Procurement Transformation: A Holistic Approach to Best Practice Procurement
Imagine a self-financing solution that could transform your company's procurement capabilities, realize savings, and sustain improvement over time. By combining human performance with strategic sourcing, process excellence, and deep category knowledge, procurement transformation will help companies realize greater benefits from their procurement programs.
Just a few years ago, e-procurement was viewed as the simplest route into the brave new world of e-commerce and, in terms of balancing risk against potential benefits, a no-brainer. But in a recent survey with 30 e-procurement pioneers, Accenture learned that many of these early adopters were still in the pilot phase of their implementations. Even the few that had fully implemented their systems were still significantly short of their original usage targets. Despite admitting to some substantial cost overruns, particularly in the area of e-requisitioning, most of the companies surveyed expressed satisfaction with the progress they had made and the savings they had realized, and were confident that they would ultimately achieve their original objectives. Accenture found only one organization out of the 30 surveyed that admitted their e-procurement initiative had completely failed to meet expectations.
Despite these optimistic findings from pioneers, the fact that so few had moved beyond the pilot stage meant that the jury was still out on key aspects of the e-procurement case. This has done little to dispel a growing perception that the enthusiasm for e-procurement in the late '90s was based on a naive trust in the ability of a magic bullet to resolve complex and long-standing procurement problems.
The same could be said of strategic sourcing. By focusing on total cost of ownership and taking into account quantitative and qualitative processes, as well as service improvements, strategic sourcing has been shown to facilitate better internal and external customer service. These improvements not only reduce costs, but also directly increase revenue. However, the suspicion has grown that many strategic sourcing programs have delivered results that, while initially impressive, are unsustainable in the long-term. This is due at least in part to a failure to transfer the expertise of the external consultants, who renegotiated the original contracts, to the client's own procurement team.
These impressions were confirmed when Accenture's recent survey asked respondents what they could have done differently. Many of the companies interviewed actually became involved with e-procurement in response to senior management pressure to do something - almost anything - with an "e" in front of it. So, business cases were often limited or nonexistent. For example, the study concluded that "companies focused on building working catalogs, rather than on ensuring that underlying supplier contracts would produce a compelling business case," and "auctions resulted in business failure even though the technology worked well." The report argued that the key to success lies, as always, in being business-driven rather than technology-driven.
Most significant was the recognition that these early e-procurement initiatives
had often run into trouble in the implementation phase - resulting in cost overruns
of 20 to 30 percent of the implementation budget, which were already 40 percent
or 50 percent of the total because they failed to recognize the human factor.
They had underestimated or ignored both the fundamental contribution made by
human expertise to the procurement process and the potential disruption e-procurement
implementation could wreak on organizational structures.
This does not mean that e-procurement can't deliver valid, measurable benefits.
E-Requisitioning offers the potential for increased contract compliance, increased
buyer productivity, and better quality information. Similarly, e-sourcing has
delivered improved market intelligence, reduced purchase prices, and compressed
cycle times.
On the downside, as we have witnessed, are the very real problems encountered in implementation. In the case of e-requisitioning, implementation costs can amount to as much as 70 percent of total cost. Unforeseen or underestimated problems interfacing with legacy systems are the most common cause of difficulties. Despite these technical problems, the most intractable difficulties seem to center on people issues. A total of 21 percent of the companies surveyed reported user acceptance difficulties, while many more acknowledged that users take far longer than expected to embrace and adapt to new technology. Given that the majority of the companies surveyed had not advanced beyond the pilot stage, more attention needs to be devoted to cultural change issues and change management procedures when projects advance to full implementation. Even then, e-requisitioning systems seldom fully address more than 20 percent of an organization's indirect spend and deliver benefits that are difficult to quantify.
Similarly in e-sourcing, the area where the companies in Accenture's survey seem to have achieved the most success initially, there are real concerns about an increasing reliance on auctions impacting supplier relationships, and whether price benefits are sustainable over the long-term. Even companies that had sought to share costs and risks through participation in e-marketplaces continue to encounter difficulties of supplier and customer adoption, supplier content integration, and integration with their own ERP systems.
In light of the growing body of research and anecdotal evidence, there is an
urgent need to rebalance the procurement value creation model, replacing what
has become a traditional focus on one-off systems or strategic sourcing initiatives
with a holistic view that places the human factor at its core. Such a model
would include, as a key resource, highly skilled buyers with expertise in procurement
processes and deep category knowledge. The role of the organization would be
to deploy that resource to maximum internal and external effect, using technology
to provide the necessary information for the procurement team to exploit its
expertise and enhance its
own productivity.
This expert buyer model, which combines process excellence with deep category knowledge, demands that buyers focus on a limited set of categories and are somewhat protected from operational demands. Similarly, the value of their expertise can only be maximized when categories requiring similar buying techniques are grouped together. It follows that a successful personnel strategy requires the development of an organizational structure that is both category-focused and capabilities-driven.
In such a context, technology still has an important role to play, but only to the extent that it supports and enhances the ability of the organization to deploy, support, and exploit the buyer's expertise. Increasingly tight financial resources must be focused on the option that is most likely to deliver the greatest sustained benefit, and technologies must be matched to the needs of specific spend segments. With senior management no longer dazzled by the "e" factor, funding will only be available for projects that promise measurable results in rigorously developed business cases. Moreover, those promised results will only be delivered if the focus shifts from simply making the technology work to achieving the rapid user adoption on which they depend.
Accenture has coined the term "procurement transformation" to describe this
holistic approach. Whereas strategic sourcing and e-procurement deliver step
changes in performance (which tend to fade over time since they fail to sustain
the best practice processes they are based on). Real transformation occurs when
an organization invests in recruiting and developing top-flight
professionals to manage its categories.
Figure 1 - A procurement transformation program rests
upon re-engineering all the drivers of procurement value creation.
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To that end, procurement transformation starts with an experience-based diagnostic that is designed to identify and prioritize cost-saving opportunities. The diagnostic is used to assess the procurement capability of the organization in terms of its processes, human resources, and organization structure and systems, as well as develop the business case and define an implementation plan. That intensive eight-week phase is the preliminary step to prepare for a 15- to 24-month implementation, in which strategic sourcing and capability development proceed in parallel. In essence, strategic sourcing drives the realization of the benefits identified in the business case by applying successive waves of best practice sourcing processes. These savings in turn fund the development of best-in-class capabilities, which ensure that the benefits are sustained and further enhanced in the longer term. Not the least attractive aspect of the approach is that, if correctly managed, it should be entirely self-financing.
Figure 2 - The procurement transformation journey combines
strategic sourcing with the development of world-class
procurement capabilities to sustain benefits over time.
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The purpose of the diagnostic phase is to develop a transformation plan tailored to the specific needs of the individual organization. As such, it comprises detailed analysis of the total spend portfolio and of the organization's procurement capabilities in terms of its processes, organization and human performance, and technology, including its existing e-procurement systems. That analysis provides the basis for the identification of potential improvements and the means by which those improvements may be realized. This forms the basis for the development of a business case and implementation plan. After the initial diagnosis phase, the client can then structure the program according to the identified opportunities, choosing either to embark on the full transformation journey or to focus the program around a few key modules. Either way, the program is driven by the business case and is focused on results.
Once the diagnostic phase is complete and the recommendations accepted, strategic sourcing and capability development run in parallel throughout the remainder of the transformation project. On the strategic sourcing side, the focus is on total cost of ownership - where commodities are prioritized and executed in successive waves of spend categories as part of a coordinated program, rather than a series of line projects. In the specific area of supplier development and management, the aim is to identify and prioritize the relatively small number of suppliers that have the most significant impact on cost and service performance. Supplier confidence and cooperation is best fostered by the organization that is willing to change and improve its own performance; there shouldn't be any "sacred cows" and organizations should embrace out-of-the-box thinking.
Key to the capability development phase is the development of best practice target setting and performance monitoring processes, which will ensure that the realization of previously identified benefits are tracked and sustained. The ultimate aim must be to ensure common goals by developing measures that are consistent both vertically and horizontally across the organization. Arguably the most important parameter to measure is the organization's ability to learn, change, and continuously improve. Procurement transformation is a process that demands the involvement, commitment, and sponsorship of senior management, and the participation and agreement of all other levels within the organization.
Figure 3 - The procurement transformation delivery model begins with
an experienced-based diagnostic, followed by the parallel delivery of
savings and capabilities.
Target setting and performance monitoring provides the framework where organizational design, human performance, and systems issues can be addressed. The optimal organization for procurement transformation is one that is based on spend segmentation and is logically designed around these segments. The resulting structure gives the required focus on categories and enables the implementation of specific solutions by category. Such an organizational design allows for proper identification of key processes and tasks, and in turn feeds into logical roles and job descriptions. It recognizes that no one organizational model can meet the needs of all organizations or, indeed, the differing needs within any one. The design also strikes a balance between external leverage and internal responsiveness. Most importantly, by creating a category-focused model, it provides the environment within which buying expertise can be developed.
That buying expertise is the focus of the human performance component of capability development. Its aim must be to attract, retain, and develop the best people by determining the competency levels needed for the different roles within procurement, identifying where gaps exist between current and targeted levels, and developing the necessary strategies for filling them. That requires the early involvement of the human resources department to ensure consistency with wider policies and procedures, and an objective assessment of capabilities by neutral and experienced outsiders. It also requires strong and effective communication in order to carefully manage expectations.
Finally, there is no suggestion that any of this can be achieved without an
investment in systems. However, the aim must be to determine how to best leverage
the current technology investment, and to take advantage of new technology options.
System investments need to be selective and based on rigorous business cases.
The overall aim is to increase the effectiveness of the expert buyer through
the provision of better information and more effective tools, while automating
transactions and reducing the need for human involvement in low-value tasks.
