Agile Procurement: A New Value Proposition for a Volatile World

The Journey to World-Class

Agile Procurement

A New Value Proposition for a Volatile World

Chris Sawchuk

Principal, Global Procurement Advisory

The Hackett Group

September 28th and 29th, 2010

Page 2

Agile Procurement© 2010 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited.

Agenda

Where Have We Been?

– Quick review of the last 2.5 years

So What Do We Do Now?

– Excelling in Uncertainty

What are World Class Organizations Doing?

– Practices of Leaders

Closing Thoughts

Page 3


Where We Have Been

Page 4


To begin, let‟s quickly review where we have been…

“Survival mode”

“Procurement‟s

perfect storm”

1

2

3

Scarce Supply,

Plentiful Demand

• Securing supply

• Staving of price

increases

• Finding talent

• Sustainability

• Evolving

procurement ‘s value

proposition

• Delaying &

scaling back

capital

investments

• Reducing

discretionary

spending

• Freezing hiring

Plentiful Supply, Scarce Demand

• Renegotiating Contracts

• Extending payment terms

• Reducing supplier viability risk

“Proactive and

deliberate focus:

cost, cash and risk”

US Producers Price Index (all commodities) last 2.5 years

Source: www.bls.gov

“The New Normal”

4

Uncertainty Prevails, Agility Is Key

• Increased climate of risk & volatility

• Globalization & emerging market exploitation

• Acceleration of creative destruction cycles:

Innovate..or die

Page 5


What is the Estimated Percentage Change that You Expect

During 2009 and 2010 in Procurement for:

Organizations hoped for growth, but also hedged their bets with still lower operating budgets and staff levels

-2.2%

-1.5% -1.7%

-2.6%-2.3%

3.7%

The jobless recovery

(i.e., even fewer

planned jobs going

into 2010)

Staffing Budgets Revenue

Change in number of staff

(FTEs) 2009

Change in number of staff

(FTEs) 2010

Operating Budget

2008-2009

Operating Budget

2009-2010

Revenue 2008-2009

Revenue 2009-2010

Source: The Hackett Group 2010 Key Issues Study

Page 6


What have you done in the last year?

2. Do you manage procurement processes as services?

3. Have you added higher-value metrics to your scorecard and gaining associated resources?

4. Have you helped the enterprise become more agile through better commercial risk management and improved variability of asset/cost structures?

5. Have you made procurement more agile to deliver more capacity and savings?

6. Have you extricated procurement staff from low-value processes? Are you obtaining maximum value (and minimizing distractions and risk) in p2p activities?

7. Are your key suppliers innovating with you?

1. Have you added high-value procurement services and related capabilities to your service portfolio?

Page 7


13%

23%

40%

47%

53%

57%

73%

Freed up working capital without undue stress on your suppliers (e.g., use of supply chain financing)

Helped critical suppliers through the downturn and garnered their goodwill and commitments in preparation for the market upturn

Extricated procurement staff from low-value processes, but also increased resources in high-value procurement activities

Added higher-value metrics to your scorecard beyond cost savings

Added higher-value procurement 'services' to your service portfolio and increased your brand to the business

Brought additional attention, focus, and resources to supply risk as an enterprise risk issue

Influenced new spending areas and put in place new policies that were not possible before

Percentage of Procurement Organizations that Used the Recession to Make Themselves Stronger


Many Procurement organizations capitalized on the downturn to evolve Procurement‟s value proposition…

Page 8


So what will happen next?

“Survival mode”

“Procurement‟s

perfect storm”

1

2

3

“Proactive and

deliberate

focus: cost,

cash and risk”

US Producers Price Index (all commodities) last 2.5 years

Source: www.bls.gov


4

Would the same purchasing efficiencies be

available second time around, if we see a

“double-dip”?

Will procurement‟s contribution quickly be

forgotten if a global recovery emerges

instead?

What if nothing changes, can we sustain

this new normal?

?Uncertainty Prevails,

Agility Is Key

Page 9


So What Do We Do Now?

Page 10


How do we deal with uncertainty?

Be Agile – ready to react to the environment

Build your value proposition – more value in the right areas

Drive performance – increase efficiency and effectiveness

Get back to the basics – build capabilities

Page 11


In this time of uncertainty, Procurement must evolve its value, build its execution capabilities and align performance

Procurement

Value:

Evolve the Service Value

“What do we aspire to be?” which

becomes “What to execute?”

Procurement

Performance:

Recalibrate the Service Execution

“What is the level of performance

for both efficiency and

effectiveness?”

Procurement

Capability:

Redevelop the Service Capability

“What capabilities do we have

today or need to acquire to

change?”

Business

Requirements

(and investments)

Procurement Value

Procurement Suppliers

Requirements & Spend

Spend / Supplier ValueBusiness Environment


Increased climate

of risk and

volatility

Exploit emerging

market

opportunities

Innovate or die (or

be acquired)

Page 12


Every Procurement organization must define the value they want to deliver to their stakeholders

Procurement

Value:




Procurement

Performance:




effectiveness?”

Procurement

Capability:




change?”

Business

Requirements

(and investments)

Procurement Value



Spend / Supplier Value

Page 13


SUPPLY ASSURANCE

PURCHASE COST

REDUCTION

TCO REDUCTION

DEMAND

MANAGEMENT

VALUE MGT

It starts with “doing the right things” as procurement continues to evolve its value proposition…

Value Proposition Role of Procurement

Safely harnessing the power of supply

markets for competitive advantage

Negotiations, n-step

sourcing process

Customer relationship

management; money management;

demand/specification influence

Cost modeling; supplier/market

analysis; supplier management;

SRM; supply planning; project

management; risk mgmt

Site-level tactical

sourcing, ordering

and expediting

Right goods and

services at the right

time at the right

place…

And at the right price…

…by reducing total supply

costs (not just supplier

profits).

…ultimately stimulating good demand and

increasing business value derived from spend

(and supply markets) rather than just reducing

spend magnitude.

Reducing unneeded demand activity,

complexity, immediacy and

variability…

Inc

rea

se

va

lue

(a

nd

re

qu

ire

d c

ap

ab

ilit

ies)

Lagging“Firefight”

Achieving“Reduce Costs”

Exceeding“Support the

Business Strategy”

Leading“Influence the

Business Strategy”

Procurement

Service Deliver

y

INFORMA

TION

SERVICE

PLACEME

NT PROCESS

SOURCIN

G

PROCESS

DESIGN

ENABLIN

G

TECHNOL

OGY

SKILLS &

TALENT

ORGANIZATION

Page 14


Source: The Hackett Group Procurement Value Proposition and Capability Study, 2010

SUPPLY ASSURANCE

PURCHASE COST

REDUCTION

TCO REDUCTION

DEMAND

MANAGEMENT

VALUE

MGMT

Value Level

Supporting

Strategic Initiatives

Managing Demand

Reducing

Total Cost of Ownership

Reducing

Purchased Costs

Assuring Supply 15%

17%

23%

20%

25%

19%

26%

15%

21%

18%

Percent of time spent on procurement activities

by non-transactional FTEs

Current Allocation Desired Allocation

Capabilities

via Investment in „Services‟Performance MeasurementPercent of firms measuring value element

on primary Procurement scorecard

43%

77%

50%

27%

40%

To ensure you are investing enough time in strategic activities you must measure the right things

Procurement

Service Deliver

y

INFORMA

TION

SERVICE

PLACEME

NT PROCESS

SOURCIN

G

PROCESS

DESIGN

ENABLIN

G

TECHNOL

OGY

SKILLS &

TALENT

ORGANIZATION

Page 15


Achieving high performance requires an increase in the level of efficiency and effectiveness

Business

Requirements

(and investments)

Procurement Value



Spend / Supplier ValueProcurement

Value:




Procurement

Capability:




change?”

Procurement

Performance:




effectiveness?”

Page 16


EFFECTIVENESS

Economic return

Supply base leverage & performance

Role of procurement

Process quality

Examples:

144% higher spend cost reductions

90% higher spend cost avoidances

58% less suppliers per $B

22% less suppliers that represent 80%

of direct spend

10% less suppliers that represent 80%

of indirect spend

50% higher spend influence in direct

materials/services

33% higher spend influence in indirect

materials/services

42% less PO Pricing errors

EFFICIENCY

Process costs

Productivity

Cycle times

Costs per transaction

Staffing Levels

Examples:

16% lower Cost of Procurement as a % of

spend

28% lower Direct - PR Cost as a % of Direct

Spend

19% lower Indirect - PR Cost as a % of

Indirect Spend

32% lower Purchase Operations cost as a %

of spend

12% higher Span of Control

174% more POs processed per FTE

54% faster Direct Receiving cycle time

63% less cost per PO

23% less FTEs per $1B of spend

– 39% less direct FTEs per $1B direct spend

– 29% less indirect FTEs per $1B indirect spend

– All cost, FTE, and wage rate data available at

a process group level

Hackett Value Grid™ − the foundation for how Hackett defines world-class performance

Hackett Value Grid™ (Procurement)

* Many of these metrics are also available at a more granular spend category level below the indirect/direct materials and services levels

But Procurement performance must start with the Value of the Procurement

“services” promised…and deliveredSource: The Hackett Group 2010

Procurement

Service Deliver

y

INFORMA

TION

SERVICE

PLACEME

NT PROCESS

SOURCIN

G

PROCESS

DESIGN

ENABLIN

G

TECHNOL

OGY

SKILLS &

TALENT

ORGANIZATION

Page 17


Procurement organizations used the recession to improve along traditional metrics – and saw the payoff in ROI

Effectiveness: Total spend cost savingsTotal spend cost savings (reduction and avoidance) as a percent of

annual spend

2.7%2.1% 2.3% 2.3% 2.0%

3.1%

5.5%4.9%

4.4%5.2%

4.8%

7.0%

0%

1%

2%

3%

4%

5%

6%

7%

8%

2005 2006 2007 2008 2009 2010Non-World-Class World-Class

Return on investmentRatio of total spend cost savings to the cost of

procurement, 2010

4.1

11.3

Non-World-Class World-Class

174%

Procurement

Service Deliver

y

INFORMA

TION

SERVICE

PLACEME

NT PROCESS

SOURCIN

G

PROCESS

DESIGN

ENABLIN

G

TECHNOL

OGY

SKILLS &

TALENT

ORGANIZATION

1.10% 1.07% 1.04%0.98% 1.01%

0.85% 0.85% 0.82% 0.82% 0.80%0.74%

0.80% 0.81% 0.83%

0.61%

0.74%0.68%

0.64% 0.63% 0.64%0.60%0.62%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1996 1998 2000 2002 2004 2005 2006 2007 2008 2009 2010Non-World-Class

Efficiency: Cost of procurementProcurement cost (labor, outsourcing, technology, other) as a percent of spend

Page 18


Once service mix (value) and performance levels are established, capabilities can and must be built

Business

Requirements

(and investments)

Procurement Value



Spend / Supplier ValueProcurement

Value:




Procurement

Performance:




effectiveness?”

Procurement

Capability:




change?”

Page 19


Service

Placement

Where?

Process

Sourcing

Who?

Process

Design

What?

Enabling

Technology

How?

Skills and

Talent How?Organization

InformationHow?

The Service Delivery Model provides a framework to answer key questions

Service

Delivery

Components

Who?

Procurement

Service Deliver

y

INFORMA

TION

SERVICE

PLACEME

NT PROCESS

SOURCIN

G

PROCESS

DESIGN

ENABLIN

G

TECHNOL

OGY

SKILLS &

TALENT

ORGANIZATION

Page 20


Clear understanding of

which activities and

processes are to take

place where

Shared services (SSCs)

Centers of Excellence

BU or Corporate Center

Decision-making

frameworks

Single version of the

truth, global master

data standards

Scorecards, KPIs,

master data

elements, and

reporting

Defined roles and

responsibilities,

organizational

entities, structure

and reporting lines

for service delivery

Independent or

integrated services

organization

Skills in functions and

business operations

Formal training and skills

development opportunities

Retention of top performers

Skills needed to

deliver and

successfully

transform services

How and where

processes and

sub-processes are

sourced

In-house versus outsource

Onshore versus offshore

Physical versus virtual

Processes,

exception- handling

rules, mappings, etc.,

associated with

functional roles and

responsibilities

BU-level

standards

Enterprise-wide

standards

Local standards

Service management

Architecture of the

technology platforms

required to support

service delivery

Automation

Online self-service access

Online and Web access

Digitization

Level of IT and systems

integration

Service

Placement

Process

Sourcing

Process

Design

Enabling

Technology

Skills and

Talent Organization

Information

Service

Delivery

Components

Consider each component of the service your Procurement organization provides, to build an agile organization

Procurement

Service Deliver

y

INFORMA

TION

SERVICE

PLACEME

NT PROCESS

SOURCIN

G

PROCESS

DESIGN

ENABLIN

G

TECHNOL

OGY

SKILLS &

TALENT

ORGANIZATION

Service

Placement

Process

Sourcing

Enabling

Technology

Skills and

Talent

InformationInformation

Page 21


Organization

Skills and

Talent

SDM

Components

Process

Design

Service

Placement

Enabling

Technology

Information

Process

Sourcing

Procurement capabilities: Service Placement

5%

6%

8%

10%

15%

17%

15%

19%

29%

29%

43%

42%

27%

35%

7%

26%

3%

15%

20%

11%

17%

16%

24%

9%

10%

17%

16%

17%

14%

7%

35%

36%

41%

46%

68%

41%

66%

49%

37%

53%

Sourcing & Supply Base Strategy

Function Strategy

Sourcing Execution

Compliance Management

Receipt Processing

Supplier Management & Development

Supplier Scheduling

Customer Management

Supply Data Management

Requisition & Purchase Order Processing

% Process Allocations to Model Type(by transactions for P2P; by spend for rest)

Shared Services COE Corporate Center Local/BU

Shared Services and COEs are increasingly serving as the delivery model for Procurement

services versus just the corporate versus SBU debate

Source: The Hackett Group Procurement Benchmark

Page 22


Organization

Skills and

Talent

SDM

Components

Process

Design

Service

Placement

Enabling

Technology

Information

Process

Sourcing

Procurement capabilities: Process Sourcing

27%

31%

31%

38%

38%

46%

62%

Supplier qualification and certification activities

Tactical sourcing (non-recurring / spot / one-time buys / three-bids-and-a-buy)

Full category management of non-strategic spend areas

Supply data management (e.g., catalog management, supplier master updates, etc.)

Market intelligence and supply risk data gathering

PO processing and PO communications to supplier

Invoice processing

Percent of Firms Citing Processes Where BPO Will be Used as Major Strategy

New capability building

Transactional

Transactional

Transactional


Today, Procurement BPO is still heavily transactional, but market intelligence, tactical sourcing,

and full category management are increasingly in play


Sourcing

Sourcing

Page 23


Organization

Skills and

Talent

SDM

Components

Process

Design

Service

Placement

Enabling

Technology

Information

Process

Sourcing

Procurement capabilities: Enabling Technology

Technology Cost per FTE, 2010World-Class: $16,960

Non-World-Class: $13,118

55%

88%


60%

Percent of organizations with greater than 75% utilization of

primary business application functionality

Investments are required, but utilization is the key to performance improvement


Page 24


Organization

Skills and

Talent

SDM

Components

Process

Design

Service

Placement

Enabling

Technology

Information

Process

Sourcing

Procurement capabilities: Skills and Talent

5%


400%

25%

Percentage of Organizations with a High Degree of High

Potential and Critical Staff with Formal Retention Plans

• World-class organizations spend 18% greater time

training their staff than non-world-class

organizations and have a workforce with 29% more

professionals.

A key success factor for world-class organizations is that

they fundamentally place a higher degree of importance

and focus on developing cost analysis skills.

Talent is the number one area of focus across G&A in 2010


Page 25


What Are World Class Organizations Doing?

Page 26


Ten Things Done Well by World-Class Procurement Organizations1. Leverage the full capabilities of its supply marketsHelps the firm safely harness the power of supply markets to get more value from external spending (i.e., gate opener –not

just gatekeeper).Value can mean spending less, but also to get more utility from spend to influence (not just support) the

business strategy.

2. Have flexible rather than rigid operating modelsAdapts its “service delivery” and transformation model to an extremely diverse set of budget owners (and functional partners)

in the value chain rather than fixating on just how to organize, control the resources, or follow a rigid n-step sourcing

process. It also takes a leadership role in helping construct not just product supply chains, but internal service chains as

well.

3. Create clear value propositions that are understood and valued by stakeholdersCreates a very clear value proposition and “brand” that can be understood, articulated, and championed by the spend

owners themselves. Performs “customer management” processes to ensure that they’re getting most value from not just

suppliers, but Procurement itself too.

4. Engage in business spend planning, not just “spent analysis”Works with the business to perform “spend planning” as part of financial/operations planning and budgeting, gaining earliest

influence, and providing forward-looking economic spend/supply information rather than forensic “spent analysis” activity.

5. Explicitly align to the business through a project portfolio plan“Connects the Dots” in tying metrics, processes, and capabilities to this value proposition in the trenches (rather than work ing

on these individually).There are currently too many disjointed activities within a typical Procurement project portfolio.

Page 27


Ten Things Done Well by World-Class Procurement Organizations

6. Protect the business from supply risk and from itselfUses formal risk management and market intelligence techniques to provide the business not only with visibility into risk,

but also with a governance structure and process to gain consensus with Finance /Business on which risks to treat and

how to best systematically treat them with limited funds.

7. Shift the game from talent to knowledgeMoves from a purely talent management model (“throw the best people at it”) to a knowledge management model by 1)

shifting from current FTE staffing models to more flexible/variable resourcing models and 2) providing better IT support for

better capturing and re-using knowledge/intelligence.

8. Turn data into information, intelligence, knowledge and insight.Uses information management as a weapon to transcend basic ERP/e-sourcing to a more thoughtful information

architecture that helps manage extended supply chains and external intelligence.

9. Measure suppliers, but also tap their hearts, minds, and budgetsNot only measures the suppliers through automated scorecards, but works collaboratively with suppliers to reduce total

supply costs (not just supplier margins) and create innovations that will deliver economic value. Becomes a “Customer of

choice” not just when you most need them, but also when they most need you.

10. Use P2P transactional processes as an asset – not a liabilityProvides not just “hands free” processes to make life easier for Procurement, but rather a failsafe “guided buying”

experience to channel employees to preferred buy-pay channels. This implies integration between P2P and sourcing as

well as a deliberate “P2P transactional channel optimization” methodology (i.e., think about applying Lean to the P2P

“transaction factory‟).

Page 28


Closing Thoughts

Page 29


Especially When Uncertainty Prevails, we must…

Continue to Evolve our Value…

…and Do More with Less…

…but we must Develop our Capabilities….

…To Be More Rapidly Flexible for Growth and Contraction

Agility!

Page 30


The Hackett Group Contact Information

1117 Perimeter Center West

Suite N500

Atlanta, GA 30338

1001 Brickell Bay Drive

Suite 3000

Miami, FL 33131

One Magnificent Mile

980 N. Michigan Avenue

Suite 1400

Chicago, IL 60611

225 Washington Street

Conshohocken, PA 19428

Chris Sawchuk

Principal, Global Procurement Advisory

+813 994 1822

[email protected]

Strawinskylaan 3051G, 1077 ZX

Amsterdam, The Netherlands

AMP Centre

50 Bridge Street

Sydney NSW 2000

8-2-120/112/88 & 89

1st Floor, Aparna Crest

Road 32, Banjara Hills

Hyderabad 500034

Martin House

5 Martin Lane

London EC4R 0DP

Torhaus Westhafen

Speicherstrasse 59

60327 Frankfurt am Main, Germany

8, rue de Port Mahon

75002 Paris, France

6183 Paseo del Norte #140

Carlsbad, CA 92011

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