tapping the strategic potential of procurement · yet the most progressive and successful...

TAPPING THE STRATEGIC POTENTIAL OF PROCUREMENT

3TAPPING THE STRATEGIC POTENTIAL OF PROCUREMENT

Companies can no longer afford to squander the strategic potential of Procurement.

Innovation, shifts in demand, evolving regulations — the forces of disruption continue

to occur more frequently as markets around the world grow more interdependent.

Now more than ever, Procurement is uniquely positioned to spot key external market

trends and internal operational risks that signal potential disruption. Companies that tap

this strategic potential will reduce their risk of being caught off-guard while they gain

competitive “first mover” advantages.

Most Procurement organizations, however, appear to be waiting for permission to be strategic. Business leaders also seem unsure of what a “strategic” Procurement organization would look like. Without clear expectations, Procurement falls back on its well-worn approach of designing processes with a theme of “efficient, then effective,” which is not sufficient to achieve the needed change.

The solution is two-fold. First, establish a vision of strategic Procurement to which both parties can agree. Second, focus Procurement’s operational model on the simultaneous achievement of strategic effectiveness and greater efficiency.

The result is a long-term capability for the Procurement organization that continually grows more advanced, increasing its competitive value to the enterprise year after year.

INTRODUCTION

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THE BUSINESS WANTS PROCUREMENT TO BE STRATEGIC

We have yet to meet a senior executive today who does not express a desire for the Procurement function to use its position to exert greater strategic leadership. However, definitions of “strategic leadership” vary.

Unfortunately, at many organizations, Procurement has been held — year after year — to a standard of operation that revolves around negotiations, contracts, measurements and monitoring. Praise for Procurement, after all, is most generous after short-term monetary metrics and tactical proficiencies are achieved. So structures, expertise and capabilities have been built accordingly. And over time, Procurement has become firmly ensconced in the tactical role it has always been asked to fill.

TAPPING THE STRATEGIC POTENTIAL OF PROCUREMENT BEGINS WITH ASKING THE RIGHT QUESTIONS:

Is your Procurement organization viewed as a team of proficient “doers” or as a team that provides strategic insights?

Is your Procurement organization a marketplace influencer or reporter?

Do you view your Procurement organization as a leader in knowledge provisioning, a commander of continuous capability development and a master of effectiveness?

Source: 1 “Reaching New Heights: The Dividends of Collaboration between Finance and Procurement,” CFO Publishing, LLC, 2012.

THE NEED TO BE MORE STRATEGIC

In many cases, Procurement seems to be stuck in its own wheelhouse. Rather than seizing the opportunity to contribute more competitive value, leaders of the function appear to be waiting for permission to change.

Even Chief Procurement Officers (CPOs), who have secured a coveted “seat at the table,” want to be viewed as strategic partners. According to a recent CFO1

Publishing survey, “many executives have yet to see Procurement as a frequent source of good ideas for improving business performance.”

Neither the business nor Procurement is completely satisfied. They both know something greater is possible.

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CHALLENGING THE FALSE CHOICE

True transformation must dispel the false choice between strategic contribution and tactical proficiency. Holistic change — the kind that transforms both business expectations and Procurement’s capability to meet them — is needed. To achieve it, leaders must address three questions:

• How do we enhance Procurement’s external sight capabilities and end-to-end internal perspectives simultaneously?

• How do we broaden Procurement’s strategic contribution beyond annual cost-savings and cost-avoidance targets?

• How do we achieve strategic effectiveness in Procurement operations, while preserving efficiency?

Most importantly, leaders must be willing to challenge the premise that has convinced so many companies the questions above cannot be resolved. Namely, they must choose between efficiency and effectiveness. Tactical and strategic. Speed and sustainability.

Both can and must be achieved simultaneously. This is the key to tapping Procurement’s strategic potential.

BUSINESS SUCCESS, PROCUREMENT SPEED, SUSTAINABLE PERFORMANCE

Traditionally, a bright line is drawn between the internal structures, practices and deliverables designed to achieve business missions (tactical efficiency) and the external ones designed to achieve enterprise missions (strategic effectiveness).

Yet the most progressive and successful Procurement organizations with which we have worked make no such distinction. They achieve both.

The key is in the design and execution of the operational model. The strategic success of the business and tactical speed of Procurement are pursued simultaneously and in such a way that each continuously enables and strengthens the other. With patience and persistence, a long-term capability takes root, ensuring sustainable, year-over-year collective performance for the enterprise.

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THE PROCUREMENT PERFORMANCE DELTA

The Procurement Performance Delta is an integrated and interdependent framework designed to ensure business Success, Procurement Speed and the Sustainability of enterprise performance.

Due to varying degrees of risk tolerance and expectations, each enterprise will define Speed — and in turn Success — differently. Naturally, both require broad agreement on the characteristics that signal their achievement. This model is designed to help companies quickly gain that needed clarity.

Every step in the model also combines the simultaneous development and benefits of greater Procurement Speed and business Success, ensuring advancements keep pace and strengthen each other. In turn, this is what enables the third and most important principle of transformation: Sustainability.

In effective Procurement transformations, Sustainability means that the ultimate result is a replicable and evolving enterprise-wide capability.


THE ELEMENTS OF EXECUTION

Delivering strategic value means more, of course, than espousing principles. It must include enterprise-wide agreement on value, needs versus wants, risk / reward tradeoffs, EBITDA enhancement and working capital effectiveness. In other words: doing the right things and doing things right. Execution is critical and it involves three elements: Knowledge, Capability and Effectiveness. The how — particularly the order and way each element is approached — is by deliberate design, as they each inform, enable and strengthen the next.

In the model below, Knowledge encompasses Strategic Sourcing — the collection of requisite information to make correct decisions. Capability refers to Operational Excellence — specifically, the collective ability to use information for appropriate planning and action. Effectiveness concerns Supplier Management, as in the means to measure performance against expectations and results.

Speed Sustainability Success

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Category

Leadership

Governance and

Risk Managem

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Category Strategy

Supplier Strategy

Contracting Excellence

Strategic Sourcing

Ope

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Category Strategy – Achieve razor-sharp clarity of needs, opportunities and deliverables

When a line of business approaches the CPO with a purchasing request, speed-to-realization is usually a high priority. Speed often carries unintended consequences. Critical perceptions go unconfirmed; currency of market is not established; trade-offs not quantified in monetary terms. Achieving clarity on the front end will not only help the CPO better incorporate these into expectations, it will also help Procurement approach the supply base in a much more strategic way.

Supplier Strategy – Gather market-based insights into the supplier network

Once spend categories have been honed to specific deliverables, Procurement can better assess where opportunities in the supply chain reside. Whether the specific category strategy can best be achieved through a multi-tiered or sole source provider will greatly influence how the network is optimized.

This will require Procurement to develop a deep marketplace awareness that, when consistently employed, will turn into a natural capability that grows stronger with each sourcing event. It will also help optimize how the arrangements with those suppliers are structured and dictate how intimate a partnership relationship will emerge with the business and the provider.

KNOWLEDGE IN STRATEGIC SOURCING

This is where Success for the business and Speed for Procurement join and begin their journey together — where sourcing expectations, framework and context are set.

In our work to help clients improve their sourcing capabilities, we have found that success in this area is very much driven by data — how good it is, how well it is interpreted, what it tells you about internal and external operations. An understanding of the market and the enterprise is significantly enhanced when that data is properly applied.

From there, an informed strategy can be built and appropriate execution wrapped around it. What will emerge is a disciplined and repeatable process that ensures concepts are clarified, plans are implemented, and expectations are delivered — no matter what changes in the market. This is achieved in three areas: Category Strategy, Supplier Strategy and Contracting Excellence.

Contracting Excellence – Balance contractual certainties and operational flexibilities

The flexibility of the supply base — one that can respond quickly to changes in demand and specifications — has become as critical as getting assurances on certainties of Service Level Agreements (SLAs) that were negotiated months ago. Striking the right balance is paramount since the energy spent in the Category and Supplier Strategies will affect the most immediate, positive return.

Armed with very specific categories to fulfill, an informed strategy of which suppliers are optimal to the network and how those suppliers are positioned in the market, Procurement is empowered to strike the contractual balance needed. More specifically, they understand better business success criteria allowing clearer parameters to form contracts that minimize downstream surprises, maximize operational certainty and ensure flexibility. The consistent practice of applying insights drawn from the previous two areas gives rise to a capability that will become second nature, strengthening the overall enterprise.

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CAPABILITY IN OPERATIONAL EXCELLENCE

Most in the organization assume that Procurement already has the capabilities needed to deliver against expectations. But that is when expectations put little to no emphasis on their strategic contributions. Gaining clarity and alignment on the business partners’ strategic goals is paramount to undertaking actions to achieve it. The rigor of the Knowledge phase will more clearly dictate the Procurement capabilities needed to deliver the nuance, flexibility and speed the business requires.

The endgame of Capability execution is to build Operational Excellence. To do that, organizations must focus on Process Design and Improvement, Talent Management and External Resources and Technology.

Process Design and Improvement – Embed speed and agility

The most typical complaint of Procurement’s internal clients is that its processes are too slow. To streamline processes to be efficient and nimble, begin by assessing them with questions such as:

• How do we interface best with internal clients?• How do we best receive work?• How do we best deliver on the work?• What is the best process we use to work with finance,

legal, supplier and other key stakeholders?


Talent Management – Groom for influence, strategy and tactics

Whether there isn’t enough or it can’t be found, talent is high on everyone’s demand list. The issue is doubly difficult in Procurement: Talent, historically, has not been groomed to think strategically from a business perspective, most notably, in how they manage risks and stakeholder relationships. Most are skilled in managing suppliers, but not internal relationships. The absence of this expertise inhibits success in Procurement’s strategic effectiveness.

A similar challenge is faced in many HR organizations. CEOs have been known to report this function is also too focused on process and not enough on being a strategic advisor. To address this, some forward-thinking organizations have split HR leadership among two roles. One oversees HR efficiency, while another — usually the Chief Human Resources Officer (CHRO) — assures effectiveness. This second role is, in effect, made the strategic advisor.

As it transforms itself, Procurement can learn from this talent management model. The creation of split roles — a Procurement Efficiency Director (PED) and Chief Procurement Advisory Officer (CPAO) — sends a powerful signal to the organization and the enterprise. One is designed to create efficiencies and the other to establish effectiveness. Better defined positions and clearer career tracks lead to a better, more comprehensive array of technical, functional and managerial skills, as well as leadership competencies — all of which are collectively essential for a best-in-class Procurement organization.

External Resources and Technology – Maintaining optimal capabilities and clarity of sight

Processes and procedures require tools to be effective and efficient. Most technology is not being used to the fullest capacity. Some technology is so poor in design and / or operation that it actually inhibits acceptance. Ensuring appropriate processes and people skills are adequately supported by the right technology solutions is critical to being capable. Using the Procurement organization’s resources more effectively is essential to continuing the transformation journey.

Momentum is key and the periodic intervention of outside specialists required to maintain it is often warranted. Many CPOs have the vision and passion needed for change, but struggle with articulating the path to transformation and building the internal capabilities needed to take the journey. Validation of market capabilities, supplementing internal vision with a qualified external voice and ensuring one’s view is current from a competitive and competency perspective are essential to continuous improvement.

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EFFECTIVENESS IN SUPPLIER MANAGEMENT

While essential, creating a solid framework to secure requisite knowledge through strategic sourcing and building the requisite capability through operational excellence will prove ineffective if similar attention is not placed in supplier management.

No matter how good a new sourcing deal may be, a lack of attentive execution in this area will render it for naught. Savings, innovation, risk management — they all stem from creating long-term, sustainable relationships with your most critical suppliers. How this interaction is approached and developed will be significant.

Stakeholder Collaboration – Anticipate change through tight interaction

The closer Procurement, internal stakeholders and the supply community can work together, the more they can ensure “first mover” opportunities are exploited, deal advantages are leveraged and that each stay in tune with what is going on in others’ respective areas.

If a CPO is managing a large technology supplier, for example, he / she is staying current with business: What’s happening in the market? What’s going on in the organization? How is the organization’s financial health? As such, that CPO is in tune with the “heartbeat” of the supplier’s organization as much as they are with that of the enterprise.

Category Leadership – Identify and leverage industry trends with the supplier network

Successful Procurement organizations establish a category leader to manage stakeholder collaboration across whole spend categories. In the preceeding example, this role would stay abreast of what’s happening not only with that technology supplier, but also that supplier’s competitors and the industry in general.

Keeping a finger on this broader pulse will help Procurement, business stakeholders and suppliers identify opportunities to improve the value of their relationship more frequently. And, the more each stakeholder knows of the challenges, demands and opportunities throughout the planning and delivery system, the better all parties are in fulfillment.


Governance and Risk Management – Continually deliver value to the enterprise while managing risks

Statistics indicate more than half of a contract value can be lost in instances with ineffective post-contract governance and risk management. So, it is critical to identify, segment and track the distribution of alerts for critical suppliers. Once this process is in place, you should be able to answer critical questions, including:

• Which of our suppliers are critical?• How are they segmented?• How are we tracking them and their ability to stay

ahead of risks?• What alerts do we have in place and how do we

ensure the right people are receiving them?• How do we convert symptoms and trends into

opportunities and advantages?

Execution is as much about creating value through the relationship as it is about managing risk. Think of it like an employee. Effectively managing key suppliers should be very much like what leading employers do in managing their employees. In that context, setting expectations at the beginning of the year and following up with quarterly check-ins is not completely sufficient.

Frequent interaction is vital if each party is to gain the most from the relationship. Likewise, relationships that encourage mutual and candid exchange will yield the most mutual, long-term value. The same is true of the company’s “external employees” — its suppliers.


The realization of Procurement’s strategic potential is wholly dependent upon the

willingness and unwavering support of executive leadership, the business partners,

as well as the Procurement organization itself. Strategic effectiveness also demands

a well-structured approach and relentless adherence to the advancement of

business Success, Procurement Speed and Sustainable enterprise performance —

simultaneously. The Procurement Performance Delta is an integrated framework for

achieving this goal.

It is past time to declare the false choice between strategic effectiveness and tactical

efficiency for what it is: false. When it comes to insights into business and market

trends, innovation and shifts in demand, no other function is positioned at such a

systemic vantage point. Leaders who enable the full, strategic potential of Procurement

will not only reduce their risk of being caught off-guard, they can also gain immense

“first-mover” advantages for the enterprise.

AUTHOR:Cyndi JoinerManaging Director+1 404 839 [email protected]

CONCLUSION

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Privately-held since 1983, A&M is a leading global professional services firm that delivers performance improvement, turnaround management and business advisory services to organizations seeking to transform operations, catapult growth and accelerate results through decisive action. Our senior professionals are experienced operators, world-class consultants and industry veterans who draw upon the firm’s restructuring heritage to help leaders turn change into a strategic business asset, manage risk and unlock value at every stage.

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