Spend Matters welcomes a guest post from Jeff Gibbons of The Hackett Group. Jeff is a director based in Chicago primarily focused on identifying measurable, implementable operations improvements. He has led and contributed to engagements in business process re-engineering, organizational transformation/design, working capital optimization, program/portfolio management, sourcing & procurement, and synergy analysis.
As cost cutting efforts have generated less benefit since the initial market downturn four years ago, organizations have increasingly turned to transforming their sourcing and procurement functions to generate the next round of gains. Whether an organization is creating/defining the procurement function, making incremental improvements, or maturing it to a world-class level, several areas consistently derail transformations. Here are six (sometimes overlooked) critical factors to ensuring a successful procurement transformation:
- Address foundational technologies. Procure-to-pay and sourcing execution rely heavily on timely availability of data as provided through centralized systems/tools (e.g. single instance ERP, contract management). In a recent benchmark of leading retailers, we found that indirect spend under management per indirect sourcing employee was 9 times higher for the median retailer vs. the trailing retailer. And the largest capability gap of the trailing retailer was in terms of foundational technology and associated data availability.
For the trailing retailer, without a cross-functional ERP platform, contract management system, e-procurement tool, or any such centralized tools, efficiencies suffered (sourcing cycle times were 2 times their peers) and so did effectiveness (procurement ROI was half). Foundational technology investments are sometimes overlooked "table stakes" for a successful procurement transformation and future state organization because they are only enablers to benefits - but they are critically important for success.
- Establish end-to-end process ownership. The procurement organizational models employed generally fall under decentralized, centralized, or a hybrid of the two. Regardless of the organizational model, the following are typical expectations of the governance by an end-to-end procure-to-pay (P2P) process owner:
- Manages and reports on KPIs supporting both purchasing and accounts payables processes end-to-end
- Develops and continuously updates the end-to-end process strategy to ensure P2P alignment with overall business and functional objectives
- Drives process improvement and technology implementations across the P2P process to ensure end-to-end performance optimization
- Facilitates involvement and alignment across potentially multiple operational entities supporting the P2P process
By establishing an end-to-end process owner, accountability for overall performance and improvements is enhanced. And while the process owner cannot directly control all aspects of the procure-to-pay value chain, aligning incentives to efficiency and effectiveness performance helps avoid sub-optimal siloed performance.
- Mature the key sourcing & procurement process areas (Strategic Sourcing, Supplier Relationship Management, and Procure-to-Pay) in parallel. A potential misstep during a procurement transformation is to overinvest in one aspect over others. For example, it is easy for a financial organization to focus a procurement transformation in strategic sourcing opportunities to drive bottom-line savings, while neglecting the transactional aspects of procure-to-pay and the compliance, development, and performance management opportunities associated with supplier relationship management. Benchmark data shows that by balancing each of these aspects, world-class procurement organizations generate more than 10 times the return on investment (ROI) of typical companies. It is, therefore, important to ensure balance in attention to the maturity of each of these critical process areas, along with supporting people and technologies.
- Use external support wisely. External consulting is valuable to support and accelerate transformation efforts. Its primary benefits include:
- Setting up and providing ongoing transformation program oversight
- Bringing external best practices
- Facilitating cross-functional discussions, and
- Adding short-term resource capacity
However, one of the greatest benefits that external support can provide is to supplement category sourcing efforts, the primary source for funding procurement transformations.
Note that it is important to ensure that external consulting has oversight from internal resources to provide:
- Input and direction into initiatives
- Management of overall results, and
- Most importantly, a smooth transition to internal ownership of the initiative and ongoing program post-transformation
- Identify, execute, and communicate quick wins. A transformational effort requires both internal buy-in and ongoing support. A key aspect of this is to identify "quick wins" that meet the following key criteria:
- Requires limited resource effort, cost, and elapsed time
- Generates measurable benefits to efficiency and/or effectiveness (e.g., bottom-line financials), and
- Ideally, benefits multiple cross-functional organizations
Momentum can often be lost on multi-year, multi-million dollar transformation efforts and one of the best methods for maintaining momentum is to identify, execute, and communicate highly visible quick win opportunities. Some of the best candidates include:
- Previously untouched, quick turn, cross-organizational sourcing opportunities (e.g., office supplies, facilities management)
- Defining, refining, and/or overhauling organizational policies and procedures (e.g., p-card program)
- Establishing cross-functional governance to improve internal customer satisfaction (e.g., internal service level agreements)
- Supplemental technology tools to free up capacity throughout the organization (e.g., workflow approvals)
- Proactively address change management. A typically under-resourced, under-appreciated procurement transformation consideration is change management. There are multiple facets to addressing change management, including:
- Managing internal and external communications regarding changes to policies and procedures. Many of these (e.g., changes to vendor payment terms) should be managed closely and consistently to avoid risking critical relationships
- Celebrating victories: victories in sourcing and procurement across functions should be communicated broadly through relevant open forums (e.g. intranet)
- Training: to address existing capability gaps and any planned changes to processes, training should be developed and administered
While there is a great deal of complexity associated with procurement transformations, the above success factors can help avoid many of the common pitfalls and roadblocks that organizations may come across.