Today’s guest post is from Joe Payne, Vice President of Professional Services at Source One Management Services, LLC and co-author of Managing Indirect Spend: Enhancing Profitability Through Strategic Sourcing.
While strategic sourcing and procurement groups around the globe continue to make headway into new departments and address categories previously off the table, their popularity with business owners and stakeholders has never been lower. Headlines and titles like “Everybody Hates Procurement: Here’s How To Fix It” and “The End of Procurement, Forever!” and “The Problem with Procurement: Misalignment” seem to pop up every day.
I attribute these headlines to the growing pains strategic sourcing and procurement will naturally experience as the role of this group continues to expand and evolve. And evolve it has! In the 11 or so years I have been at Source One, I have seen Strategic Sourcing transition from rarity, to necessity, to commonplace, to part of a larger spend management strategy. In its current form, and as it heads into the future, it looks to me that modern procurement has developed to be just as much about negotiating with an organization’s leadership as it is negotiating with a supplier base. In fact, I tell most college grads entering this industry to be prepared to challenge those within their organization, learn how to market their group, and sharpen their debate skills. Getting savings is the easy part, getting your organization to act in their own self-interest is the challenge. This is not a job for the weak-willed or thin-skinned! To explain what I mean, here is a quick rundown of the change I have witnessed.
The Reactive Buying Era
When I first started at Source One, most of the purchasing groups in the companies we worked with dealt exclusively with raw materials. If the personnel had “sourcing” in their title, it was rare, and many of our customers did not have any sort of sourcing initiative for their indirect spend items. Stakeholders and the department heads responsible for budgeting conducted the purchasing for their needs.
In those days, we did a lot of explaining to potential customers just on what Strategic Sourcing was. It wasn’t a commonplace concept even within Procurement, so those outside of it — Finance and IT, for example — had very little knowledge of it. Especially in the mid-market, any group with spend management tactics that were more advanced than three bid purchasing or preferred supplier relationships were the exception, not the rule.
The Sourcing Era
Slowly, Strategic Sourcing became more and more familiar until it ultimately blossomed. Strategic Sourcing practices were first used by a limited number of organizations as they purchased their raw materials. Seeing the successes in that category, organizations then asked these “sourcing” teams to look into areas like packaging and shipping. Strategic Sourcing’s applicability continued to grow as success after success was reported. Subsequently, most departments were soon asked to start implementing strategic sourcing practices, and procurement departments began to be more directly involved in buying decisions.
The Category Management Error
In its latest form, Strategic Sourcing is now tied into category management, meaning companies are hiring or developing sourcing experts for their individual spend categories — telecom, media buys, office equipment — or departments — Capital Projects, Marketing, IT — and restructuring their departments with the goal of achieving near 100% spend under management. With dedicated sourcing experts managing each category and an intense focus on supplier relationships, those sourcing departments effective in category management are not only able to take advantage of market conditions today, but are better able to predict future market conditions and opportunities within the managed categories.
Even utilizing these strategies, a common problem remains. These sourcing teams lack the institutional clout within their organization to be effective in managing spend. SOPs are reluctantly followed, if they are followed at all, by the end users, and the majority of the end users and stakeholders do their best to avoid involving the sourcing team. Additionally, sourcing initiatives are often dead on arrival, killed in the name of deadlines or supplier relationships
The Change Management Era
So, that’s a short history of Strategic Sourcing’s development. So where is the industry going from here?
From what I have seen in the work we perform for the clients of Source One, category managers must now become “change managers”. “Change managers” are those leaders who can navigate their organization’s structures and barriers to be effective, and transition their department’s role from that of a reactive-tactical resource to one that is proactive and strategic.
“Navigate” here means “maneuvering around” objections or otherwise getting things done, and there are a few ways that I have seen different sourcing groups approach this. At the last conference I attended, I heard some sourcing teams discussing their use of a “bell cow” — a single resource within their group that is skilled in working with department heads and generating acceptance from end users for their group’s sourcing activities. In other cases, I have witnessed sourcing departments working through an executive sponsor, often times a CFO, to help push their group’s agenda items. A third, slower method I’ve seen used to promote sourcing initiatives is the granular approach, meaning the sourcing group is using any quick-and-easy method available to build credibility and support, end user by end user and department by department. Not surprisingly, this third method is high resource-low return, and often causes some areas ripe for sourcing to go untouched. Of these, the proper solution is the one that works best within a particular organization.
When sourcing groups improve their internal relationships, the stakeholders are better encouraged to participate and end users are better encouraged to comply with sourcing activities, increasing their chances of success. These project successes give Procurement something tangible to market internally and use as leverage in drumming up support for future initiatives, and also exposes their unique skills to the organization as a whole. Through continued project success and internal relationship-strengthening, Procurement will slowly be seen as an integral and centric resource to the company; its unique skillset prized not only for its ability to identify cost savings for the organization but for its ability to generate value for the organization as a whole.
As the need for more strategic spend management practices increases, procurement departments are evolving to meet these newfound challenges. But rest assured; the industry’s progress is not slowing or stopping. Adapting to the industry’s modern changes and challenges is only setting the stage for the next evolutionary step, which will be to become a revenue center for the organization. The better equipped a procurement team is now at handling the challenges of the current market, the better prepared it will be to predict and stay ahead of future trends