The best-performing procurement organizations might be running out of steam, as their ability to run on extremely lean budgets and staffing is making it unlikely they can generate additional cost savings and return on investment (ROI) over the next year, a new report suggests.
In its report, The Hacket Group notes that “world-class” procurement organizations operate at nearly 20 percent lower cost as a percentage of spend than do typical companies. Moreover, they also have 27 percent fewer employees.
Subsequently, the best procurement organizations may have reached the limit of their ability to reduce costs, which now equal more than 9 times the cost of procurement. “This is more than double the ROI generated by typical companies,” the company said inannouncing its findings. “But the ability of world-class companies to generate savings declined dramatically in 2014, dropping by more than 17 percent."
For its “2014 Procurement World-Class Performance Advantage” report, the business advisory and operations-improvement consultancy analyzed more than 100 in-depth procurement benchmark studies performed at large companies over the past few years.
The decline among the top performers is expected to continue, according to The Hackett Group. At the same time, ROI at typical procurement organizations is expected to show a slight upward trend, improving by 4 percent to 7 percent in 2015, the company said.
"Our forecasts show that world-class procurement organizations are unlikely to be able to generate significant additional cost savings or ROI improvements next year,” said Chris Sawchuk, The Hackett Group principal and global procurement advisory practice leader. “Top procurement organizations are running extremely lean. But they are expanding their value proposition in other areas to better differentiate themselves."
A key element to that shift is an enhanced focus on becoming a trusted advisor to the business. “This is a role that procurement organizations have aspired to for some time,” he said. “But getting there is challenging because it’s a position that is defined by the stakeholders."
At the start, procurement organizations should create an environment where the business appreciates and respects the value of the insights they offer and reaches out to them proactively for guidance before making key decisions, Sawchuk said. “This is a much more complex relationship than one where procurement’s primary value is generated by delivering savings,” he said.
In its report, The Hackett Group identifies four other key strategic areas where procurement organizations can differentiate themselves:
Driving Supplier Innovation
As The Hackett Group sees it, the top procurement groups are very effective at building strong business relationships with key suppliers, and this enables them to work collaboratively to reduce costs and occasionally even create customized and unique breakthrough solutions.
"Procurement organizations have seen positive results from investing in formalizing the innovation life cycle, from idea formation and evaluation to development, “productization,” and continuous improvement, the company said. In fact, company’s research found, the top quarter of procurement firms by performance now drive more than twice as much incremental revenue as do typical companies through supplier innovation efforts, according to the report.
As procurement organizations work closely with a business during operational planning and budgeting periods, they can provide predictive insights on supply markets. This requires having the tools and expertise to turn data into actionable knowledge, The report notes/
"The ability to view spend data by suppliers on a global basis is a building block of more predictive analytics,” the company said. Indeed, the top procurement organizations have a significant level of information available nearly 90 percent of the time, more than twice as often as typical companies, the research found. “They have also mastered this competency to the point that analytics, market intelligence and benchmarking are offered on demand as a service to key stakeholders,” the company said.
The best-producing procurement organizations have formal risk-management programs to ensure supply continuity and regulatory compliance. The research suggests organizations with a formal and broadly applied strategy for assessing risk have nearly 25 percent greater procurement ROI than those without them. “This includes completing supplier-risk assessments and working with finance and other stakeholders to determine the best mitigation strategy when risk exposure is identified,” the company said.
Procurement organizations that have achieved top status are distinguished by the way they attract, develop, and retain talent. Their efforts are not limited by geographical borders, as they hire globally and from other parts of the business, opening the door to new sources of skills and fresh thinking, according to the report.
"Many are utilizing global business services, or more traditional shared-services organizations and have also established relationships with external entities such as business-process outsourcers to support activities such as providing supply-market intelligence,” the report notes. “They also provide greater training hours per associate, invest much more in retention planning, and pay higher salaries. “
Becoming a top performer through cost savings and efficiency is a short term strategy to continued success. Longer term, companies must provide added value to differentiate themselves and continue driving a sizable RIO. Examining existing client activities closely and how to expand those out into new services to offer is a good place to start.