capital project source-to- contract (s2c) life cycle ... · for the study, kpmg interviewed capital...

August 2016

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Capital project source-to- contract (S2C) life cycle management

IntroductionToday, sourcing and procurement is highly leveraged in the purchase of noncapital project-related goods and services. However, sourcing and procurement is rarely included in the source-to-contract (S2C) process capital projects. When it is, it usually occurs late in the process as capital project S2C management is still considered the purview of project management and engineering functions, not of procurement. Unfortunately, ill-managed S2C processes often lead to delayed supplier contracting, suboptimal contractor performance, and, in some cases, capital project cost and time overrun.

To better understand the inclusion of procurement know-how in overall capital project management, KPMG LLP (KPMG) launched a capital project S2C life cycle management benchmarking study.

Study methodology For the study, KPMG interviewed capital project and procurement leaders from 16 power and utilities (P&U); energy and natural resources (ENR); and engineering, procurement, and construction (EPC) firms to obtain quantitative and qualitative data on five key components of the S2C life cycle: their S2C process, organization design and people, delegation of authority, performance management and metrics, and technology enablement.

Total participants 16

EPC– providing capital project executionmanagement

P&U– with sizable capital projectinvestment spend

ENR– with similar capital investmentportfolio and size

Source-to-contract (S2C)process

Delegation of authority(DoA)

Technology enablement

Performance management and metrics

Organization and people

Study participants Survey elements

1Capital project S2C life cycle management

Key takeawaysLeading practice firms integrate procurement know-how into their capital project S2C process life cycle management.

Leading firms understand that early procurement involvement, technology enablement, and proper performance measurement positively impact project outcome by:

— Improving capital project planning and execution

— Developing a preferred supplier management strategy to actively manage and improve supplier or contractor performance

— Capturing and leveraging lessons learned and leading practices

— Measuring and mitigating capital project risk, particularly those associated with third-party suppliers

— Developing and sustaining local/regional suppliers and alliances

— Providing third-party spend cost oversight and identifying opportunities to help maximize value delivery from the existing supplier base

— Improving schedule, quality, and safety performance.

Capital project S2C process cycle time and cost per Full Time Equivalent (FTE) procurement resource appear to improve as a direct result of early and frequent procurement engagement.

Development of capital project S2C process and technology road maps enhance existing systems and increase adoption rate by highlighting management bottlenecks.

Incorporation of upgraded processes and responsibilities into capital project procurement position descriptions and performance goals emphasizes the value placed on enhancing the capital project S2C processes.

DoA levels directly impact the speed of operational processes and rely on a well-developed governance structure to balance risk and speed of execution.

Leading organizations are increasingly utilizing strategic alliances and partnerships to secure the right resources, pricing, and capacity in a saturated supplier market.

Organizations need to develop a balanced scorecard view to measure capital project S2C performance.

2 Capital project S2C life cycle management

S2C process

The survey data

Process ownershipKPMG found that 70 percent of P&U and ENR companies consider procurement as the S2C process owner, while EPC companies consider the line of business (LoB) where the capital project group resides as the S2C process owner. This point of view is driven by EPC’s project-driven procurement operating model (see Figure 1).

Process cycle timeCapital project S2C process cycle time is influenced by a number of factors, including project type (new construction versus maintenance), contract size, complexity of internal processes, and compliance with regulatory requirements.

— Figure 2 shows that average process cycle time varies greatly across all three survey sectors, ranging from

87 days in P&U to 255 days in ENR. EPCs have a more efficient process than other industries with a cycle time variance of 37 percent, whereas P&U was at 70 percent, and ENR at 61 percent.

— As demonstrated in Figure 3, contract approval cycle time varied greatly in the $1 million to $5 million range, from 32 to 325 days. But as the dollar value of the contract increases, the cycle time narrowed significantly to 141 to 219 days. As shown in Figure 4, contract negotiation, scope of work (SOW) development, and request for proposal (RFx) execution are considered as the top three activities with the longest cycle time.

0

20

40

60

80

100

15%25%

75%

100%

14%

71%

P&U ENR EPC

Procurement Business Multifunctional

%

540210

84.7

44

Days

202

135

0 100 200 300 400 500 600

255

101

ENR EPC P&U

87

Figure 1: S2C process ownership Figure 2: S2C cycle time and variance

The S2C process includes all activities performed by the capital project and procurement departments to help ensure the effective acquisition of goods and services. KPMG’s survey reviewed how process ownership and process cycle time were standardized across the various activities.


Figure 4: Average cycle time per capital project S2C process step

KPMG recommendations on the S2C process

Taking the S2C process for capital project organizations to the next level of enhanced process efficiency is an organization-wide effort founded on clearly defined processes, roles, responsibilities, and agreed expectations. Specifically, organizations should:

— Develop a strong and collaborative multifunctional partnership between the capital project functions/LoBs and the procurement functions within the organization

— Ensure early involvement of key stakeholders in the S2C process activities starting as early as project planning/scope definition

— Improve handoff communication between the S2C process multifunctional stakeholders by examining the existing problems, identifying their specific causes for failures and barriers to improvement, and then implementing and validating the new approaches

— Enhance the existing roles and responsibilities definition (RACI) of all key stakeholders involved in the S2C process to help minimize ambiguity and duplication of effort

— Foster a cross-functional learning environment to expand the awareness of each stakeholder’s contribution to the process.

Figure 3: Cycle time variance per DoA limit

>$50M

$20M–$50M

$5M–$20M

$1M–$5M

219

243

279

325

103

66

32

141

183

173

153

127

0 50 100 150 200 250 300 350

Days

SOW development

RFx execution

RFx evaluation

Contract negotiation

Purchase Request review and approval

PurchaseOrderexecution

0 5 10 15 20 25 30 35 40

36

30

24

37

9

6


Organization design and people

The survey data

Organizational right sizing and resource mix — The optimal size of capital project procurement is driven by the execution strategy and the maturity of the procurement function, which determines the range of procurement’s roles and responsibilities and associated headcounts.

— EPCs have a comparatively low capital project spend per FTE of $57 million, as compared to $69 million for ENR and $63 million for P&U. The lower capital spend per FTE for EPC organizations may be partially influenced by the wider procurement roles and responsibilities associated with their execution strategy. For example, under certain models, EPC firms usually deploy additional procurement resources to manage material expediting and logistics during peak periods.

Clarity of roles and responsibilities — Eighty percent of all respondents in the P&U and ENR industries confirmed that procurement is not involved early on in the S2C process. This trend was not observed with EPC organizations. That EPC companies include procurement early in the S2C process indicates that they do view procurement as being integral to the success of their service offerings to customers.

— Lack of clarity of procurement’s role within capital management may be because capital functions have their own procurement personnel who may or may not have a reporting relationship with the corporate procurement organization.

Capital project operating modelsOur Target Operating Model (TOM) findings showed that:

— Most P&U and ENR firms in the study utilize a service-driven model (as shown in Figure 5), which is based on process consistency across multiple projects, allowing project cost savings through synergy. The main downside is that resource allocation during peak periods may be challenging.

— All EPC firms interviewed use the project-driven procurement operating model (as shown in Figure 6), which supports rapid resource mobilization during peak periods and increases specialist knowledge per project while guaranteeing early involvement and dedication of a procurement resource. However, it encouraged a siloed view of project activities.

— Our survey also revealed that selected companies adopted a hybrid model that deployed most of its procurement resources through a service-driven approach; in the meantime, they also allocated dedicated “special force” resources with specific subject knowledge to support select strategic capital projects.

High-level study findings showed that optimization of resource size and staff responsibilities in capital project procurement is driven by execution strategy and procurement organization maturity.


Figure 6: Project-driven operating model

Materialsmanagement

Contract management

Procurement

Contract administration Transactional procurement

Category management

Capital project group


Construction management Procurement Engineering

Capital project teamCapital project team

Construction management Engineering Procurement

Materialsmanagement

Contract management

Procurement

Contract administration Transactional procurement

Category management



Construction management Procurement Engineering

Capital project team Capital project team

Construction management Engineering Procurement

Figure 5: Service-driven operating model

KPMG recommendations on organization design and people

Effective capital project procurement organizations require the organization strategy and appropriate resource mix. This mix must be reinforced by enterprise-wide visibility and executive mandates. Executive mandates—supported by clearly delineated roles and responsibilities and ownership—help move immature organizations up the capabilities maturity curve. In addition, organizations should:

— Cultivate in-depth understanding of their capital project execution strategy to help ensure support from the necessary resources

— Examine current resource mix to help ensure appropriate resource allocation between strategic and tactical activities

— Realign and clarify capital project and corporate procurement roles, responsibilities, and accountabilities throughout the S2C process

— Standardize the existing S2C process and better utilize technology to improve process efficiency

— Ensure the implementation plan includes education of all stakeholders on the various roles, responsibilities, and designated process handoffs—all of which can help diffuse the bottleneck perception

— Develop a training or immersion program structured to help ensure that procurement resources have the required understanding and knowledge of leading capital project practices.


DoA

The survey data

DoA observations per industry and employee role — As shown in Figure 7, the C-level executives at the participating P&U organizations appeared to have higher spend authorization; comparatively, ENR companies preferred to assign higher spend authorization to their nonexecutive management.

— EPC project managers and directors have unlimited DoA for their projects, which is a reflection of their companies’ project-driven operating models. This DoA structure also reduces the average S2C cycle time.

This portion of the study focused on understanding what companies are doing to simplify and standardize DoA policies and processes while maintaining the required control and risk management.

Figure 7: DoA limits by industry and title**

$5M$150M andabove

$5M$150M andbelow

$500K Unlimited

$100K$1M andabove

$10K$500K and above

ENR average

Key

Benchmark range

EPC average

P&U average

$1M Unlimited

$5M$100M andbelow

$50M and above $85M and above

$50M and below $68M and below

$3.3M $4.5M

$250K $750K

$55K $300K

$100K

$11.7M$8.5M

$15M $60M

Benchmark findingsRoles

Chief executive officer/President

Chief operating officer/ Chief financial office

Vice president

Directors/General managers

Managers

Supervisors

Board of directors

**Titles and roles were normalized across various organizations for easy comparison.


KPMG recommendations on DoA

When designing appropriate approval authority/spend authorization levels, leading organizations understand the impact of DoA on the efficiency of operational processes. To achieve this, they tend to:

— Develop and continue to refine their DoA to achieve the best balance between internal control and risk consideration, and the speed of execution

— Establish a good governance program and rely on it to review and monitor the DoA; this helps shed light on contraventions and periodic bottlenecks affecting the business practice

— Consider documented exceptions to authority on a periodic basis to determine if exceptions are appropriate or would be better reflected in an adjustment to the authority levels of those positions.

DoA approval cycle time — As shown in Figure 8, DoA/spend authorization approval cycle time increases as contract size increases.

— The average cycle time for DoA limit within $20 million–$50 million is double the cycle time of the DoA limit below $1 million.

— The average cycle time for DoA limit greater than $50 million is more than double the cycle time of the DoA limit below $ 1 million.

Figure 8: Average Cycle time by DoA limit

0

50

100

150

200

250

>$50M$20M–$50M$5M–$20M$1M–$5MBelow $1M

82

121

155170

187

Day

s

Figure 8: Average cycle time by DoA limit



The survey data

— Few survey participants consistently track the overall S2C process cycle time.

— Only one organization measures performance across the entire S2C process.

— The majority of participants have experienced difficulty obtaining timely and accurate data to identify root causes and improve performance.

— Metrics tracked by select participants include:

– Procure-to-requisition cycle time

– Service level agreement between procurement and other functions

– Vendor performance

– Contract documentation compliance.

Performance management and metrics tracking is an important requirement for a successful S2C process. Organizations need a balanced and aligned set of performance metrics to measure improvements in cycle times, compliance, and contract performance on an ongoing basis for continued transparency, stakeholder buy-in, and integrity of the process.

VendorsContractsOrganizationProcesses

Perf

orm

ance

in

dic

ato

rsB

usi

nes

s in

dic

ato

rs

— Request-to-contract sign cycle time

— sign to contract management tools, e.g. SAP

— Closed contracts per period and department

— Closed contracts per period and FTE

— Percentage ofcontracts with claims

— Vendor performance

— Ratio claim amount per vendor

— Ratio received quotes per RFx

— Ratio received quotes per bidder solicited

— Contract volume per period and department

— Contract volume per period and FTE

— Percentage and volume per category and contract types

— Contracts expiring within next x months

— Volume per vendor

— Regional distribution

Figure 9: KPMG’s leading practice example balanced scorecard

KPMG recommendations on performance management and metrics

— Leading companies use a balanced scorecard view to measure capital project S2C process across multiple dimensions, e.g., process, organization, contract, and vendors.

— A broad performance management framework should include well-defined performance metrics and a continuous improvement process with objectives, accountabilities, and supporting systems.

— Key performance indicators, such as those in Figure 9, can be used as a starting point to measure contract management performance and create business transparency.



The survey data — Approximately 80 percent of the surveyed organizations use a contract life cycle management (CLM) tool; however, most of them use CLM tools as document repositories without leveraging other functionalities, such as contract authoring and redlining.

— Select leading organizations surveyed integrated their CLM tools with their ERP system to better understand spending patterns and identify savings opportunities.

— Only about 69 percent utilize an e-Sourcing tool to drive the process. Those who do use the tool do not consistently leverage it to drive the effectiveness of the process. Most P&U and ENR organizations surveyed

use it to automate the bid issuance and collection process.

— Although all participants have a P2P tool within their organization, most still perform some aspects of the P2P process manually, in particular workflow approval.

Recent technology innovations have given procurement and IT executives a broader suite of options and deployment models to consider. Today’s landscape is more powerful and suite-oriented; less capital intensive; and more mobile, collaborative, scalable, transparent, and accessible. Some of the key technology tools that can support the different S2C processes are shown in Figure 11.

A major contributing factor to S2C success is the utilization of technology to reduce cycle times and automate tasks associated with central storage, search, and retrieval of contracts. In general, all surveyed companies use technology to support all or different aspects of the capital project S2C process.

P2P100%

CLM 81%

e-S

ou

rcin

g 6

9%

Figure 10: Technology adoption by process

Technology adoption by processIn general, every company surveyed uses technology tools to support either all or different aspects of the capital project S2C process. All EPC organizations interviewed use a form of contract management tool to automate the entire capital project S2C process.


KPMG recommendations for technology enablement

In general, most organizations are moving toward enhancement of their technology landscape. But the success of any technology improvement is dependent on the policies, processes, and governance practices. To help drive success, organizations need to:

— Secure visible executive sponsorship for S2C initiatives

— Develop a S2C technology road map to enhance existing tools, while defining appropriate strategy and integration plan for potential new systems

— Focus on changing behaviors and user adoption of the existing and new S2C process and tools by instituting a solid change management program.

Figure 11: Sample technology solutions supporting capital project S2C processes

Supplier risk management

— RSA Archer eGRC

— MetricStream

— Hiperos

— OracleSou

rcin

g/Pr

ocur

emen

t bu

sine

ss a

pplic

atio

n

Analytics and performance measurement

— Cognos

— Zycus

— Sas

— Ariba

— Spotfire

— Emptoris

— MicroStrategy

Strategic/Tactical — Category strategy

— Supplier performance management

— S2C

— CLM

Supporting technologies

— Emptoris

— Oracle

— Zycus

— Ariba

— SciQuest

— BravoSolution

— PowerAdvocate

Transaction — P2P for goods and services

— Catalog content management

— Tactical sourcing


— Coupa

— Oracle

— Ivalua

— Ariba

— Proactis

— Basware

— IQNavigator

Collaboration — Projects

— Vendor life cycle management

— Supplier chain finance

— File share


— Coupa

— C2FO

— Emptoris

— Ariba

— Taulia

— BravoSolution


ConclusionFor an organization to have an enhanced S2C process, its processes and policies, technology, DoA/spend authorization, organization structure and people, and performance measurement and metrics must be aligned to support the capital project and procurement strategy.

KPMG has identified the following attributes as leading practices in each major component of S2C success:

S2C process

Organization design and

people

DoA



— Clearly defined and implemented procurement processes, policies, and procedures

— Clearly defined procurement ownership (e.g., procurement, capital project group, or cross-functional organization)

— Clearly defined and well-implemented RACI and handoff processes

— Enhanced procurement organization size and resource mix to reflect the maturity of the procurement organization and capital project execution strategy

— Employment of a hybrid of service-driven and project-driven operating models to support process consistency while dedicating the right resources across projects

— Recognition and development of the capital project procurement team’s skills

— Periodic review and update of DoA

— DoA allocated in line with risk tolerance and speed of execution requirements

— Established governance structure to monitor compliance

— A balanced scorecard view of performance management across multiple dimensions

— Clear linkage of benefits to wider budget and cost management processes

— Full integration with suppliers for visibility into transactions, design, and planning information

— Full utilization of sourcing and procurement technology for contract authoring, procurement and sourcing technologies, workflow, and contract storage

— 100 percent paperless, supplier-enabled sourcing and procurement environment powered by the latest technologies


Pro

cess

Peo

ple

an

d o

rgan

izat

ion

DoA Technology

Basic source to contract practices

Wave 3Wave 1 Wave 2

Performance management & metrics

Skillsenhancement

Deploytraining

Standardize contractsign-off

templates Policy review and

update

Establishpreferred vendors

program andprocess

Establishpreferredvendors

agreements

Processtrainingprogramrollout

Competency assessment

Hybrid model

enhancement

Developchangeorder

training

EnhanceDoA levels

Reviewexisting

DoA levels andbenchmark with

industrystandards

Contractingstrategy

development

Processreview

(idle timereduction)

Review andupdate

RACI matrix

Leading practice capital project source to contract organization

Metrics deployment

Supplier collaboration

portaldevelopment

Procurementtechnologyreview androad map

development

Developbusiness casefor technologyenhancements

Contracting technology

training

Metrics development

Most organizations have a good understanding of their S2C process problems. Where they falter is determining the steps required to address these problems and how to implement the activities to drive the procurement function to an optimal state, as shown in Figure 12.

KPMG encourages client organizations to: — Leverage a cross-functional team covering capital projects, procurement, IT, risk management, and finance to work together in defining the activities for the capital project S2C process improvement.

— Jointly envision a future state S2C process and identify the key enablers to support it.

— Define key opportunities and activities to achieve envisioned future state.

— Prioritize identified activities into an implementation plan, based on their criticality and ease of implementation for the organization, as resources are typically limited.

Figure 12: Capital project S2C implementation road map


KPMG’s Procurement and Operations Advisory practice is a global team focused on helping clients drive sustainable improvements to make procurement and supply chain a source of value and innovation. Our approach supports both full-scale transformations and targeted improvements to address key client issues and deliver tangible benefits.

Contact us

Patrice MaheoManaging Director, Procurement and Operations Advisory T: 415-377-6536 E: [email protected]

Jie Chen ZickDirector, Procurement and Operations Advisory T: 734-358-8992 E: [email protected]

Samir KhushalaniPrincipal, Procurement and Operations AdvisoryT: 713-459-2236E: [email protected]

Sam YoudalDirector, Deal AdvisoryT: 713-870-1995E: [email protected]

Mick TamasManager, Procurement and Operations AdvisoryT: 540-692-2815E: [email protected]

Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.

© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name and logo are registered trademarks or trademarks of KPMG International. NDPPS 586619

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