob and I asked them: What if we did it for you and set up a company and did your market research for you as a third party? One of their managers calls me and says – we will take you up on your offer. I need to send you a contract, and what is the name of your company? I didn’t have a name for a company. Rob came up with the idea of calling the company Beroe, who was the goddess of Beirut, who according to legend would travel around the world and tell people what she had seen. This was a great metaphor for a market intelligence company.
Later, (after we formed the company), we discovered that Beroe was talking a lot about what she saw, but it was about the wrong type of stuff! She was the chief gossip – more like People magazine. Beroe is also the name of a jelly fish and a Turkish football club! At any rate, we started Beroe in 2006 and the company gave us a single category for a pilot study, and it went well. And we started growing. In 2006 – we had a simple outsourcing model. Instead of having analysts in Chicago, they were in India. By 2008 we had grown to 25 people. Business was good and profitable – and we never raised any external money. Our initial total investment was $9000 and I ran the business…
I started to think about how our analysts were working. By this time, Englehard had been absorbed by BASF. Each company had five analysts, and the idea was that a company could ask them for any research they wanted. They were in Chennai – but every analyst was being asked to work on a variety of things, including logistics one month, research on plastics, the next, or whatever was on their radar. But Beroe wasn’t building depth in any market area – even though procurement wasn’t that demanding yet. It was still the era of quick wins, and procurement wasn’t yet starting to ask tough questions that our analysts couldn’t answer. So we moved to a model of specialists – metals, chemicals, indirect services, etc. In this model, we decided that we will answer your question based on the right team who specializes in that market, who builds a network of subject matter experts, and who really understands the details of what is going on in that market. This worked exceptionally well – so that by 2013 we had grown to 300 analysts. We then focused on 9 industries – healthcare, FMCG, mining, materials, etc., and asked the question: what do they spend money on? What is the top 90% of their spend – and this led us to a total of 310 categories, with about one analyst per category. Today we are at 450 categories, which is more than a 1 to 1 map to our analysts.
In this model, a procurement manger could speak to an expert in virtually every space in the global supply market. You name it: eggs and milk, chemicals, freight in Eastern Europe, craft labor in Canada, you name it! It was very granular –but it wasn’t an easy way to do the business. Our specialist model was difficult to operate, especially around load balancing! We would get four questions on eggs all coming in the same week, which would all fall on one analyst. But if a company had five analysts assigned who were generalists, it would be easier to manage. It was the most important shift we made.
IN 2013 we grew to 300 people, and most of our revenue was in a time and materials model. But inflation was catching up with us in India – between 2006 – 2013, our wage bill had gone up 200%, but the billing rate had stayed flat. You can’t go to a US customer and ask for a 20% wage increase – you are lucky if maybe you get 2%. We were still profitable but the only reason for this was exchange rates. The dollar went from 30 rupees to 60 rupees. So while India had inflation, the exchange rate helped to ensure we were still profitable, but working on the idea that the dollar we appreciate by 100% every seven years is not sustainable. At least you can’t bet the business on it. So we had to de-link our revenues from our inputs, and had to become more productive.
Time and materials is the most inefficient approach for running a business, and so we decided to move to an output based model. We created a model Beroe Infinity, which involved the following proposition: Pay us a fixed feed per spend category, and use us in an unlimited way. Throughout the year you can ask us any number of questions. We are getting the same amount of revenue, regardless of the amount of input. Customers could have overrun us with this model, and we could have been overloaded. But then I discovered an important lesson.
Let me illustrate this with a story first. Food in colleges is horrible in India. When I came to the US and people complained about the food at NC State back then, I told them I thought it was amazing compared to what we had experienced in college! (Today almost all college food, including NC State, is excellent!) But at my university in India, breakfast consisted of had bread, butter and jam which was pre-plated: four slices of bread, a slice of butter and a spoon of jam. People would complain about it every day. Finally, the guy who ran the cafeteria got sick of the complaints, and one day he has brought out all the bread upfront on the counter, along with a 25 kg jar of jelly, and a massive slab of butter. “Take whatever your want!” he said. And people went crazy eating bread and jelly and butter. After two weeks of this passed, however, a note was posted in the cafeteria: the average consumption after things had settled down was 4 slices of bread, a slice of butter, and a spoon of jam.
And for Beroe, I also recognized that people will only ask for research they can consume! Beroe Infinity was a great move for us…it worked out. We moved to 425 analysts in 2014. It is about how much revenue per employee you can generate, and productivity levels doubled in 2016 and we continued to see productivity going up. We raised external capital for the first time in 2016. And we just recently released Beroe LIVE, which is providing basic MI for free to everyone, with additional insights paid for on a customized basis. And it is working great!
In the next post, Vel shares his insights on how procurement needs to be more competitive by benchmarking savings versus competitors!