Daily Archives: January 28, 2007

Don’t be a Victim of the Performance Gap (Procurement Best Practices)

According to the Hackett 2006 Enterprise Book of Numbers, there is a growing performance gap in sales, general and administrative operations between world class and average companies with top performers generating significant savings while delivering improved effectiveness and reduced risk. Don’t have a copy? No worries – the IACCM ran a great summary article last month.

Hackett’s research found that by achieving world-class performance in four core operational areas – information technology (IT), finance, human resources (HR), and procurement – companies can reduce annual SG&A costs by $60M per B in revenue. At the same time, these world class performers show superior effectiveness, deliver higher quality services, and benefit from increased economic returns and reduced risk.

In addition, Hackett found that world-class performers demonstrate strength in five best practice categories: strategic alignment of business goals and operating procedures, complexity reduction, technology enablement, business processing sourcing; and cross-functional partnering. Furthermore, the strategic use of technology plays a key role in achieving world-class performance.

The article also quotes Pierre Mitchell (who needs no introduction) who states that “The best companies may differ in their size, industry or regulatory environment, but what they share is their ability to use back-office functions, traditionally viewed as cost centers, to generate competitive advantage. They do this, regardless of function, by relying on specific management approaches in the five areas we’ve identified.” World class organizations support continuous improvement within individual functions, cross-functionally and in end-to-end processes. “It’s critical to recognize that each year these world-class performers do a little better, pulling further away from the pack. The growing gap has a multiplier effect that will make it more difficult for the lagging typical companies to compete over time, a process that may soon be irreversible for many of today’s leading corporations.”

The Hackett group key findings across various SG&A functions were as follows:

Strategic Alignment
World class organizations use “flatter” management structures that are more effective. Furthermore, the senior IT executive is almost 50% more likely to be on the company’s primary management team.
Complexity Reduction
World class organizations achieve tangible benefits by abolishing unnecessary complexity in business processes. World class procurement organizations reduce complexity through strategic sourcing, consolidating their purchases among 78% fewer suppliers than typical companies, and centralization. (Hackett found a typical company with 1B in annual spend can save 8M in process cost alone by increasing the percentage of contracts negotiated centrally from 20% to 80%.)
Technology Enablement
Companies with world-class IT organizations spend 7% more per end user than their peers and their use of technology results in improved performance across other SG&A areas. Appropriately applied technology streamlines and automates operations and world-class organizations spend 45% less than typical companies on finance operations.
Business Process Sourcing
World class companies leverage business process sourcing options at the process level and do not hesitate to change sourcing solutions if they fail to meet the desired results.
Cross-Functional Partnering
World class organizations seek synergies across business functions through cross-functional cooperation to achieve common goals. Procurement staff work alongside their functional peers to understand business need, plan spending and supplier selection, and take into account current and future needs.

So don’t get stuck in the procurement gap – take Hackett’s advice to heart and join the world-class organizations who are saving an additional 6% per year on their procurement efforts. Don’t know where to start? Since technology is key, start by adopting state-of-the-art on-demand strategic-sourcing solutions, such as those offered by Iasta and Procuri.