Some metrics to justify investment in non-technology

components.

Still wondering what differentiates best in class procurement organizations? Read on…

Ben Federlein, Senior Director at the CEB’s Procurement Leadership Council, gave a metrics-

packed presentation at Corporate United’s Synergy event in Chicago a few weeks ago. I’ll share

some of the more insightful metrics and observations. If you haven’t seen Ben speak before, he

brings a keen sense of procurement empathy and humor, and is equally at home trading up

numbers and anecdotes – in other words, we highly recommend him.

One of the first sets of metrics that Ben shared focused on overall measurement of procurement

organizations. He suggests that the bottom quartile of performers have 60% spend coverage

compared with 84% of the top quartile of performers (we know – “spend coverage” is a metric

that’s very much open to interpretation). A more standardized metric that’s easier to compute

between organizations is procurement ROI. In this regard, CEB’s benchmarking efforts suggest

that bottom quartile performers deliver a 6.77X ROI compared with top performers, whose ROI

exceeds 13X.

More interesting (at least to me) is what Ben shared around what procurement winners do

differently based on procurement transformation product portfolio composition. In short, top

performing organizations that go through transformations “place bigger bolder bets.” What kind

of bets? Not the standard sourcing usual.

For example, the bottom quartile of performers prioritized strategic sourcing 57% of the time.

This compares with top performing companies that prioritized it only 33% of the time. Bottom

performers going through transformation prioritize demand management 23% of the time

(compared with 20% for top performers). In contrast, bottom performers prioritize cost structure

transformation 12% of the time, compared with 27% for top performing companies. Moreover,

for product and brand impact of procurement transformation, only 9% of bottom providers

prioritize this compared with 19% of top performers.

This data is fascinating, but shouldn’t be a surprise for procurement organizations that have

gotten past the basics. Muddling through strategic sourcing, demand management, supplier

rationalization, standard compliance and related efforts is just the ante to succeed. But while you

won’t find any disagreement from us on these areas, we might also add the following elements

that we frequently observe among top performing procurement organizations:

Tighter finance and procurement collaboration, especially in budgeting, savings

implementation and measurement, req-to-pay systems, risk management,

treasury/working capital, and tax

Advanced sourcing approaches that engage suppliers as creative partners versus simply

vendors to negotiate with

Broader supply risk and commodity management awareness that doesn’t just forecast and

plan predicatively, but asks why. For example, why and when do predicative models for a

commodity forecast break down? What are social media indicators of supplier risk – and

how might these change?

A focus on acting as a services provider (i.e., “how can we serve you?”) that crosses all

aspects of the business versus as a functional area

Ability to influence complex services categories and optimal business decisions such as

marketing spend (managing and holding the agency of record accountable, marketing

analytics reporting, etc.)

Continuing with lessons from Ben Federlein on procurement transformation success – comparing

top and bottom performers – let’s turn our attention to the types of investments that have

maximum impact on a procurement organization’s ability to find new sources of value and drive

transformation towards higher-value opportunities (and what areas don’t). Beginning with those

that don’t, while reverse auctions, eRFX, P-card, and outsources procurement can certainly

create efficiencies and savings, they are not associated with driving transformation of

procurement’s project portfolio (they came in at 0% in the CEB study).

In contrast, areas such as SRM skills, internal relationship management and category

management skills have a direct impact on maximum performance (receiving relative percentage

analysis returns of 25%, 37%, and 43% respectively). From this, we can take away that going

beyond standard internal business relationships that might be cordial (but are likely more

differential and less challenging than they should be) is critical to procurement success.

Further, as Ben observes, the most successful procurement organizations that go through a

transformation process “challenge business partners in a healthy way by identifying underlying

assumptions” in past decisions and actions – and mental models that might be holding back more

creative and effective supplier engagement. Moreover, these leaders also possess deeper

“influencing and selling ability” like the most effective suppliers sitting on the other side of the

table. The sum of these interpersonal and leadership skills can result in an easier ability for

procurement to “redirect” the business to “higher value solutions” than the status quo – and to

engage suppliers more effectively as well.

In Ben’s words, if you get all three of these areas right (supplier relationship management skills,

international relationship management and category management), then you’re “at the top” of

your game – and in the leader quartile of procurement transformation performance. The sum of

these efforts (and skills/competencies) on the interpersonal side can help transition the role of

procurement to “trusted advisor” to the business, as Ben describes it.

But what are the specific talent attributes that have the most impact in procurement effectiveness

for selling ability? The talent attribute with the biggest impact on the ability to sell ideas

internally is the “challenger ability” according to the CEB. It has a 47% maximum impact on the

ability to sell ideas. Communications and interpersonal skills were second, at 41%. Leadership

and business acumen come in third at 40%. Reasoning/thinking (39%) and strategy creation and

execution (38%) round out the list.

As Ben suggests, “these areas are all important” in part because as we know, effective category

management is a “tough job.” But those who can effectively challenge underlying assumptions

and engage stakeholders through effective confrontation have a direct influence on the ability of

the overall function to sell ideas and their value internally. Yet CEB research finds that only 17%

of CPOs report that their teams have high levels of effectiveness when it comes to the challenger

ability. One of the major challenges faced by the other 83% of organizations is a lack of effective

“challengers” in the function. Curiously, this concept of the ability to challenge, as Ben suggests,

comes into play in sales effectiveness as well. In fact, “challenger” types in sales tend to be

among the most effective producers. See the CEB’s book on the topic: The Challenger Sale.

Based on the research in this book, CEB identified a number of different “types” of sales

professionals. 21% of the sample were “hard workers.” 27% were “challengers” who were prone

to debate and push customers “without being pushy.” 21% were “relationship builders”, 18%

were “lone wolf” types and 14% were “problem solvers.” And the most effective sales

performers? 30% of overall top performers were “challengers” compared with “lone wolves”

(25%), “hard workers” (17%), “problem solvers” (12%) and “relationship builders” (7%).

Without question, we need more effective “challengers” in the procurement function. But I ask

our readers: do we have the right demographic and psychographic make-within typical

procurement organizations to create an effective culture that can challenge the business

and suppliers? I think we all know the answer…