How to Achieve ‘World-Class’ Procurement Agility

In October, The Hackett Group released its 2016 report of its study into world-class procurement organisations and what makes them perform better than typical procurement organisations. Analysing its procurement benchmarking database revealed that achieving world-class performance, results in gaining 18% lower operating costs and using 28% fewer full-time equivalents than peers.

“For a typical company with $10 billion in revenue,” it says, “attaining world-class  performance  represents as much  as $5 million in potential savings  annually.”

It also revealed that world-class procurement also means a significantly higher procurement return-on-investment (the ratio of total savings generated by procurement to its total operating cost). “… a 9.5x payback on investment in procurement compared to 4.57x for non-world class.)

That all sounds wonderful, but we need to ask – what does ‘world-class’ look like?

It would appear from the report executive summary that world class is defined, among other things, as companies that invest in cloud-based applications and services, like end-to-end P2P systems and process-specific applications, such as risk forecasting and planning, eSourcing and spend analysis. It also sees ‘world class’ marked by companies that “selectively outsource” in certain areas, like support for procurement systems, supplier help desks and market intelligence “… to tap into greater expertise, augment knowledge, and leverage the capacity and capability of third-party providers.”

The bottom line would appear to be that world class means being able to operate and deliver services more effectively, so for example “.. their percent of transactions requiring post-issuance activity to resolve discrepancies in areas like order quantity, quality and pricing is often two to three times less compared to peers. Fewer errors mean that world-class procurement organizations have higher quality process execution across the board. These differences have real bottom-line impact: The high number of transactions for some transactional processes and the cost to correct errors mean the total cost gap between world class and peer organizations can be in the millions of dollars.”

Another contributing factor is talent retention and therefore lower turnover. “This is a sign of organizational health,” it says, “in that people are being developed and given opportunities for growth through experience. A benefit of lower overall turnover is you retain organizational knowledge. And keeping more new hires not only saves costs but shows that world-class organizations are better at fitting new hires with job requirements and delivering an employee experience that matches the expectations of recent joiners."

The report then goes on to detail five strategies that current world-class procurement organisations use to achieve better performance and align to organisational goals. To give you a taste, here is an outline, taken from the Executive Summary, of the first “imperative.” To read all five in detail and to find out what the basic steps are to getting started, you can download the full report ‘The World-Class Performance Advantage: Five Imperatives for Creating Greater Procurement Agility’ here upon registration.

Excerpt:

Imperative  #1:  Reallocate  resources  from  transactional  focus  to  value  adding

Operating budgets are only up 1.1% so procurement organizations have to self-fund their transformation. Many still focus too much attention and resources on transactional work and not enough on higher value activities such as analytics, performance management and devising purchasing strategies that drive business results.

To achieve this shift, procurement organizations must transform their structure and processes to become more efficient and effective. A basic step is the adoption of a formal service delivery model, which promotes clear roles and responsibilities and ensures that capabilities and costs of resources match the type of work performed. Two mainstays of a formal service delivery model are global business services/shared services units and centers of excellence (COEs). Overall, 39% of all procurement organizations have some form of COE in place today (Fig. 7). World-class procurement organizations use shared services and COEs to optimize their portfolio of procurement services by delivering results while still keeping costs in check.

The following steps can be taken to enable this change:

  • Move to leveraged  model  for  procurement  and  P2P  operations …
  • Focus COEs on high-value programs and expertise areas …
  • Upgrade the skills of procurement’s staff to drive higher value …

Do download the whole report here for much more detail, analysis and advice.

Discuss this:

Your email address will not be published. Required fields are marked *