by Chris Sawchuk and Pierre Mitchell
Procurement organisations are faced with the growing challenge of delivering ever-increasing savings in the face of tightened supply markets, powerful suppliers, global supply market volatility, and equally volatile demands from customers who want “free, perfect and now”. However, delivering the value when the “low-hanging fruit” has already been picked can be exasperating when procurement leaders are also dealing with issues such as the risk of internal budget cuts, reorganisations (for instance, the move to shared service models), poor IT support and outsourcing.
As such, many senior procurement executives have been asking us a fundamental question: “How can I evolve my value proposition to capture more sources of value?” It’s a good question, because CPOs who cannot evolve this faster than the rest of the organisation will at best stagnate and at worst be polishing their CVs.
But rather than just prognosticate about the future, we’ve found that the most pragmatic response is to describe the path that leading procurement organisations follow as they evolve towards world-class performance, and, more importantly, the new skill sets and operating models that will be required to execute at these levels.
An evolutionary model
In working with hundreds of procurement leaders and their staff over the past 15 years, we have found that successful ones not only inevitably hit a “tipping point” where the business actively seeks their involvement, but also move through five discrete evolutionary phases:
Level 1 – Assurance of supply: right goods and services at the right time. Procurement role is one of buyer/planner.
Level 2 – Price: right stuff and at the right price. Procurement role is as negotiator.
Level 3 – TCO: from price to total cost of ownership. Procurement role is supply expert and project leader.
Level 4 – Demand management: see and shape demand. Procurement role is money/relationship manager.
Level 5 – Value management: increase business value from spend, not just reduce spend magnitude. Procurement role is trusted business adviser and change agent.
In our new research study, Evolving the Value Proposition of Procurement – A Five-Stage Model, we dive into each level with regards to key performance metrics, skill sets and the empirically proven best practices (and emerging leading-edge practices). To summarise:
This evolutionary model starts with a traditional purchasing organisation that is reactive and transactional. The next two stages involve separating transactional purchasing from strategic supply management activities and aligning its organisational structures, processes and staff around supply markets in order to gain leverage in spend effectiveness and process efficiency. The final two stages shift 180 degrees to customer management and switch the focus from supplier relationship management to a set of customer relationship management processes that help procurement get the “voice of the customer” and “assurance of relationship” with spend owners – allowing them to get more value from their spend.
This is much more than a cursory “stakeholder management” process in a traditional sourcing methodology led by a cross-functional supply team. It involves a focus on making sure that spend owners are getting what they need from both suppliers and from procurement as a professional services organisation. At the last stage, the CPO’s agenda is the CEO’s agenda (innovation, growth, sustainability, and so on) and there’s no parallel measurement system beyond the metrics that define value for the organisation.
What’s the payoff of evolution?
The financial benefits to a company are very clear: broader spend influence (nearly 40 per cent more in indirect spend categories), earlier spend influence and deeper spend impact laid on top of process efficiencies lead world-class performers to a “procurement ROI” that is nearly three times that of their peers (see chart).
The financial benefits to the CPO are clear with regard to compensation and future opportunities, but the same also holds true for their staff, and this has led to a talent management crisis that is actually hitting world-class firms harder than average firms.
The evolution described here is at least a 5-10-year journey. The five levels build on each other and advance at different rates depending on spend category, budget owner and the operating model (process design, roles and metrics) that is tuned for unique business needs. That said, if you can evolve your model annually and self-fund your new processes, projects and capabilities, you’ll accelerate your evolution towards world-class performance.
Chris Sawchuk (csawchuk@thehackettgroup.com) is procurement practice leader and Pierre Mitchell is a senior business adviser at The Hackett Group, a global strategic advisory firm
