Those of you who have been around for awhile will know that AQPC, Hackett, Gartner, and, going way back AMR, and Aberdeen, among others, have been benchmarking and telling us for years how many employees your Procurement Organization should have based on organizational revenue.
Furthermore, those of you who have been paying attention will know that they’ve been telling you for years that the better you are, the less employees you should have.
And you probably believe them. But, THEY ARE WRONG!
Why?
All of these employee count recommendations were based on two fundamental assumptions.
1) You can automate your way to baseline, as every improvement in automation will allow you to shed employees.
2) Baseline is sufficient to maximize Procurement value.
The first assumption is true. As you automate the thunking, more and more tactical processing that requires no actual thinking is offloaded entirely onto the machines, and those resources are no longer needed for those tasks. At this point, you can redeploy them, or you can follow the crowd and reduce the headcount (while remembering that the true wisdom of crowds is that none of us is as dumb as all of us). (We’re not saying that you shouldn’t let the employees go. It all comes down to whether or not they have the skills to be redeployed in a value generating role. But more on that later. We are saying that you should think twice before reducing the headcount target. More on this later.)
The second assumption is false. Baseline is considered to be enough for an average organization to source the top 80% of their spend over the average contract window and sufficiently manage the critical suppliers.
But simply having enough headcount to do baseline sourcing events and manage a few suppliers is not necessarily enough to guarantee value. And that’s what it comes down to. Value.
If the buyers barely have enough time to setup and run the events, but don’t have any time to discover or qualify new suppliers, negotiate beyond initial bids, or work with existing suppliers to identify additional opportunities for cost saving (such as minor design/spec changes) or value creation (such as new value added services), then are they really providing any value (beyond simply adopting a bleeding edge sourcing platform that can automate an entire sourcing event and reducing headcount even further)? No, they aren’t.
Now that inflation is back with a vengeance, in any managed category, savings is out the window. The absolute best case scenario is you keep costs flat, but most of the time the best you will be able to do is reign in increases less than the market average increase (and less than your peers). So if you want, or need, savings, you need to redefine the category, the product, the service, the delivery, the network, etc. That takes a lot of expertise, creativity, focus, and time from true Sourcing professionals … focus and time they won’t have if they have to launch a new sourcing event every week because you are measuring Procurement success based on how low the headcount can go and not how much value Procurement can generate.
Similarly, if all buyers have time to do on the supplier management side is deal with critical issues and the fires that arise because of them, you’ll never get real value out of the relationship, never build the relationship to the point where you co-innovate and jointly take cost out of the supply chain, become a true customer of choice (and not a fake one based on standard contract rhetoric which only guarantees they won’t screw you in pricing more than any other customer), and never discover capabilities in your supply base that you never new existed (… capabilities that may allow you to offer new products and services with a greater profit margin).
Plus, if you’re only tackling the top 70% to 80% of spend and the top 10% to 20% of suppliers, what opportunities for significant spend reduction, or at least control, are you missing. There’s often more overlooked opportunity in the tail than the middle categories. And you’ll never know the true extent of the potential in your supply base if you only ever talk to 1 in 10 suppliers.
The right amount of headcount is the number of professionals that add value and an ROI 3X to 5X their fully burdened FTE cost. the doctor would hazard a guess that the right number is probably 2X what AQPC, Hackett, and Gartner would have you believe. Look to these reports to understand what percentage of tactical headcount can be redeployed with the right automation, not for the right number of strategic headcount to retain. (Based on the current numbers, you should be able to redeploy 80% of your tactical head-count as you go from the bottom to best in class, but you only start redeploying headcount out of Procurement when adding more strategic resources doesn’t increase value at a 3X to 5X ROI.)