Category Archives: Market Intelligence

Procurement Myths Debunked! Part I

Over on spendmatters.com/cpo, the maverick has been doing a great job knocking out Procurement myths one by one, with twenty (20) down and five (5) to go. While the doctor did not co-author this series, as per a post this spring, he did consult on them and believes that all of these are myths that you need to be aware of.

The first 10 myths are:

  • Hit Your Metrics
  • Pay No Heed to Cost Avoidance
  • Stay Away from Maverick Spending
  • Surveys are Silly
  • The Shared Services Model is Bad
  • PMOs and CoEs are Bad
  • Spend Should Always Decrease
  • Category Management is Best
  • Take Negotiated Savings Out of Budgets
  • Sourcing and P2P Definitions are Set in Stone

Of these, the doctor‘s favourites are:

  • Stay Away from Maverick Spending,
  • Spend Should Always Decrease, and
  • Take Negotiated Savings Out of Budgets.

While avoiding maverick spend is generally a best practice, sweeping it under the rug, even if it is small, is not a best practice — nor is mandating a stop until you understand why there is maverick spend. Is it because the buyer doesn’t know, doesn’t care, or thinks he has found a better deal? If the buyer didn’t know, then there is an issue with the process (of communication) somewhere, and fixing it will prevent future maverick spend. If the buyer doesn’t care, then there is a personnel issue that needs to be dealt with. If the buyer thinks he has a better deal, why? Lower cost, higher quality, quicker acquisition, or false perception. In the first three cases, the Procurement pro needs to investigate to see if there is a new opportunity she was not aware of, in the last case, an education program is probably required.

While spend is important, it is not the most important thing. Organizations exist to make profit for their shareholders. Profit is revenue minus expenses. That means that profit is increased when spend is decreased, or revenue is increased faster than spend is increased. The best way to to increase revenue faster than spend is to increase value. That’s why value creation, and not spend reduction, is the most important thing.

Savings are not a means to cut budgets — they are a means to find additional revenue for investment into opportunities for future value creation. These days, no department has enough money, and no one has enough money, or time, for training. If budget is freed up, it should be used to invest in training and new technologies, not to blindly increase shareholder dividends.

But these are just a few of the myths. More to come!

Has The Role of Procurement Really Changed?

This spring, Xchanging, one of the four largest Procurement Outsourcing Providers and a provider of Procurement and Sourcing technology (through MM4) released the initial results of its 2015 Global Procurement Study. According to the study, the role of Procurement has changed. It has evolved from a cost saving function to an invaluable strategic partner.

Based on the results of the study, the doctor doesn’t agree. If Procurement is an invaluable strategic partner, the kind that generates value for the organization, then why are the top 4 most important KPIs that Procurement is measured against cost related? And, more specifically, why is cost-savings realized, at 47%, 2.5 times as important as the next most important metric of revenue impact, at a mere 19%. If Procurement was really strategic, should not revenue impact be (almost) as important as cost-savings realized? And, more importantly, why is ROI only the 8th most important metric at 8%?

A truly strategic Procurement function generates value, and value is measured not just as savings (realized), not just (additional) revenue (impact), but overall profit margin, captured in an ROI metric. And not just one that captures savings from outsourcing/technology partners.

Moreover, the rest of the results are not that impressive either.

  • The most common reason for missed objectives is lack of internal engagement.
  • The most important skill set with the greatest perceived skills gap is relationship management.
  • The most common challenge is time pressure, faced by 79% of operations.
  • 59% consider talent shortage a challenge and 13% consider it an extreme challenge.

Procurement is on its way to becoming strategic. The realization that relationship management is key, that skills are needed, that new talent will be required, and that there is never enough time will push the organization to adapt better practices, processes, and technology, and this means that Procurement will evolve and get more strategic over time. However, it’s strategic and value to the overall organization will be limited until the organization measures Procurement more strategically. If a CPO’s bonus, and more importantly, a CPO’s job, depends on hitting an ill-defined cost-savings measure, than that is where the CPO is going to focus, and while doing so, miss out on a number of mid-term and long-term value generation activities that could, over time, take the organization from average to best in class. (There’s a reason that it’s the Hackett Group top 8%, and that’s because very, very few organizations realize what it takes to truly take Procurement to the next level.)

Regardless of the results, Xchanging should be applauded for undertaking this study across 830 Procurement professionals across the US and the EU. Until the C-Suite puts their measurements where their mouth is, the reality must continue to be documented.

World Class Procurement Organizations Are Beginning to Align with the Business

A recent publication from The Hackett Group for Procurement Executives addresses “How Procurement Organizations Are Reinventing the Stakeholder Experience” that looked at world class procurement organizations, which continue to outperform their peer group by a wide margin (by up to 5M in cost savings for a typical company), and found a surprising result.

We’ve known for quite some time that world class Procurement organizations, also known as The Hackett Group Top 8%, outperform their peers. We’ve known that some of these generate savings up to 41% higher than other (laggard) organizations. But we did not know that almost twice as many world class organizations (83% vs. 44%) have dedicated resources that act as liaisons between Procurement and the rest of the business.

As the authors state, raising stakeholder satisfaction levels builds trust and helps procurement gain the organizational permission to take on higher-value work. This is confirmed by the Hackett Group’s database of thousands of benchmarks across hundreds of performance studies which found that organizations that continue to invest in activities that elevate their role to that of a trusted advisor are taken more seriously, especially when they communicate that activity appropriately to the other departments in the organization. Furthermore, when these Procurement organizations are seen as a valued business partner, they generally report 68% higher savings! (This comes by way of an average cost reduction of 3.5% vs. 2.1% and an average cost avoidance of 1.2% vs 0.7%.)

Simply put, world class Procurement organizations have climbed to the top of the hierarchy of supply (which the doctor and the maverick discussed in their piece on “The CPOs Agenda I: Availability and Delivery”), having mastered supply assurance, cost reduction, and demand management. They listen and engage the internal customer, understand the customer’s needs, manage the relationship, offer them a superior service experience, and get better results. They follow all of the best practices the doctor and the maverick have been, and will be, discussing* over on the spendmatters.com/cpo site, and are seeing the return.

* The Agenda series has been broken up into three series:

  • the Conundrum# serieswhich discusses the outside-in issues putting pressure on, and shaping, Procurement
  • the Agenda serieswhich discusses the most pressing objectives on the CPO’s plate that are required to respond to the outside-in issues
  • the Value Drivers serieswhich discusses the primary actions that a CPO can take to realize the objectives on their journey to master the hierarchy of supply

# the doctor‘s terminology

Procurement Outsourcing is On the Rise

But is it the dawn of a transformational era?

Everest Global just released it’s Annual Report on Procurement Outsourcing, which it called the dawn of a transformational era, where it found that the procurement outsourcing market is growing at a rapid pace (12% year-over-year in 2014) but that it is in a state of flux with record new deal signings intertwined with high end-of-year terminations (26%), indicative of service provider switching (or, sometimes, the pulling of the function back in-house because not all outsourcing decisions outsourced the right functions). (However, 2 providers, Accenture and IBM, still command over half of the Annualized Contract Value and the next two largest providers, Xchanging and GEP, command about 17% of the ACV, which means that two thirds of the market is dominated by four providers.)

This, and other findings discussed below, was based on Everest Group’s database of over 1,100 Procurement Outsourcing contracts (each worth over 1M with managed spend typically in the 50M+ range), its database of operational capabilities of roughly 20 Procurement Outsourcing providers, and ongoing surveys and interactions.

There were seven key messages in this report, including the rapid 12% year-over-year growth, but the three we are going to focus on are:

  • The value proposition is transitioning from a cost-focussed model to a cost+value model, where strategic drivers such as market intelligence, supplier relationship management, and operational excellence are gaining more importance
  • The scope of contracts is expanding to a more end-to-end approach
  • The role of technology is growing, with increased adoption of end-to-end platform-based offerings

Advancement of the Value Proposition

In the beginning, outsourcing was mainly focussed on economics (cost reduction):

  • procure goods and services at the best prices
  • optimize activities to be cost efficient

More recently, outsourcing has been focussed on efficiency (cost avoidance):

  • spend consolidation to drive further impacts (with volume pricing)
  • satisfaction of complex demands
  • quality as well as price (to reduce warranty/return costs and protect the brand)

But now outsourcing is starting to focus on value generation:

  • the outsourcer is trying to become a strategic partner and not just a cost centre
  • the outsourcer is trying to define and drive business outcomes that impact overall growth
  • the outsourcer is trying to predict market trends to help organizations adapt to, and take advantage of, macroeconomic shifts early

How? Outsourcing is becoming more interested in identifying innovative suppliers, tracking and enforcing compliance and risk management, and gathering and harnessing the power of market intelligence.

Increasing Contract Scope

While many outsourcing contracts start out as Source-to-Contract (S2C), where the outsourcer helps the organization identify savings in indirect, non-strategic, or even strategic categories where the organization just does not have the volume, many are transitioning to Source-to-Pay (S2P) contracts where the provider also takes over the back-office invoice management and accounts payable function. Similarly, those contracts that started out as (P2P), because the organization thought its first priority was freeing up resources for strategic sourcing, are transitioning to S2P as well because these organizations realize that a third party can source those categories that it does not have expertise in better than the organization can.

More Prominent Technology

“Cloud”, Big Data, Digitization, and Consumerization is reshaping the Procurement Outsourcing marketplace as organizations demand more from their outsourcing providers and outsourcing providers look for an edge over their peers. With the proliferation of S2P SaaS solution offerings on the marketplace, outsourcing providers can not only offer S2P services but also enterprise S2P platform deployments where the customer organization not only gets platform access, but the ability to use the platform for their sourcing projects as well.

These are promising findings. Given that most Procurement departments are under-staffed and that no Procurement department can be an expert in every category and every technology, it’s good that there are maturing outsource providers that can add value to the organization and not just drain dollars.

And the other findings, which can be found in Everest Global’s just released Annual Report on Procurement Outsourcing, the dawn of a transformational era, are promising as well. It’s worth checking out.

Data Analytics is Big Money, But

Last Friday, Palantir raised $450 Million in a new round of funding, at a valuation of almost $20 Billion, making it the fourth most valued “startup” to date with almost 1 Billion in funding including Founders Fund, Tiger Global Management, and In-Q-Tel, the CIA’s investment arm.

But it’s not just big data that generates big money (for the software provider) and big value (for the organization that has [access to] it). It’s big analytic power. And, as SI has indicated repeatedly, the data set doesn’t necessarily need to be that big to identify considerable savings opportunities.

A million transactions might not be more insightful than 1,200 transactions. If the transactions are for 10 different products from 10 different suppliers over the course of the year, a single summary transaction for each month for each supplier-product pair that summarizes the lowest price paid, the average price paid, the highest price paid, and the total paid is just as informative from a spend analysis perspective. Given this data, the buyer can see, for each product, how much money it would have saved if it always bought at the lowest price, how the price is trending, and how much could be saved by using a contract to lock the product in at a price less than the current market price. The other 998,800 transactions are not needed.

In other words while you need large spend cubes to find value opportunities, which will often depend on redefining categories, redefining shipping lanes, redefining delivery schedules, and so on, you can often get away with cubes that are at most, hundreds of thousands of well defined (summary) transactions (for the right time period). Millions of transactions are typically not necessary, and that’s why you can do enterprise wide spend analysis on a laptop with the right spend analysis tool (like busiq.com) as you can generally define a transaction set of just a few million transactions that covers the last three years and fits in memory!