You are on page 1of 9

Co

m
pl
Procurement Executive Insight

im
Management Issue

en
July 2016

ta
ry
Re
s ea
rc
The World-Class Performance Advantage:

h
Five Imperatives for Creating Greater
Procurement Agility
By Christopher S. Sawchuck, Patrick Connaughton and Srinivasa Dabbera

Executive summary
The 2016 analysis of The Hackett Group’s procurement benchmarking database quantifies the performance advantage
of world-class compared with typical procurement organizations. Among the results: World-class procurement
organizations have 18% lower operating costs (Fig. 1) and use 28% fewer full-time equivalents (FTEs) than peers
(Fig. 2 on page 2). Also revealed are five strategies used by current world-class procurement organizations to achieve
superior results.

Achieving world-class performance takes five years or more. However, a company is likely to see marked
improvements within two. These early wins are pivotal, establishing a foundation for more sweeping successes
down the line.

Key takeaways:
• Procurement organizations must continuously transform their capabilities to keep pace with changing business
requirements, but many are challenged by practically flat budgets and FTE counts.
• World-class organizations stay ahead of change by continuously building key capabilities that enable them to deliver
services more efficiently and effectively as well provide high value tools, expertise and insights to business leaders.
• World-class procurement organizations achieve outperformance by reallocating resources from low- to high-value
activities; digitally transforming service delivery; building and deploying sophisticated analytics capabilities;
designing and delivering services around the customer experience; and upgrading the skills of their staff.

FIG.1 Cost of procurement Organizations continue to face economic headwinds and other challenging conditions in
as a percent of spend 2016. Finding new sources of revenue growth remains difficult, resulting in pressure to
protect margins through cost control. This, in turn, is straining0.8operating budgets. At the
18%
same time, competitive pressures and a broad range of business 0.7 risks are increasing,
requiring transformation and innovation, not only to support growth,
0.6 but also to fend off
competition. Adding to this mix of challenges is the disruptive0.5change from new digital
technologies. 0.4

0.3

This environment makes the imperative for efficient and effective


0.2 delivery of
procurement services more challenging than ever. Procurement 0.1
must continuously
Peer group World class
transform its service delivery model to respond with agility to
0.0
shifting demands and
opportunities.
Source: Procurement Functional
Benchmark, The Hackett Group, 2016

FIG. 2 Number of FTEs per


US$ billion of spend

60

28%
50
© 2016 The Hackett Group, Inc.; All Rights Reserved. World-Class Procurement Executive Insight I The Hackett Group I 1
40
Peer group World class

Source: Procurement Functional


Benchmark, The Hackett Group, 2016

FIG. 2 Number of FTEs per The ultimate measure of procurement’s performance is its ability to support the
US$ billion of spend company’s overall business strategy. This will require some procurement organizations
to make far more than incremental improvements.
60
As procurement’s operating budget is
28% expected to grow by just 1.1% this year (Fig. 3), it can afford to fund only a select few of
50
its highest-priority initiatives.
40

FIG. 3 Changes in procurement FTEs and budgets


30 for 2016

20
2.2%
10

Peer group World class 1.1%


0.9%
Source: Procurement Functional 0.7%
Benchmark, The Hackett Group, 2016

Number of staff (FTEs) Procurement function


in the procurement function operating budget

2015 COMPARED TO 2014 2016 COMPARED TO 2015


(ACTUAL INCREASE OR DECREASE) (FORECASTED INCREASE OR DECREASE)

Source: Key Issues Study, The Hackett Group, 2016

Total procurement operating cost and staffing levels are significantly lower
for world-class procurement
World-class procurement organizations continue to significantly outperform the peer group
in procurement service delivery cost and productivity, operating at 18% lower cost and
with 28% fewer FTEs (Fig. 4). For a typical company with $10 billion in revenue, attaining
world-class performance represents as much as $5 million in potential savings annually.

FIG. 4 Procurement world class and peer costs as percent of total spend

18%

12%
13% 40%

Peer group World class Peer group World class Peer group World class Peer group World class

Labor cost Outsourcing cost Technology cost Other cost

Source: Procurement Functional Benchmark, The Hackett Group, 2016

World-class procurement also has a significantly higher procurement return-on-investment


(ROI) (i.e., 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.
However, even for world class, this number is losing ground as cost reductions and savings
are forecasted to level out over the next four to five years (Fig. 5 on page 3). World-class
procurement has to find new ways to continue to unearth value.

© 2016 The Hackett Group, Inc.; All Rights Reserved. World-Class Procurement Executive Insight I The Hackett Group I 2
FIG. 5 The ROI of world-class procurement

14.00
12.71 12.53

12.00 11.35 above 9.5 x payback


10.72
9.74
10.00 9.44 9.50 9.55 9.62 9.69
9.01
8.64
8.20 8.00
8.00 7.28
6.96

6.00

4.73 4.78 4.84


4.00
4.14
4.73 4.38 4.57 4.66
3.89 4.06
3.20 2.94
2.00 2.81 2.79
2.50 2.50

0.00
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

PEER GROUP WORLD CLASS

Source: Procurement Functional Benchmark, The Hackett Group, 2016

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. Moreover, world class continues 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. This helps to 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, 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.

Last but not least, the higher degree of talent retention planning and lower turnover
rates illustrate the ability of world-class procurement to generate outcomes that impact
business performance (Fig. 6 on page 4). This is a sign of organizational health 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.

© 2016 The Hackett Group, Inc.; All Rights Reserved. World-Class Procurement Executive Insight I The Hackett Group I 3
FIG. 6 Retention planning and turnover levels

Percent who have retention planning for Annual overall turnover percentage
procurement personnel in place

97% 51%

Peer group World class Peer group World class

Source: Procurement Functional Benchmark, The Hackett Group, 2016

Closing the gap: The 5 imperatives of world-class procurement


transformation
Although the journey to world-class performance takes five or more years, a company
is likely to see marked improvements within two years. These early wins can free up
resources to enable procurement’s digital transformation, increase analytics capabilities,
better align with stakeholders and upgrade skills, enhancing talent management
capabilities. These are the top imperatives for improving procurement’s performance and
supporting the business strategy over the long term.

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.

FIG. 7 Thirty-nine percent of procurement organizations have a COE in place today

Please select the statements that are true for your procurement organization

We have recently gone through (or are planning)


64%
a major procurement transformation initiative

We currently have a procurement


center of excellence in place 39%

We use peer benchmarking to measure


35%
the success of procurement’s efforts

We have a formal market


17%
intelligence program in place

We currently (or are planning to next 12-24 months)


7%
outsource strategic sourcing and category management

Source: Procurement Functional Benchmark, The Hackett Group, 2016

© 2016 The Hackett Group, Inc.; All Rights Reserved. World-Class Procurement Executive Insight I The Hackett Group I 4
The following steps can be taken to enable this change:
• Move to leveraged model for procurement and P2P operations. Having
concentrated resources performing administrative and transactional work enables
greater standardization and quality, more focus on service, and cost reduction through
better economies of scale and labor arbitrage.
• Focus COEs on high-value programs and expertise areas. Focus COEs on creating
strategies and programs that enhance procurement’s capabilities to both run the
function better as well as to provide the business with better methodologies and tools.
• Upgrade the skills of procurement’s staff to drive higher value. Recruit staff from
key business units in your company to serve a stint in procurement. To build business
acumen more broadly, assign staff to cross-functional teams to provide exposure to
different parts of the organization’s operations and make understanding of business
fundamentals a requirement in hiring procurement staff.

Imperative #2: Embrace digital transformation


Cloud-based infrastructure and applications, virtual business and technology networks,
and business analytics are coming together with rapidly transitioning 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. Increasingly,
this becomes the platform for delivering a whole new class of services, such as
information and predictive analytics to guide decisions. Moreover, digitally enabled
processes reduce errors and make information easier to access, freeing procurement
staff for higher-value work.
FIG. 8 Cost per order
Technology spend per procurement FTE 20 in world-class organizations is often higher due

to greater investments in areas such as process automation. This investment yields


real productivity advantages: for example,
15
world-class procurement has a 71% lower
cost per order than non-world class (Fig. 8). More important, a high use of automation
10
71% allows procurement staff to devote more time to talent development and business
performance-related activities.
5

The following steps can be taken to further the digital transformation imperative:
0
Peer group World class
• Create a procurement technology strategy. Design a technology strategy,
Source: Procurement Functional Benchmark, implementation roadmap and data architecture for building a platform for delivery of a
The Hackett Group, 2016
comprehensive set of procurement services. Including performance measurement and
analytical capabilities is essential.
• Partner with the IT group. Work closely with IT leadership to create long-term
procurement technology strategy, architecture and implementation plans. Recruit and
train procurement staff to assume greater responsibility for technology management
and usage. Identify specific business-related goals for the use of procurement
technology.
• Create a technology roadmap. Design an implementation plan that defines desired
strategic outcomes, key performance indicators (KPIs) and needed behaviors. The
roadmap should support the business case for procurement technology, identifying the
most logical connections between technology and achievement of strategic objectives.

Imperative #3: Leverage analytics-based decision making


Without an advanced information management capability, enterprise agility is impossible.
Agile operations require a “sensory” system that monitors external conditions and
analytical capabilities that comprehend this data within the business context. This flow of
feedback information is the basis for business decision-making in agile enterprises.

© 2016 The Hackett Group, Inc.; All Rights Reserved. World-Class Procurement Executive Insight I The Hackett Group I 5
FIG. 9 Technology cost per FTE
The hallmarks of information-centric world-class procurement organizations are having a
20000
23% sophisticated information/data architecture that makes effective data analysis possible;
planning and analysis capability that is dynamic and information driven; and performance
15000
measurement that is aligned with the business. World-class procurement organizations
spend 23% more on technology per 10000 FTE (Fig. 9) and invest a greater proportion on
systems and tools to enable analytics capability.
5000

The following are steps that can be taken to better understand the needs of information
consumers and deliver insights that are0 meaningful to them:
Peer group World class
• Engage key stakeholders. Meet with important stakeholders or with procurement
Source: Procurement Functional Benchmark, staff responsible for managing stakeholders to understand what problems they are
The Hackett Group, 2016
facing and the types of data required to solve them.
• Invest in a technology platform and tools. It will usually be necessary to start
doing analysis using existing tools (e.g., spreadsheets and presentation software) to
show value and build trust with stakeholders. This will make it easier to obtain funding
approval for investments in more sophisticated analysis platforms and tools.
• Look for opportunities to move from supplying information to tackling business
problems. As trust and credibility grow, opportunities will arise to penetrate deeper
into the business and use data to resolve key problems.

Imperative #4: Adopt stakeholder/customer-centric service design and delivery


Understanding and managing the customer experience requires a holistic, structured
approach, starting with a clear understanding of customers’ needs and then improving
relevant elements of the procurement service delivery model. The customer must
be the focal point of all key activities and functions within procurement. An important
component of customer experience management is service design. It addresses the
question of what functionality is desired and what information is needed from the
perspective of the consumers of services. In this approach, services are designed
based on users’ wants and needs, rather than forcing them to change their behavior to
accommodate procurement’s internal processes. The way each service needs to support
customers’ work should influence the design of the delivery method/interface.

FIG. 10 Percentage of procurement World-class organizations are service oriented and customer focused in their approaches
organizations with formal internal to procurement delivery. They design services and processes from the customer
customer SLAs in place
perspective or outside in rather than from the inside out. World class are also sure to
actively measure the results of their efforts through formal service-level agreements
(SLAs) for internal customers (Fig. 10).60The result is a far better customer experience.
66% 50

Self-service is a prime example of the difference


40
this approach can make. Most self-
service is designed to make processes more efficient, rather than enable the user to be
30
more effective. World class procurement have high usage of both employee and manager
self-service because they create capabilities
20
with the customer experience in mind.
10

The following are actions that can be taken to promote customer-centricity:


Peer group World class 0

• Act holistically. Creating an end-to-end customer experience cuts across multiple


Source: Procurement Functional Benchmark,
The Hackett Group, 2016 procurement (and sometimes other function) processes, so they must get involved early.
Identify and engage the key players in the processes that affect the customer experience.
• Prepare to hire and acquire new skills. Service design demands a non-traditional
project team and set of skills. A traditional procurement project team is not sufficient.
Participants must be skilled in communication and digital media. Not all team
members need to be assigned to the project full time.
• Set up councils and focus groups to provide “voice of the customer”
recommendations. Use these to guide decisions regarding design of the process
and supporting systems. Design councils should be treated as an investment in
project success. They should be created early in the process and participants coached
on their roles.

© 2016 The Hackett Group, Inc.; All Rights Reserved. World-Class Procurement Executive Insight I The Hackett Group I 6
Imperative #5: Re-skill the procurement function
One of the biggest challenges facing procurement organizations is deploying people and
skills that are more relevant to the core activities of the business. Top management looks
to procurement to help the business execute purchasing strategies more successfully
and, in turn, enable the business to become more agile and innovative.

We noted earlier that world-class procurement has 28% fewer FTEs per $1B in spend.
Within that FTE count, the percentage of people allocated to specific areas is also
markedly different. For example, world class employ a larger percentage of the overall
staff to sourcing, supply base strategy and planning/strategic roles. Peer organizations
have a higher percentage of people focused on operations and compliance management
(Fig. 11).

FIG. 11 Total procurement FTEs allocation (world class employ a larger percentage of overall
staff to sourcing, supply base strategy & planning/strategic roles)

6% 8%
5%
8%

41%
49%

OPERATIONS AND COMPLIANCE MANAGEMENT


SOURCING AND SUPPLY BASE MANAGEMENT
48%
35% PLANNING AND STRATEGY
MANAGEMENT AND ADMINISTRATION
Peer group World class

Source: Procurement Functional Benchmark, The Hackett Group, 2016

We have noted earlier how much more productive and effective world-class procurement
staff are. This has to do not only with the more balanced mix of staff skills, but also
with the individual characteristics of world-class staff. For example, a higher percentage
are very effective at self-management, which suggests they are better able to operate
effectively in a flat organization, don’t need to be told what to do, and are more
responsive and agile in dealing with work requirements.

The following are steps that can be taken to enhance the skills sets of procurement staff:
• Invest in talent development. Hire or train procurement staff with the skills and
business acumen required to meet the business needs of senior executives. Start
with team members who have the most opportunities for interactions with business
unit executives. Recruit staff from key business units in your company and have them
mentor and coach other business partners who have come up through the procurement
ranks.
• Increase the business acumen of procurement staff. To build business acumen
more broadly, assign staff to cross-functional teams to provide exposure to
different parts of the organization’s operations and make understanding of business
fundamentals a requirement in hiring.
• Build analytics skills. Create a dedicated analytics group to fully leverage skills and
tools across all areas of procurement: This may range from a single person in small or
midsized organizations to a COE staffed by a team of people in large, multi-business
enterprises who can apply sophisticated analytical techniques and interpret their
business implications. Train procurement staff more broadly in skills to synthesize and
abstract data into business relevant findings and recommendations.

© 2016 The Hackett Group, Inc.; All Rights Reserved. World-Class Procurement Executive Insight I The Hackett Group I 7
Where to begin: Define your procurement function’s current state and
identify gaps
There are several basic steps that procurement organizations can take to jump start their
journey to world-class performance:
• Measure baseline efficiency and effectiveness levels to gauge performance and
uncover areas needing improvement. Assess staffing levels and skills mix against
current and future business priorities and needs. What capabilities and competencies
does the business need from procurement that you’re currently not able to provide?
• Document processes. Do they produce consistent results or frequently breakdown
and require rework? Seek to reduce complexity – simplify and streamline and then
standardize processes for consistency and performance.
• Evaluate existing technology architecture. Do your current systems enable efficient
administration and transaction processing? Do they provide easy, direct access to
managers and employees? Do they provide the necessary tools and data to enable
analytics that support business decision making?

Finally, adopt a service delivery model that aligns task complexity with skill set. Move
as much administrative and transactional work as reasonable into shared services units;
use centers of excellence for strategy, program and subject matter expertise; and deploy
business partners with skills to advise senior business managers on human capital
issues driving business performance.

These may sound like heavy-duty investments, but as you’ve seen from
The Hackett Group’s results of world-class procurement performance, the payoff is huge.
Considering all that procurement organizations are up against, it’s a bet worth making.

Related research
Procurement’s Key Priorities in 2015: Harnessing Big Data and Renewing Training
Programs to Promote Enterprise Agility, The Hackett Group, 2015

How World-Class Procurement Teams Are Reinventing the Stakeholder Experience,


The Hackett Group, 2015

Procurement’s Key Priorities in 2016: Reducing Tail Spend, Increasing Influence,


Embracing Predictive Analytics, The Hackett Group, 2016

About the advisors

Christopher S. Sawchuk
Principal & Global Procurement Advisory Practice Leader

Mr. Sawchuk has nearly 20 years of experience in supply management,


working directly with Fortune 500 and midsized firms around the globe and
in a variety of industries to improve all aspects of procurement, including
process redesign, technology enablement, operations strategy planning,
organizational change and strategic sourcing. Mr. Sawchuk is a regular
contributor to business publications, a frequent presenter at industry
events, and co-author of ePurchasingPlus. He has been recognized by Supply & Demand
Chain Executive magazine as one of its “Pros to Know.” Mr. Sawchuk’s background
includes engineering and operation roles with both United Technologies and IBM.

© 2016 The Hackett Group, Inc.; All Rights Reserved. World-Class Procurement Executive Insight I The Hackett Group I 8
Patrick Connaughton
Senior Research Director

Mr. Connaughton leads the development of The Hackett Group’s


intellectual property in the areas of strategic sourcing and procurement.
He has over 15 years of experience in supply chain and procurement
research and advisory roles. He has published groundbreaking research
in areas like spend analysis, contract life cycle management, supplier risk
assessments and services procurement. Prior to joining Hackett, he was
principal analyst at Forrester Research, where he focused primarily on helping executives
mitigate risk through more effective supplier relationship management. Previously,
Mr.Connaughton was a consulting manager at Manhattan Associates and Accenture.

Srinivasa Dabbera
Director, Quantitative analysis

Mr. Dabbera is responsible for leading benchmark database analysis


and supports several analytical initiatives within the Hackett Group. He
has over 13 years of experience in business analytics applications and
quantitative research and manages The Hackett Group’s Quantitative
Analysis team. Mr. Dabbera’s primary responsibilities include
converting, analyzing and interpreting data from benchmarking surveys,
performance studies and other research into insights that are applied to solve process
and performance challenges of global clients. He works closely with benchmarking,
advisory and research teams to respond to inquiries from The Hackett Group’s advisory
and benchmark program members. His experience spans the general and administrative
domain. Prior to joining The Hackett Group, Mr. Dabbera held a variety of analyst roles
with a leading market research company and management consulting company.

For more papers, perspectives and research, please visit: www.thehackettgroup.com. Or to learn more
about The Hackett Group and how we can help your company sharply reduce costs while improving business
effectiveness, please contact us at 1 866 614 6901 (U.S.) or +44 20 7398 9100 (U.K.).

The Hackett Group (NASDAQ: HCKT) is an intellectual property-based strategic consultancy and leading enterprise benchmarking and best practices
implementation firm to global companies. Services include business transformation, enterprise performance management, working capital
management, and global business services. The Hackett Group also provides dedicated expertise in business strategy, operations, finance, human
capital management, strategic sourcing, procurement, and information technology, including its award-winning Oracle EPM and SAP practices.

The Hackett Group has completed more than 11,000 benchmarking studies with major corporations and government agencies, including 93% of the
Dow Jones Industrials, 86% of the Fortune 100, 87% of the DAX 30, and 52% of the FTSE 100. These studies drive its Best Practice Intelligence
Center™, which includes the firm’s benchmarking metrics, best practices repository, and best practice configuration guides and process flows. It is
this intellectual capital that enables The Hackett Group’s clients and partners to achieve world-class performance.

Email: info@thehackettgroup.com
www.thehackettgroup.com

Atlanta +1 770 225 3600 London +44 20 7398 9100 Sydney +61 2 9299 8830
Atlanta | Chicago | Frankfurt | Hyderabad | London | Miami | Montevideo | New York | Paris | Philadelphia | San Francisco | Sydney | Vancouver
This publication has been prepared for general guidance on the matters addressed herein. It does not constitute professional advice.
You should not act upon the information contained in this publication without obtaining specific professional advice.

© 2016 The©Hackett
2016 The Hackett
Group, Inc.;Group, Inc.;Reserved.
All Rights All Rights Reserved. World-Class Procurement Executive Insight I The Hackett Group I 9