What Does it Take To Be a World-Class Procurement Organization?

A recent benchmarking analysis by The Hackett Group outlines the performance advantages of world-class procurement organizations. So what did the study find? .

The study outlines five key imperatives needed for creating what it terms a “world-class” procurement organization. Key elements include value-adding activities, digital transformation, analytics-based decision-making, customer-centric service design and delivery, and “re-skilling” Procurement talent..

Inside Procurement
In defining world-class procurement organizations, the benchmark research from The Hackett Group found that such organizations have 18% lower operating costs than typical companies and operate with 28% fewer staff while generating more than twice the return on investment (ROI).

Digital business transformation is one key enabler to how world-class procurement organizations achieve greater efficiency, effectiveness, and higher return on investment the research found. The study pointed to potential opportunities in digital technologies to transform service delivery, reduce errors, and free procurement staff for higher-value work.

“For many years, world-class procurement organizations achieved dramatically better results than their peers by focusing on process optimization,” said The Hackett Group Principal and Global Procurement Advisory Practice Leader Chris Sawchuk, in commenting on the study. “Technology has long played a role in helping these top performers standardize, simplify, and streamline their operations. But today, world-class procurement organizations are focusing much more broadly on digital business opportunities to maintain their performance advantage. They understand that cloud, mobile, and other digital business tools can allow them to truly transform the way procurement functions, including forecast and plan more accurately, collaborate with suppliers more effectively, and improve the experience for their customers.”

The application of these digital technologies are sometimes described as the “Amazon effect” on the procurement function. “In just the past couple years, we have seen world class procurement organizations shift towards a complete digital experience for their business users, including a true move to a paperless environment and the ability to work from anywhere on any device,” said The Hackett Group Principal, Sourcing and Procurement Practice Leader Robert Derocher. “The “Amazon effort” on procurement is real, and we are seeing it play out with our clients. As a result, companies are implementing new, integrated source-to-settle technology platforms, primarily in the cloud, and adopting new capabilities that enable the agility required by their customers and the marketplace.”

The Hackett Group’s research revealed five strategies used by current world-class procurement organizations to achieve superior results: reallocate resources from transactional focus to value adding; embrace digital transformation; leverage analytics-based decision-making; adopt stakeholder/customer-centric service design and delivery; and re-skill the procurement function.

Re-allocating resources from transitional focus to value adding. The study found that operating budgets for Procurement are up only 1.1%, so procurement organizations must find ways to fund their transformation. The study found that procurement organizations 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.

To achieve that, the study says that procurement organizations must transform their structure and processes to become more efficient and effective, citing as a basic step using a formal service delivery model, which outlines clear roles and responsibilities to ensure that capabilities and costs of resources match the type of work performed. Under a formal service delivery, two elements are key: a global business services/shared services units and centers of excellence. The study noted that 39% of all procurement organization use shared services and centers of excellence.

Digital transformation. Technology spend per procurement full-time equivalents (FTE) in a world-class procurement organization is typically higher due to greater investments in process automation, for example, notes the study. The study points out there are new opportunities for procurement organizations to transform service delivery. The study outlines three key steps in enabling digital transformation: (1) create a procurement technology strategy; (2) partner with the IT group; and (3) create a technology roadmap that defines desired strategic outcomes, key performance indicators, and needed behaviors.

Analytics-based decision-making. World-class procurement organizations spend 23% more on technology per FTE and invest a greater proportion on systems and tools to enable analytics capability. The study suggests three elements to enable proper generation and use of analytics: (1) engagement of stakeholders or with procurement staff to understand problems and what types of data can solve them; (2) investment in technology and tools, which includes use of existing tools, such as spreadsheets and presentation software, to show value of these tools to stakeholders; and (3) expand use of data to address more complex business problems.

Stakeholder/customer-centric service design and delivery. The study points out that the customer must be the focal point of all key activities and functions within procurement with an important component of customer experience management being service design. World-class procurement organizations design services and process from the outside in rather than the inside out, notes the study, which includes service-level agreements with internal customers. The study points to three elements to promote customer centricity: (1) act holistically; (2) use of non-traditional project teams and skill sets in communication and digital media; and (3) use of councils and focus groups to provide “voice of the customer recommendations to guide decisions regarding design of the process and supporting systems.

Re-skilling the procurement function. World-class procurement organizations employ a larger percentage of the overall staff to sourcing, supply-based strategy, and planning/strategic roles whereas less performing organizations have a greater focus on operations and compliance management. The study suggests three important actions: (1) invest in talent development; (2) increase the business acumen of procurement staff; and build analytics skills.

Characteristics of a world-class procurement organization
As a percentage of total procurement spend, world-class procurement organizations spend 18% less on labor (by far the largest cost in procurement) and 13% more on outsourcing than typical companies, according to the Hackett study. They also see more than twice the return on investment (the ratio of total savings generated by procurement to its total operating cost), thereby generating a 9.5 times payback on investment versus 4.6 times for typical companies. However this number is forecast to rise only slightly for all companies over the next five years as cost reductions and savings continue to level off, according to the study.

In addition to operating with fewer staff, world-class procurement organizations also allocate their staff very differently. They dedicate a significantly larger percentage of the overall staff to sourcing, supply-base strategy and planning/strategic roles and have a much smaller percentage of people focused on operations and compliance management, according to the analysis.

Many world-class organizations are investing in the new wave of cloud-based applications and services ranging from core end-to-end procure-to-pay (P2P) systems to process-specific applications, such as risk forecasting and planning, e-sourcing and spend analysis, the research found. Cloud-based infrastructure and applications, virtual business and technology networks, and business analytics are coming together with employee and consumer bases that are increasingly adept with new mobile technologies and business models. “This convergence is creating tremendous new opportunities for procurement organizations to apply digital technologies to transform service delivery,” says the study. “Increasingly, this becomes the platform for delivering a whole new class of services, such as information and predictive analytics to guide decisions. Digitally enabled processes also reduce errors and make information easier to access, thereby freeing procurement staff for higher-value work.

The research found that world-class procurement organizations spend 23% more on technology per staff person, and the investment yields real productivity gains, including 71% lower cost per order than typical companies. A high use of automation also allows procurement staff to devote more time to talent development and business performance-related activities, according to the study.

World class procurement organizations also continue to selectively outsource in areas such as procurement system support, supplier help desks, and market intelligence to tap into greater expertise, augment knowledge, and leverage the capacity and capability of third-party providers, noted the study. These efforts increase agility by providing resources that can scale to demand and frees up procurement to focus on anticipating and responding to critical business needs.

In addition to a higher procurement ROI, world-class organizations are more effective in how they operate and deliver services. For example, the research found that their percent of transactions requiring post-issuance activity to resolve discrepancies in areas such as 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. The high number of transactions for some transactional processes and the cost to correct errors means the total cost gap between world class and peer organizations can be in the millions of dollars, notes the study.

In addition, world-class procurement organizations are nearly twice as likely to have talent retention planning in place and see turnover rates that are more than 50% lower than typical companies, illustrating the ability of world-class procurement to generate outcomes that impact business performance.

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