Real Results From Purchase-to-Pay Opportunities
The Challenge Is Not One of Vision, But of Execution
Executive leadership understands and awaits the substantial savings promised from internal change initiatives to control and manage indirect spend, but most continue to wait. Why? Although those primarily responsible chief procurement officers recognize the proverbial pearl in the oyster of procurement, they have been unable to reach it for a variety of reasons, most of which relate to how internal procurement organizations are typically positioned, resourced and operated.
So what has been happening? Many corporations and public organizations have attempted various programs to capture procurement savings from e-procurement solutions, through buying consortiums or more rigorous supplier management programs, yet the inherent challenges of achieving savings across the organization remain. Given all the demands on companies to compete effectively, whats all this effort really worth? Quite a lot, actually, which is why most procurement executives still are trying to wrestle procurement to the ground and why so many CEOs still are waiting for the potential benefits of procurement to reach the bottom line, let alone capture the innovation and value locked up in their key supplier relationships.
According to the Aberdeen Group, For a typical enterprise, it takes an increase of $5 in sales to equal the impact of a $1 reduction in procurement costs. For a public body, every dollar saved is another dollar that can be used elsewhere. Thus, the question usually isnt whether a company should improve its business through more effective procurement operations, but rather how to unlock the sizable value potential within its reach.
Consider this: Would the executive leadership of a Fortune 1000 company be willing to invest in initiatives to improve their procurement capabilities for 10 to 20 times return over three to four years? For many, the answer is (unfortunately) no. Is the reason for inaction a lack of vision or a lack of credibility and confidence in the organizations ability to drive the change required to unleash the financial potential trapped inside the procurement process?
The reason that senior executives often hesitate to fund procurement transformation initiatives is not because they dont recognize the opportunity, but because they dont believe the proposed solution will actually deliver the promised benefits. In most companies, internal forecasts and ongoing efforts to reduce indirect spend levels have lost credibility over time, as business units across the enterprise fail to see tangible and sustainable results to their bottom lines.
What Is the Scale of the Problem and the Opportunity?
If you could actively manage the procurement of all nonstrategic goods and services, what would that be worth to your organization? When Accenture asked that question of 100 procurement executives, the answer was that annual savings would average over 11 percent of baseline spend levels. In fact, more than one-fourth of surveyed executives expected the annual savings potential to be in excess of 15 percent of current spend. Yet these same executives acknowledged that for many significant spend categories, including temporary and contract labor, IT hardware and software, telecom, marketing and professional services, the procurement executives influenced less than half (and as little as 9 percent in some categories) of total spend across the enterprise. These survey results starkly underscore the importance of realizing the full potential of effective procurement. Consider the profit improvement opportunity, as shown in Figure 1.
Given the size of the prize, why have so many organizations struggled to achieve it? The answer rests in a number of interrelated challenges. For starters, in most companies, CPOs lack control over autonomous buying decisions across the enterprise. In such cases, individual business units, geographic units and functional units (e.g., marketing, legal) resist initiatives to centrally influence procurement through a best-practice shared-service organization. Arguably, executive management could mandate enterprisewide commitments to best-practice procurement management, but this is by far the exception to the laissez-faire rule. The lack of executive support reflects a chicken-and-egg paradox faced by many organizations. Lacking strong executive sponsorship, and the investment commitments that go with it, many procurement departments have to make do with outdated technology and tools, as well as inadequate sourcing and buying expertise on a categoryspecific basis.
As a result, procurement organizations often struggle to operate up to best-practice standards, and lack the ability to provide timely and accurate information on spend savings achieved or savings opportunities lost. The resulting suboptimal outcomes self-reinforce status quo behaviors of autonomous buying across the enterprise and limited executive management sponsorship.
So, for many procurement organizations, the questions remain: How can we overcome the barriers to achieving the full potential of procurement? How do we break the cycle?
Transform How You Approach Procurement To Get the Results You Know Are There
Today, a growing number of companies are outsourcing procurement operations to procurement service providers (PSP) in multiyear arrangements to realize the financial returns from an improved procurement process.
Qualified PSPs offer immediate access to category-specific knowledge and experience across multiple spend categories; the ability to plug into leading-edge procurement technology to promote enterprisewide compliance; higher user satisfaction and improved vendor management; and the opportunity to exploit highly efficient global operations centers to lower baseline costs, improve efficiency and enhance management visibility and control.
Building the capabilities listed above is challenging for any one enterprise to manage or afford on its own, which is precisely why it makes sense to consider exploiting the knowledge and experience of a qualified multi-client service provider whose sole focus is on building and continuously improving world-class procurement expertise on a global scale.
Get Better Control
Rather than becoming less important, procurement leaders take on a more strategic role in the company that outsources. While this may seem counter to corporate culture, it works this way because, by outsourcing with the right provider, the organization has access to the resources and investment required to realize the vision. This, in turn, gives procurement executives more control and accountability in their business process, not less. Then the procurement executives can spend more time in the value-adding areas, such as supplier-led revenue opportunities, strategic outsourcing initiatives, corporate social responsibility, etc.
Get Better Resources
As part of this expanded role and influence, the CPO can exploit vastly better tools and capabilities to serve the corporation, which were previously unavailable due to their cost or the skill-sets required to develop and maintain them. The right provider brings key personnel with deep category management expertise and the right relationships to leverage.
The right provider also brings proven multinational, multicurrency processes and operations, supported by dedicated technology solutions that enhance the process, along with a level of professional management across the marketplace that a singlecompany spend base cannot match.
Get Better Focus
By outsourcing, companies can migrate from simply managing administrative inputs to driving real business outcomes. This means that external PSPs manage (and are contractually responsible for) critical but noncore activities such as those listed in Figure 2, including order processing, category management, vendor selection, contract negotiation, accounts payable and travel and expense reporting. The provider contracts to manage key inputs, such as people, processes and technologies, that underpin all of these activities, in order to deliver the outputs that matter to management.
Get Real Change
We all know that nobody likes change. But when its necessary, companies can actually transform procurement operations faster and more reliably by using an external PSP a change agent to drive lasting improvements in procurement. Outsourcing can be used as a forcing function to accelerate behavioral change across the enterprise.
An executive from a Fortune 1000 company embarking on an outsourcing program commented, We were bloated by our own internal costs, so management put the whole organization on the hook to perform. Procurement was an area where we knew we could generate savings quickly, but in order to drive demonstrable and sustainable benefits, we needed an outside forcing function to initiate, accelerate and successfully complete enterprisewide change.
For Real Results
So what are the business outputs of all this effort? How about sourcing your spend through a global network with the scaled buying power to help negotiate (and actually receive) better discounts, which can reduce the overall cost of goods and services by as much as 7 to 11 percent. That translates to savings of up to $110 million for each $1 billion in indirect spend, driving substantial value to the bottom line. Or how about raising category spend compliance to as high as 95 percent across the entire enterprise, saving an additional 3 to 5 percent off of previous internal costs. Companies such as Deutsche Bank, Thames Water and Lincoln Financial have entrusted critical, yet noncore, elements of their procurement function to outside providers, seeking these types of benefits.
Outsourcing can enable companies to consolidate and aggregate more of their procurement spend, gain more visibility and control, strategically source additional spend categories and acquire better data and transparency around many of their financial transactions. As a result, they have not only enabled procurement to drastically improve how it supports the business, but they also have delivered a better service at a lower total cost. The case study in Figure 3 shows how procurement outsourcing helped Thames Water achieve high performance. Over 10 years, a change in ownership, two changes in regulatory framework and a major rebalancing, results have been delivered and the service continues to evolve and develop.
There is no one-size-fits-all approach to how companies allocate their resources to drive results. Outsourcing is neither a fad nor a panacea, and almost all major organizations outsource at least parts of one or more major business processes today, procurement among them. IDC estimates that procurement outsourcing will grow at a 34 percent compounded annual growth rate among Fortune 1000 companies over the next five years.
What to Consider in Your Make-vs.-Buy Transformation Decision
Purchase-to-pay outsourcing might be the right transformation option for you if a PSP can demonstrate that outsourcing will help your company achieve greater savings, faster, in a manner that gives you more control, not less, by deploying a transformation program that is likely to be more successful than internal efforts.
There are several additional factors specific to procurement outsourcing that help companies determine if and how outsourcing will work for them. Which of the attributes in Figure 4 apply to you?
Even if all these factors apply, it still takes considerable leadership to successfully execute a procurement outsourcing program. Championing such a program requires substantial executive commitment; the vision to look beyond the traditional role of the chief procurement officer; and a willingness to transform the procurement function in order to achieve and sustain higher performance.
The Question Is Not Whether To Transform Procurement, But How?
The executives who have successfully driven long-term savings from their sourcing and procurement operations have a shared vision and desire to transform their business practices. Their organizations are relying on them to find and execute possibilities to improve their bottom line from the inside out. And they are all dealing with the type of scale and decentralized business processes that current resources cannot manage effectively enough.
Accenture invites you to let us assess the savings potential at your organization. Accenture provides sourcing and procurement services to half of the worlds largest companies and offers the full scope of sourcing-to-payment outsourcing services through a combination of supply chain professionals and a global delivery network for supplier management, assisted buying and transaction processing.
