Beyond Shedding the Deadweight in Procurement and Operations

There's a lot to be said for shedding deadweight in companies. GE's model of rewarding top performers and weeding out the bottom 10% acts as a form of HR Darwinism. And it's something that most companies could sorely use in their human capital management thinking. Not only does it keep folks on their toes and challenge them to perform better, it also ensures -- in a solid economy -- a constant flow of new blood coming into the corporate organism. But for many organizations, the downturn has already forced out the bottom 5-10% and with no hope for rehiring. When you get past this level when it comes to procurement and operations cutting, it's not a good sign -- it's a recipe for corporate savings and working capital suicide, unless, of course, you replace full-time FTEs with third party firms (e.g., outsourcing providers, contractors, consultants). But in this environment, even this is unlikely.

I still hear excuses that lend themselves to making CFO-types feel secure in their headcount cutting decisions. "Volumes are down," "we're managing fewer suppliers," "there are fewer POs and invoices to manage," "we're seeing good savings from reduced commodity costs," and "it was an across the board thing" are excuses founded on faulty logic (in most cases). Fact is, procurement, operations and finance can work together -- even in a downturn -- to reduce costs further. Hackett data suggests that even average performing procurement organizations deliver a near 300% annual ROI when factoring in headcount, technology, consultants, contractors, overhead, etc. This climbs by over 2x when looking at a world-class company. Tell me, if procurement is not a good investment, then what is? Show me one IT system you can rationalize that will deliver a 300% ROI. It might improve TCO, but we're not talking hard dollar returns and savings that will have a material impact on the bottom line in year 1.

Unfortunately, my view is in the minority. If I had my druthers and needed to cut heads 10% across the board, I'd sooner whack HR, IT and marketing before targeting those very functions that can prop up earnings in the downturn (without negatively impacting customer relationships). And I say this as someone who taps marketing budgets for a material portion of his income. But my view is not popular. Most companies are approaching RIFs right now with the precision of a 1920s machine gun, spraying bullets in whatever direction they can (provided the gun doesn't jam or backfire on them). In this environment, it's critical to do more with less in procurement. And even though we can fundamentally disagree on whether or not this is a good thing, it's become reality.

Given this environment, I'd suggest that procurement, operations and finance organizations take a few steps together when it comes to getting the most from cost cutting initiatives with fewer resources. The first step involves true P2P (eProcurement + EIPP) automation. This is not the, pardon the language, BS-isolated process automation that SAP and Oracle are selling which results in something like 1-15% supplier enablement and spend under management in most cases. It's the real deal, combining either installed or SaaS-based (or a combination thereof) enabling tools that span everything from upfront supplier enablement and onboarding, content and catalog management, and requisitioning all the way through to invoicing and payment (and the associated workflows and capabilities for invoice automation, supply chain finance, etc.). Sure, SAP and Oracle do some of this but anyone who thinks that a SAP or Oracle stand alone will get you to where you need to be in an era of reduced staffing in procurement and A/P is, to borrow a word used to describe my former governor, cuckoo. And don't fall for IT's rhetoric that system rationalization or standardization is going to get you there and save money at the same time -- especially in the downturn when productivity and efficiency is all the more critical (YOUR PRODUCTIVITY AND EFFICIENCY -- not IT's). If you need proof about the power of what this end-to-end P2P transformation can deliver, reach out to Hackett and check out their specific benchmarks. It's shocking.

The next step I'd take in this environment where reduced headcount is a reality is to turn to third parties on the sourcing front. Seek out expertise (especially those who will work with you without significant upfront fees if you don't have them) and go and bid out as much of your spend as you can. You should not feel good about the fact that your current prices are falling because of commodity markets. Rather, take this as a signal that someone is taking advantage of you somewhere in the supply chain by not passing on savings and open capacity fast enough. If you don't have the resources to go after dozens of categories yourself after layoffs, bring someone in who can show you the savings. They'll be there. And they'll probably be 5-20% higher than before the downturn.

The final recommendation I'll make is to be contrarian and scale up your operations and supplier development teams. On the ops side, take a close look not only at who is holding inventory, but where. A lot of the early planning assumptions you made a few years back may no longer be relevant and there might be a chance to take some serious working capital chunks out of the business without cutting too far to the inventory bone where you don't need to (which could result in less than perfect fill rates the moment anything ramps back up). By the same token on the supplier development side, identify those suppliers who are critical to your business and send in the reserves to help them get their cost structures down to ensure survival in the market. Chances are they lack your level of cost cutting sophistication. Create a plan to share in the savings love and get to work. This is not just a risk management question -- it's a savings one. And this is a big distinction when it comes to justifying headcount.

So what are you waiting for? Get to work. And go tell your VP of HR, CMO and CIO to fly a kite if they think cutting procurement and operations head count -- versus their own -- is a good way to save money in this environment.

- Jason Busch

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