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Strategic Sourcing and

Procurement in Engineering
and Construction
A Path to High Performance and
Sustained Cost Efficiency
In many markets, horizons are once again One way E&C firms can get their own
dotted with new construction. Revenue houses in shape is to closely examine
from commercial, residential, public sector their supply networks and procurement
and infrastructure projects is growing operations, with the objectives of
again, reversing the retrenchment that optimizing costs and streamlining
followed the financial downturn. A 2013 operations, both of which would improve
survey1 found that executives in the their competitive position. In Excellence in
global construction industry projected Infrastructure & Construction Procurement:
increases in capital expenditure on ‘new A transformational approach to achieving
product developments’, ‘IT infrastructure high performance, we examined how
developments’ and ‘machinery and optimizing indirect spend can boost profit
equipment purchases’. In North America margins for E&C firms. While indirect cost
the top 400 contractors increased savings are obviously beneficial, they pale
contracting revenue in 2013 by 4.8 percent in comparison to the amounts possible
to $324.16 billion from $309.45 billion2, by addressing direct spend inefficiencies
with growth in non-residential construction associated with the materials comprising
set to double from 2013 to 2014. built infrastructure.

Yet, the return to building should not This point of view examines why now is the
signal business as usual in engineering right time—the perfect time—for E&C firms
and construction. As in many sectors, to focus on direct procurement, identify the
engineering and construction (E&C) firms— barriers that traditionally stymied efforts
both publicly and privately held—face new to optimize enterprise-wide procurement,
demands and heightened expectations to and propose solutions to overcome these
improve margins/shareholder returns and challenges, including the benefits of
improve operations, all in an environment partnering with third party procurement
where project complexity is increasing. experts to expand capabilities.
These new demands are in addition to the
constant pressure to deliver projects on
time and on budget.
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Higher risks and expectations require
deeper procurement capability
The E&C sector continues to change in The bottom line is that E&C firms are • How can we better mitigate both supply
significant ways, placing renewed pressure facing a lot of internal pressure to risk and commodity price risk for key
on profitability. Margin pressure is rapidly improve profitability and at the same time, material inputs?
intensifying as infrastructure owners external pressure to reduce price. The • In which categories of indirect and direct
undertake larger and more complex solution to relieving both these pressures spend have we seen the most variability
projects. Further, where competition is better procurement operations and and unpredictability and why?
was once contained to local and project execution. Accordingly, firms must
regional markets, consolidation and the determine where opportunities exist to • Are there opportunities to improve
globalization of E&C firms are bringing improve procurement, what capability efficiencies and help minimize risk by
larger and financially stronger competitors gaps exist in the function, and how to fill taking on procurement of material
into the bid room. In turn, this translates them. Questions that are top of mind for traditionally left to sub-contractors?
to a need for superior, streamlined executives at E&C firms include: Answering these questions is a necessary
operating capabilities, including optimized • Which categories of procurement have first step to capturing value from an
procurement practices. we examined—and truly optimized? enterprise-wide procurement improvement
While access to capital remains somewhat • Is our operating model aligned to initiative.
constrained, expectations from developers leverage our company’s scale and
and lenders are expanding. Both stakeholders scope in order to get the best terms on
look to E&C firms to contain and minimize materials?
costs while maintaining quality, increasing • How does our procurement organization
certainty of delivery, and providing visibility compare to our peer companies in the
in costs and procurement risks. More and E&C sector and other industries?
more owners are deploying new financing
models that embed private construction • Are there better ways or better sources
managers to oversee contractors and sub- of information about our suppliers that
contractors to exert disciplined cost we should use to rationalize bids/quotes
management. from vendors and sub-contractors?

Cost overruns due to unmanaged spend, unmitigated cost


fluctuations or unplanned work stoppages can wipe out
profit from even the most promising project; accordingly,
firms need to be vigilant in controlling costs and constructing
facilities as-bid. A misstep in a single category can tip the
scales into the red.

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Procurement: A function
ripe for evolution
Many companies have whittled away at That improvement could flow through the 1. Preconceived role limitations. Many
administrative and back office expenses, balance sheet to increase profit margins, members of the procurement team view
but those areas do not make up the but it can also help drive top line revenue their role as getting quotes/estimates from
majority of costs. Commonly, up to growth where companies reinvest these suppliers, perhaps in a limited number
70 percent of a construction company’s funds in delivering a more competitive of categories or for a limited number of
revenues can align to direct and indirect and attractive price to owners, and thus projects. This narrow approach to sourcing
purchases, from construction materials and generate more business. Consequently, far does not view spend across the enterprise
commodities to subcontracting services, from being a cost reduction effort, there or portfolio. Thus, suppliers with multi-
as well as industrial supplies and project are revenue-enhancing, topline benefits to disciplinary capabilities from raw material
management tools. Accenture analysis treating procurement as a core capability production to logistics and distribution are
found that for every $1B in addressable and optimizing spend. used by different functions or siloes in the
spend, potential savings up to $155M are enterprise, rather than a company taking
possible with more disciplined and strategic A 15 percent reduction in non-labor costs advantage of the broad-based offerings to
sourcing. See Figure 1. is significant in any industry, of course. support the whole enterprise or multiple
Given that, what’s stopping E&C firms from projects.
taking a more expansive view of improving
procurement? As Figure 2 illustrates, there
are several barriers to enterprise-wide
procurement improvement, including:

Figure 1. Bottom Line Impact of Improving Procurement

3-year average vs. world-class savings analysis

*$1B of external spend, services company


Benchmark* Impact on $1B of annual spend

% spend managed 51% 90% $510M $900M

% savings achieved 7.7% 15% $39M $135M

% savings realized 61% 92% $24M $124M

% continuous
improvement and 0.5% 3.4% $2.6M $31M
spot buy

BOTTOM-LINE IMPACT $27MM $155MM

Average World-class

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2. Inability to leverage scale through 4. Lack of centralized information
suppliers. Price leverage resulting from and analysis. Most firms operate on a “We weren’t looking
consolidation of enterprise-wide purchases decentralized basis—at least as it pertains to
in a category can benefit all stakeholders— procuring materials and hiring subcontractors.
for just an anonymous
the E&C firms themselves to subcontractors In part this is an effort to control service provider, but for
and suppliers. transportation costs, as well as to ensure a partner: a company,
compliance with local/state licensing
3. Limited integration of and visibility that brings along strong
requirements. Yet, the fragmentation and
into current supplier data. At many firms decentralized operations end up adding experience and success
there are no resources dedicated to obtaining costs in the long-run because a full menu and that has the same
or synthesizing data on forward looking of potential suppliers is not considered, and
demand, trends in commodity prices, or cooperative mindset.”
price/scale efficiencies from consolidating
suppliers. Thus, firms may not really volume are not captured. Dr. Martin Rohr
understand the range of pricing available.
Executive Board member
It is easier and faster for procurement
managers to rely on or default to the list of Accenture research shows that while 60 HOCHTIEF
approved suppliers—the known quantities— percent of executives fund new
and not rock the boat by suggesting investments by reducing indirect and non-
alternatives, even if they offer a competitive product input costs, far fewer—a mere eight Procurement as a function and business
or best service or product. While loyalty percent—view procurement as strategic, a driver is evolving, both by choice and
has its place, a mentality of “We always disparity that is both perplexing and necessity; it is becoming more strategic
use Supplier X always in western region” alarming given current market pressures. and requiring higher level skills in broad
can add costs rather than avoid them. The good news is that more executives are areas like negotiation and data and trend
realizing that spend optimization and cost analysis, as well as the need for specialized
innovation are key factors in helping drive category knowledge. Many E&C companies
profitable growth. are not equipped with these advanced
skills in their procurement functions, or,
if they are, they prefer to deploy them in
other areas. The question then becomes:
how do E&C firms ensure they have the
procurement skills they need to succeed
now and in the future?

Figure 2. Barriers to Improving Procurement Capabilities and Processes

Issue Implication Solution

1 Limited Reach 49%


of spend is untouched
Category Experts

2 Lack of Information; Limited


Sub-Contractor Visibility
3-5%
additional savings lost
Market Intelligence

3 Lack of Follow Through


and Compliance
30%
of negotiated savings
End-to-End Process
are never realized

4 Limited Third Party/Sub-


Contractor Access to Pricing
Resulting impact will vary
by client and situation
Category Expertise;
New Back Office Model

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Moving toward world-class
procurement capabilities
E&C firms must respond in a way that will • Clear delineation of roles. Policies are • Defined service level improvement goals.
both satisfy business partners, and position executed by people, so it is imperative Transformation leaders need to set
their organizations for long-term success. that roles, responsibilities and expectations between procurement and
Doing nothing is no longer an option—there accountabilities for each category and the business and operating units in the
is too much margin and market share at sub-category are clear. enterprise, reflected in key performance
stake. Fortunately, companies have multiple • Refined procurement operating model. metrics measuring cost and supplier
paths to consider in evolving procurement Successful transformations address four performance.
capabilities and processes, from launching critical operating pillars—strategy, people,
internal transformation efforts to leveraging These are the basic building blocks of a
processes and tools. All need to work in successful procurement transformation.
third party procurement service providers. harmony and be refined to support the Although summarized here, Accenture
overall goals established. has used them to help many companies
A: Launching an Internal • Change management. Constant successfully evolve their procurement
Transformation Initiative reinforcement, feedback and functions, close critical capability gaps
communication about the ‘what and and inject procurement innovation into
Accenture’s experience shows that
why’ of the transformation, pilot/testing, their operating models (see sidebar). It is
successful transformation initiatives are
and integration of new processes are possible to strengthen the bottom line
undertaken after a thorough review and
needed to build and sustain momentum and capture substantial spend reductions
diagnostic. For procurement, that means
for positive change. with a methodical, disciplined enterprise-
looking at all major spend categories and
wide approach.
benchmarking performance (costs) against
industry leaders. There are compelling data
and clear opportunities to close significant
gaps with internal transformation initiatives,
keeping a few key success factors in mind:
Partnering with HOCHTIEF to Transform
• Strong and continuous leadership/
sponsorship. A mandate for procurement Procurement Operations
transformation has to come from the top,
meaning the CPO, CFO and CEO. A clear As a company, HOCHTIEF was always managed the purchase of goods and
goal and compelling benefit need to be on the lookout for innovative ways services in 16 material categories
communicated and reinforced. to remain a lean organization while including IT hardware, office supplies,
improving operational effectiveness, furniture, tools and security items.
• Recalibration of incentives. Project including procurement processes. The Accenture deployed a highly skilled
managers are used to having a high company retained Accenture to help it team of procurement specialists and
level of control and latitude in choosing consolidate the procurement of non- established a new set of processes to
suppliers. Motivating them to embrace strategic goods and services, which had source products and services centrally
change and participate in centralized/ historically been managed by individual for HOCHTIEF companies in Germany,
consolidated procurement will require organizational entities. Consolidating Austria and Luxembourg. An extensive
new incentive models to reward them for these parallel procurement activities communication effort was rolled out
the savings they control. in a shared services environment to keep employees informed about
would reduce costs and provide the changes ahead, describe the
greater visibility into the company’s new system being put in place, and
procurement activities and expenses. answer any questions they might have.
The successful launch of the new
Accenture provided the global procurement platform and processes
capabilities and relentless focus needed allowed the company to meet its goals,
to deliver significant bottom-line and stay in the vanguard of procurement
value for HOCHTIEF. Under a multi- innovation in the construction industry.
year services agreement, Accenture

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B: Leveraging Procurement
Service Providers Helping a Commercial OEM Improve Performance
E&C firms are, by definition, in the business
Through Global Sourcing
of building. Procurement is a core capability,
but not the essence of how companies are Accenture’s High Performance Business Armed with fact-based price comparisons
evaluated. Yet, the Everest Research Institute research found that tough economic and scripts for supplier negotiations,
recently found that the P&L impact of times can actually present significant teams were able to revise contracts with
procurement outsourcing is five times opportunities for companies. Such was new and existing suppliers that reduced
greater than other BPO initiatives like HR the case for an original equipment sourcing costs by nearly $8 million
or F&A, going far beyond straightforward manufacturer (OEM) that recognized (exceeding the original savings goal by
transactional cost reductions. Accordingly, sales would fall off as the global three percent) and reduced the supplier
it makes sense to divide the tasks of downturn hit and turned to Accenture base by 18 percent, even as the company
procurement between internal teams and to help develop and deliver a strategic switched sources for approximately 350
external experts. Third-party procurement sourcing program. parts to new suppliers.
experts can focus on specific high-value
categories or all categories; either approach
can yield substantial savings while freeing
internal capacity to devote to other • Better matching and scaling of with proven results and deep industry
procurement activities. construction bidding capabilities to the experience. These vendors will be able
ebb and flow of project volume. Using to understand the strategy, context and
Benefits Expected “on-demand”, third-party capabilities challenges faced by your company.
Collaborating with a service provider and means that they can be ramped up
or down more quickly than internal Knowledge of Industry. Every sector
employing a divide and conquer approach
resources can be redeployed as project/ has its own traditions and mindset about
to procurement optimization can benefit
business volume shifts. procurement, making deep knowledge and
companies on multiple levels, specifically:
direct experience in the sector crucial.
• Improving the depth and breadth of • Using sourcing know-how, procurement Providers that try to apply structures and
procurement skills companies have at expertise, and flexibility (as a differentiator methods to E&C borrowed from other
their disposal, without the complications and a service) in large, complex, multi- industries generally fail to maximize
of recruiting, training and managing more year projects—including joint ventures. savings or efficiencies because the methods
employees. The best service providers help do not reflect the unique aspects of E&C
By enlisting the services of third-party
clients adopt and implement rigorous work and project-based organizations. The
procurement experts like those at
approaches such as zero-based budgeting most valuable partners have deep industry
Accenture, E&C firms stand to gain the
and ‘no exception’ compliance standards knowledge, as well as an informed, current
cost and operating benefits that companies
to inject further budgeting discipline, perspective on the unique procurement
in other industrial manufacturing sectors
increase visibility and capture more problems the E&C sector faces, and a clear
have realized for years.
savings opportunities. understanding of stakeholders’ processes.
• Allowing companies to reduce enterprise What to Look for in a Value-added Insights. The best service
costs overall because they can more Procurement Service Provider providers are resourceful data scientists
easily work across functional silos and
The comfort of dealing with known who are able to access and synthesize large
barriers to consolidate and optimize
quantities/vendors is just one of the main data sets to generate insights into and
a broader range of category and sub-
reasons E&C firms have not transformed performance information about suppliers.
category spend.
their procurement operations. This begs In fact, Accenture’s recent acquisition of
• Enabling better bidding—both for internal the question of what to look for in a Procurian was driven, in part, by that
spend and projects—because specialists procurement service partner. Key criteria in company’s world-class market intelligence
with comprehensive information about evaluating a potential partner include: capability. Procurement service providers
categories and vendors expand the range should have a demonstrated commitment
of supplier options and supply greater Relevance and Experience. Look for to developing ongoing market intelligence
cost certainty. Estimators can complete organizations who can offer experts (for services, subcontractors, materials and
projections based upon what the dedicated to the most problematic or equipment) that can translate to more
company will spend on a future project important categories for your company. accurate bids for E&C companies. Vendors
vs. what has been spent in the past. Procurement service providers have been should also have in place clear processes
around for years, so compare the relative and tactics to communicate news, changes
experience of vendors and select those
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and analytic results to the procurement
team, even down to the tactical level of The New New Math: Accenture’s Acquisition of Procurian
compiling up-to-date databases and
catalogs of materials to support more Enhances Strategic Sourcing Managed Services
informed, competitive bidding.
For over 14 years Accenture has helped Our combination adds new category-
Breadth. Even if a service provider is clients across the globe extend their specific market intelligence capabilities
focused on a subset of categories, they procurement capabilities and capture based upon data analysis of over $80B
should be knowledgeable about how global savings by offering a comprehensive in aggregate spend under management.
procurement processes flow and fit together. suite of Procurement Managed Services. The proprietary platform aggregates
For example, Accenture’s end-to-end In 2014 Accenture strengthened the intelligence across clients and applies
procurement service span the three main services by acquiring Procurian, a market analytics to create powerful real-time
areas of procurement, from sourcing and leader in procurement services. intelligence.
category management, to procure-to-pay
operations and source-to-pay. See Figure 3.

Figure 3. End-to-End Procurement Processes

Value Proposition
Sourcing and Category Management
(S&CM) ensures increased visibility,
year on year category plans, analytics

Sourcing
and insight resulting in better deals and
contracts leveraging Accenture’s expertise
and scale.

Procure to Pay (P2P)—Business process


transformation and improved efficiency
results in improved compliance, ensuring
savings stick. Providing better visibility and
controls throughout the enterprise with Stakeholder
process efficiencies reduces operating & Journey
costs of 20-50%. Management
Source to Pay (S2P) leverages both S&CM
and P2P maximizing the value of closed-
loop and an end-to-end processes, driving
compliance and locking in realized savings.

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Sustainability and Enablement. It’s In Accenture’s experience, a high performing
fairly easy for an experienced procurement procurement organization combines superior Procurement service providers
manager—internal or external—to find the sourcing with complementary capabilities
lowest cost supplier at any given point in in areas such as market intelligence,
should have a demonstrated
time. But cost is just one aspect of strategic demand planning, supplier enablement, commitment to developing
sourcing. E&C firms would benefit more relationship management, and closed-loop ongoing market intelligence
from collaborating with service providers spend management. See Figure 4. (for services, subcontractors,
who can help them design a strategic,
materials and equipment) that
dynamic procurement approach that flexes
with business cycles and opportunities can translate to more accurate
and builds in trade-off analysis. bids for E&C companies.

Figure 4. Procurement Transformation Components

High-Performance Sourcing
Methodology and Engine
A complete source-to-pay offer focused on
driving real business outcomes by leveraging
the outsourcing concept to reduce costs and
improve performance and compliance.

Analytics, Reporting and Supplier Relationship


Performance Management Management
A comprehensive approach to Accenture defines this as the
end-to-end management of systematic management of
data through analytics design, supplier relationships to
decision support, integration optimize the value delivered
with the business, reporting through the relationship over
and target setting. their life cycle.

High-Performing
Procurement
Organization
Material Component Organization and
Rationalization Human Performance
Application of a formal method Design
to identify candidates for This includes transforming
Material rationalization to and integrating the
eliminate cost, complexity, organization and team
procurement spend, quality structure of the procurement
issues, and supply chain impacts. group for maximum
Rationalizing the Material Catalog efficiency, visibility and
can have significant benefits to impact. Also focuses on
Procurement and Operations. human performance design
Closed-Loop Spend Management such as training, job-level
design, incentives and
Visibility, category ownership, demand performance strategies.
management, strategic sourcing, integration
with budgets, procure to pay operations and
control & monitoring drive best in class
selling, general and administrative (SG&A)
performance.
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Conclusion

It is tough to ignore the savings possible by improving


procurement operations; to do so means profits are left on
the table. Our work demonstrates that cost optimization and
substantial improvements in procurement efficiencies are
possible for E&C firms in a broad range of indirect and direct
procurement categories. Yet, to make procurement organizations
high performing, the support of suppliers is required, which
many E&C firms overlook on the assumption that suppliers
will revolt.

Our experience proves that the opposite response is more likely:


large national suppliers, in particular, are highly motivated to
participate in procurement transformation because they want
a bigger share of wallet currently taken by small, local focused
businesses. More volume allows them to leverage their supply
chains most effectively. In that way, procurement improvement
initiatives started within E&C firms will have a multiplicative,
ripple effect throughout the supply network. Given the potential
win-win for E&C firms and their suppliers, there is no reason to
delay the journey towards procurement optimization.

Notes
1
Industry Supplier Outlook Survey 2
Tulacz, Gary J. “ENR The Top 400” ENR.
2013–2014: Market Trends, Marketing 19/26 May 2014: 17. Print.
Spend and Sales Strategies in the Global
Construction Industry. June 2013.
http://www.academia.edu/4598993/
Market_Trends_Marketing_Spend_
and_Sales_Strategies_in_the_Global_
Construction_Industry

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Contact us
For more information on Procurement in Engineering and
Construction, please contact:
Gary T. Markle Andy R. Howard
gary.t.markle@accenture.com richard.a.howard@accenture.com

Patrick H. Wildenburg
patrick.h.wildenburg@accenture.com

About Accenture
Accenture is a global management
consulting, technology services and
outsourcing company, with more than
336,000 people serving clients in more
than 120 countries. Combining unparalleled
experience, comprehensive capabilities
across all industries and business functions,
and extensive research on the world’s
most successful companies, Accenture
collaborates with clients to help them
become high-performance businesses and
governments. The company generated net
revenues of US$30.0 billion for the fiscal
year ended Aug. 31, 2014. Its home page is
www.accenture.com.

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High Performance Delivered
are trademarks of Accenture. 15-3596U/9-8611