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To raise procurement’s value contribution to the next level, world-class organizations have adopted a “borderless” approach, breaking down traditional geographic, information and process boundaries. This includes optimizing the service placement model globally, embracing analytics to gain new insights, and extending process transformation beyond the enterprise to include suppliers.
Are World-class Procurement Organizations Too Lean?
In 2013, world-class procurement organizations reduced their labor, outsourcing and technology costs by 1.6 percent; the peer group, by 3.0 percent. Over the years, cost-reduction efforts have been successful, but these have come at a price. Today, these organizations are running extremely lean – perhaps too lean. World-class procurement’s challenges are compounded by their diminishing ability to reduce spend and avoid purchase costs, down sharply in 2014. This represents a 17.3 percent decline, returning annual savings levels to only slightly above pre-recession benchmarks.
World-class ROI (i.e., the ratio of total purchase cost savings to the total cost of procurement) is still strong at 9X payback on investment in procurement processes, but this number is losing ground as cost reductions level out and savings decrease.
Five Characteristics of World-class Procurement
World-class procurement organizations are offsetting the reality of today’s diminished returns by expanding their value proposition and focusing on five areas in which to differentiate themselves:
1. Being a trusted advisor to the business
Half of world-class procurement organizations report a high level of involvement in the company’s budgeting and planning cycle. They are considered valued business partners by the organization, not gatekeepers or administrators. To achieve this status, they make certain to proactively understand what drives the requirements of the business as opposed to simply facilitating the buying process. When the requirements are truly understood, costs can be reverse-engineered, making it possible to explore potentially less-expensive and/or higher-quality alternatives.
Procurement’s senior executives play an important role as well, making sure that staff goals are aligned to the strategic plan of the company. This helps ensure that the value delivered is tailored to the specific needs of the business and that priorities are properly set. When goals are aligned and procurement is viewed as a valued business partner, its ROI is over two times greater than at organizations where these characteristics are lacking.
2. Driving suppliers to innovate
World-class procurement groups are very effective at harnessing the intellectual capital of their suppliers to bring new and innovative solutions to bear, helping to influence (not just support) the business strategy. This is enabled by maintaining a strong business relationship with key suppliers and working collaboratively to create customized and unique solutions. Even if breakthrough solutions are not identified, better collaboration often leads to cost savings, product substitutions and cost-sharing programs. Procurement organizations that have invested in formalizing the innovation life cycle (spanning idea formation, evaluation, development, productization and continuous improvement) have seen positive results. In fact, in 2014, the average contribution of supplier innovation efforts to companies' total revenue is 3.5 percent.
3. Providing analytics-backed insights
World-class procurement works closely with the business during operations planning and budgeting periods to provide predictive insights on supply markets. This requires having the tools and expertise to turn data into actionable knowledge. The ability to view spend data by suppliers on a global basis is a building block of more predictive analytics. Among world-class organizations, 89 percent have a significant level of information available compared to just 43 percent of the peer group. More advanced technology is also being put in place. Using artificial intelligence, these tools “learn” patterns that help them automate the process of cleansing and rationalizing data. World-class procurement organizations have mastered this competency to the point that analytics, market intelligence and benchmarking are offered on demand as a service to key stakeholders. These skills are frequently centralized in a center of excellence so they can be leveraged company-wide in a standard format through a single point of contact.
4. Protecting the business from risk
World-class procurement organizations have formal risk management programs to ensure supply continuity and regulatory compliance. Organizations with a formal and broadly applied strategy for assessing risk have greater procurement ROI (6.18) than those without them (4.99). This includes completing supplier risk assessments and working with finance and other stakeholders to determine the best mitigation strategy when risk exposure is identified. Despite the advances of world-class organizations in this area, the lack of a mandate and limited resources remain top challenges.
5. Taking an agile approach to staffing
World-class procurement organizations are distinguished by the way they attract, develop and retain talent. For one thing, they provide more training and invest more in retention planning; they also pay higher salaries. This helps explain why they require substantially fewer FTEs than the peer group and are more productive overall.
World-class procurement organizations adapt their service delivery model to an extremely diverse set of budget owners (and functional partners) in the value chain. Delivering this level of agility requires that these organizations move from individual talent management (i.e., “throw the best people at the problem”) to knowledge management. The key is shifting from current FTE staffing models to more flexible/variable resourcing models and by providing better IT support to capture and reuse knowledge/intelligence.
World-class procurement organizations are not limited by geographical borders. Hiring globally and from other parts of the business helps open the door to new sources of skills and fresh thinking. For example, many have created internal entities (e.g., Global Business Services or more traditional shared services organizations and Centers of Excellence); they have established relationships with external entities such as business process outsourcers to support activities such as providing supply-market intelligence.
Over the next decade, the location of procurement activities will continue to evolve until the optimal mix of efficiency and effectiveness is reached. The talent aspect of this equation cannot be underestimated. Procurement staffs will be required to blend critical business skills (e.g., transformation experience, relationship building, management and communication skills, and strategic thinking) with emerging skills (e.g., category knowledge, global supply market and technology know-how, and risk assessment). With this increasingly sophisticated set of requirements, procurement leaders will need to become adept at mixing and matching talent to obtain a complete skill set stretched across several people, rather than try to hire or develop individuals with all of these skills.
Increasingly, senior executives want to know what the future of procurement looks like and how its value proposition will evolve. Based on years of working with hundreds of procurement organizations, we have identified a series of discrete stages that nearly all companies pass through as their value proposition evolves on the way to world-class performance.
This model starts with a traditional purchasing organization that is reactive and transactional, processing POs and occasionally negotiating a contract with pre-selected suppliers. The next two stages above the base involve separating transactional purchasing from strategic supply management activities and aligning organizational structures, processes and staff around supply markets in order to gain leverage in spend effectiveness and process efficiency. The top two stages focus on how to help internal customers get more value from their spend.
At this highest level of the value pyramid, procurement has no other agenda than to advance and support the business strategy, and no measurement system other than the metrics that define business value for the organization. It becomes a professional services provider that is a proactive, trusted agent of change. At this stage of maturity, a deep arsenal of capabilities allows the company to harness the power of global supply markets for competitive advantage.
The strength of the vision of future supply processes is a key predictor of the evolution of procurement’s value proposition. No single action will instantly elevate procurement’s brand and value proposition. Rather, continual self-reinvention is required.
The authors – Patrick Connaughton, senior research director; Srinivasa Rao Dabbera, manager, quantitative analysis; and Christopher S. Sawchuk, principal and global procurement advisory practice leader – are with The Hackett Group.
The Hackett Group
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