What Is A World-Class Procurement Organisation?

We welcome this guest post by Nic Walden, Senior Director, The Hackett Group, following the release of its World-Class Procurement report.

Hackett defines World-Class procurement organisations as those which achieve top-quartile performance in efficiency and effectiveness across a balanced scorecard of metrics. Analysis of Hackett’s 2018 procurement benchmarking database shows the performance advantage of World-Class is significant: by focusing on achieving optimal performance they benefit from delivering more than double the return on investment (i.e., the ratio of savings to operating cost), through achieving higher levels of cost savings, 21% lower labour costs, and 29% fewer full-time equivalent staff than the peer group.

So how do they achieve this performance advantage?

Technology and procurement’s operating model

Digital technology is playing a crucial role in enabling world-class performance: The Hackett Group’s research found that technology enables a shift in the operating model by enabling automation of lower-value activities, improving data quality, accelerating execution times, and enhancing spend visibility and compliance. As well as freeing up time for more valuable activities, processing costs are reduced by 30% for the peer group, and by 22% for world-class procurement organisations.

But how is this technology used?

By standardising and automating routine tasks, world-class procurement organisations improve efficiency and service delivery productivity. A typical company with $10 billion in revenue can, on attaining world-class performance in procurement, benefit by reducing its operating costs by as much as $6 million annually.

Six digital accelerators drive superior procurement performance. Digital Engagement boosts efficiency, engagement and customer experience – facilitating easy-to-use personalised and time saving self-service functionality for shoppers, buyers, and other stakeholders.

Robotic process automation is enjoying more widespread adoption. In purchase-to-pay and other business processes, it enables the automation of many routine repetitive processes and tasks.

Analytics-driven insight – considered a hallmark of top-performing procurement organisations – increasing availability and ease of access to reliable supply base insight enables faster and more forward-looking decision-making whether it be supplier performance, risk, or identifying savings opportunities. Supplier master data governance and effective supplier onboarding are now ‘must haves.’

Modern digital architecture encompasses easy-to-use, easy-to-connect, cloud software for capabilities like e-sourcing, supplier discovery and contract lifecycle management. These types of tools enable procurement with digital connections to the supply market to significantly speed up tasks like finding and qualifying suppliers, solving supply issues, reducing lapsed contracts, and increasing the use of standard terms and conditions.

Digital Workforce Enablement aims to foster collaborative and continuous learning centric cultures by encouraging openness to new ways of working, developing new digital skills, and collaborative approaches to supplier interactions to crowdsource solutions and access innovation.

Cognitive computing and artificial intelligence may be in the early stages, however early adopters are already utilising new AI-powered sourcing and contracting tools. These tools excel at automating execution, easily analysing large data sets and recommending when to take action, e.g., which suppliers to involve, answering questions relating to supply chain composition beyond the top tier.

The tangible benefits of world-class status

The benefits of achieving world-class status and incorporating digital solutions go beyond savings. World-class procurement teams receive a 10.7X payback on procurement investment – twice that of the peer group. To maintain this level of cost reduction saving into the future it will be essential to find new ways to continue to unearth value, whether that be from mitigating supply risk, diversity, or innovation.

Staff turnover is also a third lower. The focus of world-class procurement organisations on business performance means they are more likely to have retention plans in place for procurement personnel.  World-class procurement teams are better at retaining company-wide knowledge and have an improved ability to match new hires with organisational requirements to deliver an employee experience that matches expectations.

World-class procurement organisations have 2-3X fewer transaction discrepancies as a result of higher-quality process execution and culture of compliance.

Based on these insights, it’s clear the non-world-class procurement organisations have a significant opportunity to become faster, cheaper, smarter, and vastly more responsive to customers. The upshot of this is that these organisations can go beyond simply responding to business requests, and delivering cost savings, to truly become a valuable strategic partner to the wider business.

Embracing a digital future

Accelerating procurement’s shift to a more value-oriented function is important for many, with the benefits of technology investment allowing team members to be redeployed to better focus on activities the business values, rather than stuck on lower-value administrative activities. That said, as important as digital technology is, it will not deliver improvements on its own.

Full performance improvement potential will only be realised within the context of a larger strategy focused on delivering a superior service delivery model. This includes topics like enhancing the brand and profile of procurement, process streamlining and ease of use, updating skills and mindsets, accurate data and insights from analytics, more agile organisational models, and of course technology which usually involves navigating legacy technologies, as well as onboarding and enablement as part of the shift to more modern digital infrastructure.

In the meantime, procurement teams should focus on principles like cultural shift, agility, ease of use, and continuous improvement. After all, it is moving forward that will drive improvement and raise procurement’s status within the organisation; staying still will not.

The full report is free to download here.

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