World-class procurement professionals are operating at nearly 20 percent lower cost and with 27 percent fewer people than at typical companies, according to new research from The Hackett Group, Inc. But these world-class organizations may have reached the limit of their ability to reduce costs, the report concludes.
World-class procurement organizations now generate purchased cost savings equal to more than 9x the cost of procurement, according to the research. This is more than double the ROI generated by typical companies. But the ability of world-class companies to generate savings declined dramatically in 2014, dropping by more than 17 percent. The Hackett Group expects ROI at world-class procurement organizations to further decline next year. At the same time, ROI at typical procurement organizations is expected to show a slight upward trend, improving by 4-7 percent in 2015.
"The value proposition of procurement is clearly evolving," said The Hackett Group Principal and Global Procurement Advisory Practice Leader Chris Sawchuk. "Top procurement organizations are running extremely lean. Our forecasts show that world-class procurement organizations are unlikely to be able to generate significant additional cost savings or ROI improvements next year. But they are expanding their value proposition in other areas, to better differentiate themselves. A key element of this is the focus on becoming a trusted advisor to the business."
The research identified five key areas where world-class organizations are adopting procurement strategies to differentiate themselves:
- Being a trusted advisor to the business;
- Driving suppliers to innovate;
- Providing analytics-backed insights;
- Protecting the business from risk; and
- Employing an agile approach to staffing.
World-class procurement organizations are much more likely than typical ones to be considered valued partners by the business, not gatekeepers or administrators. Hackett’s research shows that they have a high level of involvement in planning and budgeting half the time, nearly 4x more often than at typical companies. To achieve this status, world-class procurement organizations make certain to proactively understand what drives the requirements of the business as opposed to simply facilitating the buying process. This makes it possible to reverse-engineer costs and explore potentially less expensive and/or higher-quality alternatives.
Driving Supplier Innovation
World-class procurement groups are very effective at building strong business relationships with key suppliers, enabling them to work collaboratively to reduce costs and sometimes 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. In fact, the research found that top-quartile companies now drive more than twice as much incremental revenue as typical companies through supplier innovation efforts, demonstrating the value of this supply chain strategy.
World-class procurement works closely with the business during operational planning and budgeting periods to provide predictive insights on supply markets. This requires having the tools and expertise to turn data into actionable knowledge. The ability to view spend data by suppliers on a global basis is a building block of more predictive analytics. World-class 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.
World-class procurement organizations have formal risk management programs to ensure supply continuity and regulatory compliance. Organizations with a formal and broadly-applied strategy for assessing risk have nearly 25 percent greater procurement ROI than those without them, the research found. This includes completing supplier risk assessments and working with finance and other stakeholders to determine the best mitigation strategy when risk exposure is identified.
World-class procurement organizations 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. 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. They also provide greater training hours per associate, invest more in retention planning, and pay higher salaries.