Aberdeen Report StrategicSourcing Jun2011

7/27/2019 Aberdeen Report StrategicSourcing Jun2011

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The State of Strategic SourcingBuilding a Context for the Next Decade

April 2011

Christopher J. Dwyer, Constantine G. Limberakis


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The State of Strategic Sourcing: Building a Context for the Next DecadePage 2

2011 Aberdeen Group. Telephone: 617 854 5200

Executive Summary

Research Benchmark

Aberdeens ResearchBenchmarks provide anin-depth and comprehensivelook into process, procedure,methodologies, andtechnologies with best practiceidentification and actionablerecommendations

Strategic sourcing, for as long as this function has been in place, has been

established as a valued set of processes for companies looking to drivesavings out of their purchasing activities. As organizations see the currentstate of strategic sourcing as a high-value component of overall spendmanagement activities, companies will increasingly look to link sourcingactivity with the objectives of the greater organization. This reportdemonstrates the intentions, performance and strategies of over 315companies globally (responses collected between February and March2011), as they continue in their pursuits to drive true procurementperformance out of their strategic sourcing activities.

Best-in-Class Performance

Aberdeen used the following three key performance criteria to distinguish

Best-in-Class performance: spend under the management of theprocurement group, procurement contract compliance, and realized /implemented cost savings.

Best-in-Class enterprises in this study are notable for their superiorperformance and attribute their reliance on key capabilities and technologiesfor the advantages that they hold over their peers:

72% higher procurement contract compliance than all othercompanies

52% higher rate of realized / implemented cost savings 37% higher rate of spend under management

Competitive Maturity Assessment

Survey results also show that the firms enjoying Best-in-Class performanceshared several common characteristics, including:

47% higher likelihood of instituting internal collaboration betweenkey internal units

36% higher likelihood of leveraging an active spend analysis programRequired Actions

In addition to the specific recommendations in Chapter Three of thisreport, to achieve Best-in-Class performance companies must:

Leverage e-sourcing solutions to drive higher savings and automatemanual strategic sourcing processes

Utilize spend analytics to drive visibility into corporate spending andforecast savings for future planning and budgeting

Align overall sourcing activities / processes with the goals andobjectives of the greater organization

www.aberdeen.com Fax: 617 723 7897

This document is the result of primary research performed by Aberdeen Group. Aberdeen Group's methodologies provide for objective fact-based research andrepresent the best analysis available at the time of publication. Unless otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, and may not be reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by Aberdeen Group, Inc.
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Table of Contents

Executive Summary.......................................................................................................2 Best-in-Class Performance.....................................................................................2Competitive Maturity Assessment.......................................................................2Required Actions......................................................................................................2

Chapter One: Benchmarking the Best-in-Class....................................................4Business Context .....................................................................................................4 Pressures: Cost and Sourcing Performance ......................................................5The Modern Strategic Sourcing Program: Typical Attributes and WeakLinks ............................................................................................................................ 7The Maturity Class Framework ............................................................................9The Best-in-Class PACE Model ............................................................................9Best-in-Class Strategies: Alignment and Analytics..........................................10

Chapter Two: Benchmarking Requirements for Success.................................12Competitive Assessment......................................................................................12Capabilities and Enablers......................................................................................14Better Sourcing Through Technology Enablers ..............................................15

Chapter Three: Required Actions.........................................................................19Laggard Steps to Success......................................................................................19Industry Average Steps to Success ....................................................................19Best-in-Class Steps to Success............................................................................20

Appendix A: Research Methodology.....................................................................22Appendix B: Related Aberdeen Research............................................................24FiguresFigure 1: The Value of Strategic Sourcing ...............................................................4Figure 2: Top Strategic Sourcing Pressures ............................................................5Figure 3: The Leakage Problem..................................................................................6Figure 4: Typical Attributes of the Modern Strategic Sourcing Program ........7Figure 5: Strategic Sourcing "Weak Links"..............................................................8Figure 6: Best-in-Class Sourcing Strategies ...........................................................10Figure 7: Sourcing Collaboration.............................................................................11Figure 8: Best-in-Class Technology Utilization.....................................................15Figure 9: Best-in-Class Spend Analysis Attributes...............................................17TablesTable 1: Top Performers Earn Best-in-Class Status..............................................9Table 2: The Best-in-Class PACE Framework .....................................................10Table 3: The Competitive Framework...................................................................13Table 4: The PACE Framework Key ......................................................................23Table 5: The Competitive Framework Key ..........................................................23Table 6: Relationship Between PACE and the Competitive Framework ......23


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Chapter One:Benchmarking the Best-in-Class

Fast Facts

57% of organizationsperceive strategic sourcingas a high value internalfunction

Nearly 2.7% of the averagecompany's identified costsavings are lost due tosavings leakage (Best-in-Classhave only experienced a0.26% rate of savingsleakage)

The past decade saw an increased reliance on strategic sourcing, withcompanies identifying extreme cost savings based on the innovations e-sourcing technologies have provided. During this time, strategic sourcinghad been leveraged as a positive means for identifying new businessopportunities, developing meaningful supplier relationships and driving thenecessary cost savings. As a result strategic sourcing has provided a bolsterto the bottom-line, while contributing to greater corporate growth anddevelopment. It is within this backdrop that we unveil The State of StrategicSourcing, not only for illustrating the true perception of this valuable internalfunction, but also for looking ahead at the innovative sourcing strategies intothe next decade.

Business Context

Sourcing activity can involve a variety of processes from buying raw / directmaterials related to products and goods to indirect items such asMaintenance, Repair and Operating supplier (MRO) and complex spendareas (i.e. contingent labor, travel, strategic meetings, etc.), that support thegreater organization. In this regard strategic sourcing was designed tostreamline activity around these two purchasing areas in an efficient mannerthat is conducive to cutting costs through favorable contracts andmaintaining long-lasting supplier relationships designed for future growth.

To this point, Figure 1 indicates, the majority (57%) of the organizationsparticipating in this benchmark survey perceive strategic sourcing as a "high

value" function.

Figure 1: The Value of Strategic Sourcing

5%

38%

57%

Low value

Moderate value

High value

Our sourcing group isperceived as disciplined andeffective. They deliver benefitsthrough collaboration andsharing of market shifts andtrends as well as deliveringstrong contracts with bottom-line impact.

~ Director of Purchasing, Large

Chemicals Enterprise

Source: Aberdeen Group, March 2011



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Since strategic sourcing is tied to a series of corporate performance arenasthat all have a direct link to organizational growth and financial health, themore corporate spending is managed by a sourcing team (the group taskedwith strategically purchasing goods, materials and services), the greaterpotential value supplier contracts can provide that is later realized againstpurchase orders within procurement. This invaluable link provides a basisfor strategic sourcing activity to be perceived as a high value series ofprocesses that even C-level executives see as necessary to corporate healthdevelopment.

Pressures: Cost and Sourcing Performance

Although a new decade of strategic sourcing may unearth fresh approachestowards this internal function, there remains one classic factor drivingorganizations to rely on their sourcing teams: the drive for increasing costsavings. For instance, Figure 2 illustrates that 60% of survey respondents

cited top-down directives to increase cost savings as the top pressure.

Figure 2: Top Strategic Sourcing Pressures

19%

32%

40%

60%

Need to improv e

supplier relat ionship

management

Need to mitigate

overall sourcing risks

Need to improve

sourcing

performance

Top-down directives

to increase cost

savings

Strategic sourcing is seen as akey contributor to the successof the organization. Executivesbelieve that if strategic sourcingis successful, then the bottom-line will improve.

~ Director of Procurement,Large North AmericanConsumer Electronics

Manufacturer


With the modern Chief Procurement Officer (CPO) facing the overarchingissue, the trickle-down effect of linking sourcing to savings has continued tobe the top pressure faced universally by strategic sourcing teams. And it's allin the design; C-level executives (especially the CFO) understand thepurpose of modern sourcing efforts and the main benchmark on whichthese teams rely: identified cost savings.

Moreover the need to improve overall sourcing performance (40%) andsourcing risk mitigation (32%) plays a major role in modern strategicsourcing. Metrics such as spend under management (which has cost savings



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as an underlining factor) and procurement contract compliance are alsocrucial in evaluating sourcing performance. This is combined with theconcerns over managing for the risks related to supplier engagement duringthe sourcing process.

New Decade, Old Problem


The path to true bottom-line growth is paved with enterprise cost savingsnegotiated by the strategic sourcing team. However, as we move into a newdecade, sourcing as a part of the larger procurement organization, isincreasingly looked upon to augment financial efforts and help resolve asignificant issue that the average organization continues to face: savingsleakage (Figure 3).

Figure 3: The Leakage Problem

6.4%

3.7%

Ident if ied sav ings Realized / implemented sav ings

2.7% leakage

6.4%

3.7%

Ident if ied sav ings Realized / implemented sav ings

2.7% leakage

Savings, Defined

Identified: Beyond simpleidentification of a savingsopportunity, this tier ofsavings is characterized bysourcing activity andnegotiated pricing, wheresavings potential is attainable.

Implemented (or realized):

After the contract has beenexecuted, enterprises beginto realize the potential ofpreviously identified savingsopportunities. This tier ischaracterized by purchasing,receiving, invoicing, andsettlement activity andensured by contractcompliance and strong end-user adoption.

Booked: Once savings have

been realized, they can berecognized or booked inoperating budgets and otherenterprise-level financialstatements. This tier ischaracterized by closeinvolvement with finance,procurement, and the budgetholder.


The average organization stands to lose nearly 2.7% of their identified costsavings to the savings leakage issue. Translated for the modern enterprise,

this dilemma could result in losses of millions of dollars every year despitethe robust work initially put in by sourcing professionals to negotiate costreductions with key suppliers. Causes for savings leakage include:

Unexpected increases in supplier prices due to economicconditions. For example, despite efforts from strategic sourcingteams, adverse economic conditions may prevent the ability toidentify savings, particularly when unpredictable events such as civilunrest or environmental disasters cause inflationary pressures.When sourcing professionals are faced with the pressure to


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maintain supplier relationships while trying to preserve savingsmargins, savings leakage may be a result.

Off-contract spending and poor contract managementexecution. "Maverick" spending is often the detractor of savings;when internal business units purchase goods or services fromsuppliers outside of contracted agreements, prices may be inflatedand can burst the savings bubble.

Failure to accurately forecast and understand businessperformance. CFOs are relying on the sourcing organization'sability provide insights for budgeting and cost benefit analysis.Therefore the CPO shouldn't be the only executive with a solidunderstanding of how company budgets are spent three or sixmonths into the future. The CFO should be on the same page asthe CPO in his or her ability to forecast corporate spending andhow this spending is reflected in agreements with current suppliers.

The Modern Strategic Sourcing Program: TypicalAttributes and Weak Links

Strategic sourcing is one ofseven critical initiatives for2011 and 2012. Due to budgetreductions, our organization islooking for cost savings andefficiencies in managing spend.

~ Procurement Director, LargeNorth American University

This report is meant to be perceived as a guidebook for companies thatwant to reevaluate existing strategic sourcing program attributes and learnnew methods for improving the performance of their efforts. Figure 4details the typical attributes included in the modern strategic sourcingprogram.

Figure 4: Typical Attributes of the Modern Strategic Sourcing

Program

59%

59%

69%

78%

80%

Tracking /

monitoring of

sourcing results

Cost analysis for

materials / serv ices

Savings

assessment

Current spend

assessment

Supplier

negotiations




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Assessing current spending (78%) and supplier negotiations (80%) are"givens" in the world of sourcing today; sourcing program heads arefrequently tasked with understanding budgeting, managing spend and utilizingthat information when negotiating with key vendors. In this regard, nearly60% of organizations are also actively tracking and monitoring the results ofsourcing efforts, which can help determine existing gaps in the program andcan be addressed through the utilization of technology enablers or internalcollaborative coordination.

While many of the aspects addressed in Figure 4 are typical of modernstrategic sourcing, there are a several "weak links" that must be shored upfor organizations to reduce savings leakage and drive more spend under themanagement (Figure 5).

Figure 5: Strategic Sourcing "Weak Links"

35%

33%

29%

28%

Supply risk

assessment

Geographical

assessment of supply

needs / requirements

Optimization of ideal

suppliers

Proactiv e dataanalytics for futur e

sourcing projects


Based on this study, only 35% of survey respondents are currentlyinstituting supply risk assessments as part of their current strategic sourcingprograms. With a seemingly uncertain economic outlook and a recentincrease in geo-political challenges today, major suppliers could facebankruptcy or supply chain disruption issues, causing not only an increase incosts, but also adverse effects for organizations relying on raw / direct

materials for product development.

Worse yet, only 28% of the survey respondents are currently relying onproactive data analytics for future sourcing projects, thus reducing the abilityfor organizations to plan or predict supply chain disruption issues. The usageof proactive data can be leveraged within existing contract management orspend analysis systems / solutions to accurately forecast future spendingwith key suppliers within specific categories or commodities. This canultimately assist in boosting visibility into corporate purchasing activity andhelp push savings towards the realized realm.



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The Maturity Class Framework

Aberdeen used the following three key performance metrics to distinguishthe Best-in-Class from Industry Average and Laggard organizations: spend

under the management of the procurement / sourcing organization, savingsthat are realized and implemented, and compliance to negotiatedprocurement contracts and agreements.

Table 1: Top Performers Earn Best-in-Class Status

Definition ofMaturity Class

Mean Class Performance

Best-in-Class:Top 20%

of aggregateperformance scorers

80% spend under management


78% procurement contract compliance12% realized / implemented cost savings

Industry Average:Middle 50%of aggregate

performance scorers

62% spend under management

Our strategic sourcingorganization is a vitalcontributor to the bottom-line

performance of ourorganization.

~ Procurement Manager, LargePharmaceutical Manufacturer

30% procurement contract compliance 8% realized / implemented cost savings

Laggard:Bottom 30%of aggregate

performance scorers

22% spend under management11% procurement contract compliance 2% realized / implemented cost savings


Best-in-Class companies in the data pool have demonstrated their ability to

drive not only spend under management, but also record top-tier levels ofrealized / implemented cost savings and procurement contract compliance.

Spend under management, a classic measure of procurement's impact on thegreater organization, is the percentage of non-payroll spend that is activelymanaged by the procurement group. For every dollar of spend undermanagement, Aberdeen has historically quantified 5% to 20% cost savings.Top-performing enterprises place nearly 37% more spend undermanagement than all other organizations.

Top-performing organizations have also effectively plugged the savingsleakage issue currently plaguing all other organizations. In fact, Aberdeenresearch has found that the Best-in-Class have only experienced a 0.26%

rate of savings leakage.

The Best-in-Class PACE Model

In order to utilize the modern strategic sourcing program to realizesuperior cost savings (i.e. minimize savings leakage), increase the amount ofspend managed by the procurement group, and achieve corporate goals,requires a combination of strategic actions, organizational capabilities, andenabling technologies that can be summarized in the PACE Framework inTable 2


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Table 2: The Best-in-Class PACE Framework

Pressures Actions Capabilities Enablers

Improvesourcingperformance(spend undermanagement,savings andcontractcompliance)

Establish formalstrategic sourcingorganization withstandardized andformal processes

Align sourcingactivities andobjectives with thatof the greaterorganization

Standardized sourcing processFormal sourcing organizationActive spend analysis programCross-functional coordination

with finance, product, andsourcing groups

Visibility into enterprise-widespend across all categories(commodities and services)

eSourcingSpend analysisContract Lifecycle ManagementAutomated data analytics and reporting

tool (business intelligence)Supplier Performance Management (SPM)E-procurement system / solutionCategory-specific solutions (MSP, expense

management, etc.)Strategic sourcing consulting services


Best-in-Class Strategies: Alignment and Analytics

Best-in-Class companies are known for their superior level of performanceacross a broad scope of procurement and sourcing performance metrics.When looking behind the curtain and peering into the Best-in-Classstrategic sourcing program, it is clear that these top-performers haveleveraged a series of strategies to enhance sourcing operations and drivesignificant value to the greater organization (Figure 6).

Figure 6: Best-in-Class Sourcing Strategies

64%

52%

27%

56%

32%

16%

Align sour cing acti vi ties with

goals of the greater

organization

Enhance spend analytics

capabilities

Automate strategic sourcing

processes

Best-in-Class

All Others


Based on the survey findings, it is evident Best-in-Class organizations havealigned their sourcing activities with the goals and objectives of the greaterorganization (64%). This strategy entails having the CFO, CPO and other C-level executives on the same page in regard to all corporate purchasingactivity, thus allowing the sourcing team to negotiate with the suppliers thatwill have the most effect on the bottom-line.



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The majority (52%) of Best-in-Class organizations have also enhanced theirspend analytics capabilities. Spend analysis has become a top tool in theCPO's arsenal by funneling valuable corporate spend data into sourcingefforts. By holding intelligence on the aspects of company spending, such astop suppliers, top spend categories and opportunities for consolidation,strategic sourcing program heads can form a plan of attack when negotiatingwith potential and existing vendors. Spend analytics also plays into theabove-referenced strategic action (overall business alignment) in the sensethat CPOs and CFOs can work together to formulate a proactive financialplan that allows for peering into the future.

Aberdeen Insights Strategy: Sourcing Collaboration

As noted in The CPO's Agenda for a New Decade study (September 2010),one of the main items on the desk of the modern CPO is collaboration andcross-functional coordination with other key internal units and groups. At

the core of the modern strategic sourcing program is intelligence and,intelligence regarding organizational-wide spending can be acquiredthrough free-sharing of information between procurement and other keygroups. Figure 7 shows the top groups currently collaborating with thestrategic sourcing / procurement teams.

Figure 7: Sourcing Collaboration

66%

67%

77%

80%

IT

Executiv e office

Operations

Finance


Collaboration between procurement, sourcing and finance (80%) has

become a "hot" spend management topic in recent years, as more CPOsand CFOs have realized that they are often on the same page with regardto specific financial goals and targets but are traditionally not aligningtheir efforts. Moreover, it is interesting to note that the vast majority oforganizations are also currently instituting collaboration with operations(77%) and the executive office (67%). Coordination with these two unitsis an indicator that the sourcing team is a catalyst for linking the activitieswithin their team and with that of the greater organization.

http://www.aberdeen.com/Aberdeen-Library/6355/RA-procurement-spend-management.aspxhttp://www.aberdeen.com/Aberdeen-Library/6355/RA-procurement-spend-management.aspx


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Chapter Two:Benchmarking Requirements for Success

Fast Facts

87% of Best-in-Classorganizations are currentlyleveraging spend analysis

Best-in-Class companies are47% more likely than allothers to institutecollaboration betweenprocurement, sourcing andother internal groups

The current reliance on strategic sourcing increases the need fororganizations globally to look for innovative strategies that drive spendunder management and solve the savings leakage conundrum. Withorganizations on the rise of linking sourcing efforts with the objectives ofthe greater organization, it has therefore become crucial to shore up theweak links of modern strategic sourcing programs and enhance existingprocesses.

Case Study The Benefits of Spend Analytics

A large European consumer goods manufacturer faced issues recentlywithin its strategic sourcing program. The top challenge was to better

understand corporate spend data and develop granular visibility into themulti-lingual data that was spread across their 40-plus ERP and financialsystems. With economic conditions causing supplier price increase, thecompany required a strategy that could help them reduce costs and gainthat coveted visibility into corporate spend data, especially since thecompany conducts business globally and necessitates 17 differentlanguages as part of their data reporting and analysis.

Implementation of a full strategic sourcing suite that offered both e-sourcing and spend analysis resulted in elimination of disparate anddecentralized spend analysis capabilities. The automated spend analyticssolution helped to provide transparency into all corporate spend data inless than six months, and resulted in a $100MM reduction in spendingdue to consolidation of suppliers and superior intelligence within theglobal marketplace. "The spend analysis solution was an enabler for us inidentifying savings opportunities," said the senior project manager.

The organization was also enabled with consistency in detailed spendreports (due to better classification of data) and allowed for trueunderstanding of the multi-lingual sources of key spend data aspects in allenterprise systems.

Competitive Assessment

Aberdeen Group analyzed the aggregated metrics of surveyed companies todetermine whether their performance ranked as Best-in-Class, IndustryAverage, or Laggard. In addition to having common performance levels, eachclass also shared characteristics in five key categories: (1) process (theapproaches they take to execute daily sourcing operations); (2)organization (corporate focus and collaboration among stakeholders); (3)knowledge management (contextualizing spend data and exposing it tokey stakeholders); (4) technology (the selection of the appropriatesourcing tools and the effective deployment of those tools); and (5)performance management (the ability of the organization to measure its



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sourcing results to improve its business). These characteristics (identified inTable 2) serve as a guideline for best practices, and correlate directly withBest-in-Class performance across the key metrics.

Table 3: The Competitive Framework

Best-in-Class Average Laggards

Standardized sourcing process

77% 61% 50%

Active spend analysis programProcess

77% 62% 37%

Collaboration with internal units (finance, productdevelopment, treasury, etc.)Organization

80% 44% 41%

Ability to collect spend data from multiple internal sources70% 48% 34%

Visibility into all enterprise spending across all categoriesKnowledge

69% 50% 31%

Strategic sourcing technology solutions / tools in place:

Technology

87% spendanalysis system

66% automatedcontractrepository

63% contractlifecyclemanagement

57% e-sourcing53% supplier

performancemanagement

34%Optimization-based sourcinganalytics













Strategic sourcing performance-tracking capabilities:

Performance

73% ability todevelop andanalyze reportson spend data

54% track andupdate strategicsourcingpipelineregularly







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Capabilities and Enablers

Best-in-Class organizations have demonstrated a strong reliance on specificprocess, organizational, knowledge management, performance management

and technology capabilities/enablers to effectively drive spend undermanagement, increase bottom-line savings, and reduce savings leakage.

Process: Standardization and Spend Analysis

Purchasing activity is tied directly to corporate performance; companiesmust follow consistent guidelines and methods to spend wisely and avoidthe pitfalls of procuring goods and services off-contract. In this regard,standardized sourcing processes are in place in nearly 30% more Best-in-Class organizations than all others. This capability also assists in centralizingpurchasing activities through a singular set of guidelines to ensure buyersare procuring under contracted terms for maximum savings.

The organization is slowlylearning the benefits ofstrategic sourcing. Thestrategies / methodology is

getting more attention fromexecutives.

~ VP of Procurement, MediaRelations Firm

Best-in-Class companies are also 36% more likely than their peers to havean active spend analysis program in place. While the benefits of spendanalytics will be detailed later in this chapter (and the Best-in-Classutilization of specific attributes within this program), having an internalspend analysis program helps CPOs and other executives understandcurrent spending (suppliers, categories, materials, frequency, etc.) andprovides them with the ability to forecast future spending for budgetaryplanning.

Organization: Collaboration

Sourcing's internal collaborative efforts were detailed at the end of ChapterOne. However, it is worth revisiting this aspect given Best-in-Classcompanies are 47% more likely to have collaboration in place than all otherorganizations and because cross-functional coordination is a major means ofreinforcing the top strategic action in companies today while aligningsourcing activities with the goals of the greater organization.

Cost savings and contract compliance are also significant metrics for thesourcing team, and communicating regularly with other divisions (especiallythose departments that spend major corporate dollars) can help identifysavings, push those into the realized / implemented realm, and helppurchases stay on contract. In fact, companies currently institutingcollaboration between procurement / sourcing and other key internal unitshave experienced nearly 31% higher realized / implemented cost savings

than those companies that have not instituted this type of collaboration.

Knowledge Management: Spend Visibility

Best-in-Class companies are 42% more likely than all others to have visibilityinto enterprise spending across all spend categories (direct and indirect).This visibility translates into intelligence in what categories an organization isspending in terms of products, goods and services. Visibility also enables theCPO and CFO to work together to identify specific spend patterns and



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trends, and funneling this information to the sourcing team as fodder forimproving negotiations with suppliers.

The ability to collect data from multiple internal sources (in place in 41%

more Best-in-Class companies than all organizations) has also assisted top-performing enterprises. This capability provides additional visibility intoorganizational-wide spending by extracting valuable spend data from variousavenues, such as accounts payable, ERP, spend analytics, and businessintelligence systems, as well as the general ledger. This capability also providesthe CPO and CFO with a clear (and often in real-time) view of companyspend performance against savings targets and pre-determined budgets.

Performance Management: The Sourcing Pipeline

Best-in-Class companies are 34% more likely than all other organizations toactively track and monitor the sourcing pipeline. This capability helps alignthe needs of the organization (from a supply / service standpoint) with the

ideal suppliers at an ideal price. Active tracking and monitoring of thispipeline can also help the CPO forecast identified savings and identifyexactly how those savings can fit into the company's existing financial plans.

Better Sourcing Through Technology Enablers

Although internal capabilities are critical components of a modern Best-in-Class strategic sourcing program, it is through sourcing solutions andenablers that these top-performers have enhanced their downstreamprocurement activities and driven more value out of their sourcing efforts.Figure 8 details the Best-in-Class reliance on technology solutions.

Figure 8: Best-in-Class Technology Utilization

16%

30%

41%

41%

64%

34%

53%

57%

63%

87%

Optimization-based

sourcing analytics

Supplier

performance

management

E-sourcing

Contract lifecycle

management

Spend analysis

Best-in-Class

All Others

Spend analysis work is donecontinually at our company. Itis used for strategic sourcingevents as well as reportingcategory and geographicspending trending to thegreater business.

~ Director of Supply ChainManagement, Large UtilitiesEnterprise




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The enablers listed in Figure 8 have helped Best-in-Class organizations excelwithin their strategic sourcing programs. The following solutions have beenmajor cogs in the Best-in-Class sourcing machine:

Supplier Performance Management (SPM) is an enabler whichutilizes a unique set of supplier-specific metrics to track, monitorand analyze the performance of key suppliers. Companies utilizingSPM can accurately forecast savings, compliance and delivery aspectsfor their suppliers and analyze this information as a means ofrenegotiating when renewals are approaching. SPM will be coveredin-depth in Aberdeen's upcoming Supplier Management researchstudy (April 2011).

E-sourcing, which Best-in-Class companies are nearly 30% morelikely to utilize than all other organizations, automates all facets ofthe strategic sourcing set of processes, such as event creation,electronic bidding, scenario development, and supplier optimization.Automation of these steps ensures that organizations make use ofanalyzed spend data and are able to effectively negotiate with majorsuppliers.

Contract Lifecycle Management (CLM), in use in 63% of Best-in-Class organizations, is a major contributor in the drive for costsavings, the reduction of savings leakage, and ensuring all purchasingactivity is compliant with supplier agreements. Aberdeen researchhas found that companies currently utilizing CLM solutions have a32% higher rate of procurement contract compliance than thosecompanies without this enabler in place.

Yet above all else, Best-in-Class companies are leveraging a major tool that,over the past decade and moving into a new one, has resulted in significantvisibility increases into corporate spending and allowed CPOs and sourcingexecutives with the necessary intelligence for supplier negotiations: spendanalysis.

Spend Analysis: The True Link to Best-in-Class Sourcing

The top technology tool utilized by Best-in-Class companies (87%), spendanalysis is the true link between sourcing programs of yesteryear and themodern set of processes. The information inherent in companies that utilizespend analysis systems presents a potential wealth of accurate spendintelligence, a factor which allows top organizations to truly understand

spend behavior by breaking down areas such as frequency of spend with topsuppliers the categories of spend with those suppliers.

Moreover, Aberdeen research has discovered that companies currentlyutilizing spend analysis solutions have achieved a 30% higher rate of realized/ implemented savings and a 20% higher rate of spend under managementthan companies not currently leveraging spend analytics.


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The attributes listed in Figure 9 are the subsets of a modern Best-in-Classspend analysis program and contribute to their superior level of spendvisibility and overall sourcing performance.

Figure 9: Best-in-Class Spend Analysis Attributes

34%

28%

45%

49%

57%

45%

54%

64%

73%

78%

Data enrichment

Proactive

forecasting /

budgeting

Slice-and-dice

analytics

Data suppor t in

negotiations

Category-level

spend data utilization

Best-in-Class

All Others

Spend analytics is the basis ofunderstanding our overallspend base and spend withincommodities and sub-commodities. This drives

savings opportunities andallows improved managementof suppliers as well as oursourcing staff.

~ Director of Procurement,Large North American

Enterprise


Category-level spend data utilization refers to the usage of spend data,drilled down to the actual spend category (temporary labor, travel, strategicmeetings, services), that is leveraged by the CPO (and sometimes the CFO)to not only gain visibility into corporate spending, but also understand whichcategories are receiving monetary attention. Sourcing professionals can thenapproach specific indirect or complex spend categories with a more detailedeye, gain intelligence on the top suppliers in these spaces, and funnelinformation into their sourcing pipeline.

Slice-and-dice analytics is the most alluring component of the spend analysissystem. Sourcing professionals can uniquely cut data (by supplier, category,time period, division / region, etc.) and funnel this information into

intelligence on corporate spending. When in negotiations with key suppliers,sourcing teams can also utilize this intelligence to build better contractterms that will result in higher (and more consistent) cost savings.



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Aberdeen Insights Technology: The E-Sourcing Advantage

Manual strategic sourcing processes often encompass a variety of menialtasks, such as spreadsheet-based scenarios, manual handling of supplierresponses during bidding / sourcing events, and the creation of events.

E-sourcing solutions automate these processes and allow a greater rangeof suppliers into the sourcing mix, expanding the opportunities for costsavings and highlighting new vendors that can meet unique corporaterequirements.

E-sourcing solutions also typically offer a Software-as-a-Service (SaaS)platform that can easily create new sourcing events, invite relatedsuppliers, execute bidding and allow sourcing professionals to not onlymonitor and track responses in real-time, but also enable the necessaryanalytics for reporting on sourcing events and efforts after activities have

come to a close.Best-in-Class companies 30% more likely than all others to leverage e-sourcing. In fact, users of e-sourcing technology report the followingadvantages over those not currently relying on this sourcing enabler:

57% lower rate of savings leakage 21% higher rate of procurement contract compliance Nearly 20% higher rate of spend under management


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Chapter Three:Required Actions

Fast Facts Best-in-Class companies are

over 52% more likely thanLaggards to utilize spendanalytics

Best-in-Class companies are23% more likely thanIndustry Averageorganizations to leverage e-sourcing

Based on the findings presented in Chapter Two, it is evident Best-in-Classorganizations have demonstrated their ability to perform at a high levelacross the full scope of strategic sourcing metrics, such as realized /implemented cost savings, spend under management, and procurementcontract compliance.

In order for companies on the lower levels of the Maturity Framework toachieve Best-in-Class strategic sourcing performance or continue in theirability to maintain high levels of it, it is recommended organizations followthe recommended actions below:

Laggard Steps to Success

Take measures to implement an active spend analysisprogram. Industry Average companies are over 40% more likelythan Laggards to utilize this type of program, which can helporganizations dig deep into organizational spend data as a means ofdriving spend visibility, understanding the categories of products /goods / services being procured, and forecasting for futurebudgetary planning.

Institute collaboration between procurement, sourcing andother internal groups, such as finance and operations. Thecurrent state of strategic sourcing dictates that organizations worktogether to drive value out of their purchasing activities. Industry

Average companies are 38% more likely than Laggards to have thesourcing team work with other groups, particular finance andoperations, which can help further align financial targets (such ascost savings) and reinforce the importance of on-contract spendingacross the company.

Standardize all strategic sourcing processes across theentire organization. Industry Average organizations are over 20%more likely than Laggard companies to formally-standardizestrategic sourcing processes. This aspect will ensure that allstrategic purchasing activity (across all business units and locations)is in line with negotiated contracts and agreements with keysuppliers. This can curb savings leakage and drive more savings to

the bottom-line.

Industry Average Steps to Success

Actively monitor and track the strategic sourcing pipeline.A sourcing team is only as good as its pipeline; Industry Averagecompanies must align ideal suppliers to spend categories and keeptabs on potential savings opportunities. Best-in-Class companies are

http://assessment.aberdeen.com/aErlMcdnTs/index.aspx


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30% more likely than Industry Average organizations to monitor andtrack their sourcing pipelines.

Leverage CLM automation and technology. Savings leakage isa concern for every organization, and the main cause for this issue ispoor management of procurement contracts. To keep purchasingactivity closer to compliant measures, Industry Average companiesmust leverage CLM solutions to improve their savings retention andprovide sourcing executives with visibility into current milestonesand delivery dates for the supplier base. Best-in-Class companies are25% more likely than Industry Average organizations to have a CLMsolution in place.

Look to e-sourcing to eliminate manual sourcing activityand drive cost savings. Manual sourcing processes, such asspreadsheet-based scenario creation, savings forecasting andtracking of supplier responses to bids, can waste time andresources. E-sourcing can streamline these processes and drive costsavings. Best-in-Class companies are 23% more likely than IndustryAverage organizations to leverage e-sourcing.

Best-in-Class Steps to Success

The strategic sourcing groupreports directly to our CEOand is involved the company'splanning processes.

~ Director of Supply ChainManagement, Large Utilities

Enterprise

Utilize optimization-based sourcing analytics. Only 34% ofBest-in-Class companies are currently leveraging sourcing analyticsas an enabler, which can help create future savings forecasts andoptimize the organization's material needs against the existingsuppliers out in the marketplace. This can also help spur savings andbuild long-lasting supplier relationships.

Shore up supplier performance management by utilizingKPIs to address supplier effectiveness. Less than 20% of top-performing organizations are currently measuring true suppliereffectiveness. KPIs such as on-time delivery and frequency of savingsincreases "year-over-year" can help Best-in-Class companies tomonitor their top suppliers and ensure that the sourcing teamreconnects with those suppliers that are lagging against corporateexpectations.



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Aberdeen Insights State of the (Sourcing) Union Address

The current state of strategic sourcing differs from the programmaticventures that were part of this team a decade ago. As we usher in a newdecade of supply management, it has become clear that based onimprovements in technology, strategic sourcing functions have thepotential to play a greater corporate role than in years past.

Furthermore with this increased alignment between sourcing and theoverall organization, it has become critical for organizations to ensurerobust sourcing strategies, approaches and capabilities are in place todrive procurement performance.

In order to effectively solve the savings leakage quandary as discussed inthis paper, companies must improve contract management efforts andconduct superior forecasting, primarily through spend analytics. Spend

analysis systems can also assist in helping sourcing executives understandcorporate spending and identify key spending patterns and trends.Intelligence gleaned from these systems will support on-going suppliernegotiations and assist in the drive for cost savings.

Looking forward, companies will need to utilize these systems, inconjunction with an organizational outlook that strongly includes otherinternal groups and stakeholders and looks to further propel sourcinginto the strategic stratosphere of corporate development and growth.


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Appendix A:Research Methodology

Between February and March 2011, Aberdeen examined the use, theexperiences, and the intentions of more than 315 enterprises using strategicsourcing in a diverse set of enterprises.

Study Focus

Responding executivescompleted an online surveythat included questionsdesigned to determine thefollowing:

The degree to whichstrategic sourcing isdeployed in their retailoperations and the financialimplications of thetechnology

The structure andeffectiveness of existingstrategic sourcingimplementations

Current and planned use ofstrategic sourcing to aidoperational and promotionalactivities

The benefits, if any, that havebeen derived from strategicsourcing initiatives

The study aimed to identifyemerging best practices forstrategic sourcing, and toprovide a framework by whichreaders could assess their ownmanagement capabilities.

Aberdeen supplemented this online survey effort with interviews with selectsurvey respondents, gathering additional information on sourcing strategies,experiences, and results.

Responding enterprises included the following:

Job title: The research sample included respondents with thefollowing job titles: manager (36%); director (25%); VP / EVP / SVP(15%); C-level / executive office (6%); and others.

Department / function: The research sample included respondentsfrom the following departments or functions: procurement,sourcing or supply chain (72%); finance (7%); business development(5%); operations (5%); IT (4%); and others.

Industry: The research sample included respondents from thefollowing industries: manufacturing (11%); public sector (10%);utilities (10%); IT (9%); financial services (8%); food and beverage(5%); and 25 others.

Geography: The majority of respondents (62%) were from NorthAmerica. Remaining respondents were from the following regions;Europe (24%); Asia / Pacific (8%); Middle East and Africa (4%); and

South / Central America (2%).

Company size: Sixty percent (60%) of respondents were from largeenterprises (annual revenues above US $1 billion); 24% were frommidsize enterprises (annual revenues between $50 million and $1billion); and 16% of respondents were from small businesses (annualrevenues of $50 million or less).

Headcount: Seventy-two percent (72%) of respondents were fromlarge enterprises (headcount greater than 1,000 employees); 17%were from midsize enterprises (headcount between 100 and 999employees); and 11% of respondents were from small businesses(headcount between 1 and 99 employees).



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2011 Ab d G p T l ph 617 854 5200

Appendix B:Related Aberdeen Research

Related Aberdeen research that forms a companion or reference to thisreport includes:

Bridging the eProcurement Gap through Contract Management; March2011

Effective eProcurement: Assessing Options for the New "EconomicNormal"; November 2010

From Preservation to Prosperity: The CPO's Agenda for a New Decade ;September 2010

Spend Analysis: Visibility for Intelligent Decision-making; July 2010

The CFO's View of Procurement: Work in Progress; November 2009 Spend Analysis: Transforming Data Into Value; September 2009 Procurement Contracts: Real Value, Real Returns; March 2009 Spend Analysis: Pulling Back the Cover on Savings; October 2008 Strategic Sourcing in EMEA; May 2008 The CFO's View of Procurement: Same Page, Different Language;

November 2007

The Advanced Sourcing and Negotiation Benchmark Report: The Art andScience of the Deal; January 2007

Information on these and any other Aberdeen publications can be found atwww.aberdeen.com.

Authors: Christopher J. Dwyer, Research Analyst, Global Supply Management([email protected])

Constantine Limberakis, Senior Research Analyst, Global Supply Management([email protected])

For more than two decades, Aberdeen's research has been helping corporations worldwide become Best-in-Class.Having benchmarked the performance of more than 644,000 companies, Aberdeen is uniquely positioned to provideorganizations with the facts that matter the facts that enable companies to get ahead and drive results. That's why

our research is relied on by more than 2.5 million readers in over 40 countries, 90% of the Fortune 1,000, and 93% ofthe Technology 500.

As a Harte-Hanks Company, Aberdeens research provides insight and analysis to the Harte-Hanks community oflocal, regional, national and international marketing executives. Combined, we help our customers leverage the powerof insight to deliver innovative multichannel marketing programs that drive business-changing results. For additionalinformation, visit Aberdeen http://www.aberdeen.com or call (617) 854-5200, or to learn more about Harte-Hanks, call(800) 456-9748 or go to http://www.harte-hanks.com.

This document is the result of primary research performed by Aberdeen Group. Aberdeen Group's methodologiesprovide for objective fact-based research and represent the best analysis available at the time of publication. Unlessotherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc. and may not bereproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by

Aberdeen Group, Inc. (2011a)
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