The CIPSA-Hackett Group
procurement value, performance
and capability study
Contents
Page
Foreword by Jonathan Dutton – Managing Director, CIPSA
Executive summary
Introduction
Distinguishing procurement performance vs. procurement value
Aligning procurement, value and capabilities
Study background and approach
The capabilities that matter
Purchase-to-Pay – a hidden opportunity
Aligning value, performance, and capabilities in practice
Summary findings and conclusions
Looking forward
Index of figures
About the authors
2
Contents
3
4
5
6
10
12
23
29
33
35
36
37
38
Foreword
In autumn 2010, CIPS Australasia (CIPSA) asked The Hackett Group to conduct a
study focused on measuring the procurement profession's current performance,
capabilities, and value. This white paper presents the main study findings and
compares the results for both the CIPSA participants and the broader study
population.
I would like to thank the CIPSA members for their participation. Especially since
the survey required significant time and effort. Those who did participate will get
individual feedback naturally.
The Hackett Group will also present summarized findings from this study at the 6th
Annual CIPSA Annual Conference to be held in October 2010, but the wider learnings
are certainly relevant to all procurement professionals in the region. The key question
is, does the procurement profession today truly possess the capabilities it needs to
address the growing challenges of the future and the widening demands upon it?
Jonathan Dutton FCIPS
Managing Director
CIPS Australasia
Melbourne, October 2010
Foreword
3
Executive summary
1. Procurement practitioners in the main are too reactive and need to move into better
management of working capital, enterprise process sourcing (how capability should be
delivered – in versus out source) and tapping supply markets for innovation. Supply
assurance and purchase cost reduction where many practitioners operate are foundations
for value management and Procurement practitioners need to evolve to produce greater
value by getting more involved in stakeholder processes earlier.
2. Top performers have great strengths in process capabilities supported by technology that
moves beyond the commoditised technology offerings available today. They have moved
beyond supply sided strategic sourcing methodology application to earlier and deeper
involvement in stakeholder processes.
3. Business is receptive to Procurement taking on more challenging categories of expenditure
and responsibilities that give step change in performance however Procurement needs to
earn the right to move into these categories and this comes from assembling a bank of
wins for sustainable improvements. Procurement practitioners need to sell the Procurement
value proposition, develop capability and execute to improve performance as there is
a strong correlation from study findings that the value proposition, capability and
performance are strongly aligned.
4
Executive summary
Introduction
The relentless pursuit of innovation and operational excellence in the face of risk and
volatility may be the ‘new normal’, but it’s certainly created an unheralded opportunity
for Procurement to evolve its value proposition to the enterprise. Smart procurement
organisations have used the recent economic downturn as a burning platform to drive change
within Procurement and the broader enterprise.
This situation, however, is a two-edged sword. On the one hand, global supply markets have
never offered so many innovations on demand to those willing to harness them. On the
other, there is only so much Procurement organisations can do with limited time and
decreasing budget, especially when maintaining the status quo of year-over-year cost
savings is increasingly difficult. The Hackett Group has been benchmarking Procurement
performance since the mid 1990s, and has seen the cost of performing Procurement
processes for an average company decline from 1.1% as a percent of expenditure to today’s
0.74% (Fig. 1). Average performers have nearly closed the efficiency gap to world-class
performers, which run their Procurement processes for 0.62% of expenditure.*
Of course, the world-class companies haven’t been sitting idle. They’ve reinvested many
of their efficiency gains into capabilities that are focused on delivering Procurement
effectiveness.
FIG. 1 Doing more with less is nothing new to procurement
Cost of procurement
Procurement cost (labor, outsourcing, technology, other) as a percent of expenditure
1.10%
0.80%
1.07%
0.81%
1.04%
0.98%
1.01%
0.85%
0.83%
0.85%
0.82%
0.82%
0.80%
0.74%
0.74%
0.68%
0.61%
1996
1998
2000
2002
2004
2005
0.64%
2006
0.63%
2007
0.64%
2008
PEER GROUP
0.60%
2009
0.62%
2010
WORLD CLASS
*Note that Procurement in this benchmark includes all activity-based costs and Procurement-specific overhead costs
associated with Procurement processes – not just the costs associated with the Purchasing department. This, along with
peer-group selection, expenditure taxonomy definitions, detailed metric definitions, and other techniques help ensure an
apples-to-apples comparison of organisations’ relative performance and capabilities to each other.
Introduction
5
Distinguishing procurement
performance vs. procurement value
Effectiveness and efficiency are the two dimensions that empirically define measurement
of Procurement performance – based on Hackett’s rolling Procurement benchmark database
of organisations that participate in Hackett’s global procurement benchmark study (Fig. 2).
Companies that have top-quartile performance on both dimensions (with each dimension
made up of over 50 individual performance metrics) are deemed world-class and the
average performance and related best practice adoption (determined by hundreds of best
practice adoption metrics for practices that Hackett has correlated to world-class
performance) for this top-quartile population of companies is then compared to the average
values of the non-world-class performers, i.e., the peer group.
A simpler version of this same basic methodology is applied to the Procurement value,
performance, and capability study except that top-quartile performers will be called
‘Top Performers’ and that we’ll also add a third group called ‘Australasia Peer’ that includes
all CIPSA participants (of which some are top performers and the majority being nontop-performers or ‘peer group’ companies).
FIG. 2 The Hackett Group’s Procurement benchmark empirically defines world-class
Procurement performance on a balanced set of effectiveness and efficiency metrics
Hackett Value Grid™ for Procurement
Effectiveness
Efficiency
• Economic return
•
•
•
•
•
• Supply base leverage & performance
• Role of procurement
• Process quality
Examples:
Examples:
• 144% higher expenditure cost
reductions
•
90% higher expenditure cost
avoidances
HIGH
World-class
World-class
EFFECTIVENESS
1D
• 22% less suppliers that represent
80% of direct spend
• 10% less suppliers that represent
80% of indirect spend
EFFECTIVENESS
1Q
• 58% less suppliers per billion of
revenue
World-class
EFFICIENCY
LOW
HIGH
1Q
1D
EFFICIENCY
• 50% higher spend influence in
direct materials/services
• 33% higher spend influence in
indirect materials/services
• 42% fewer PO pricing errors
6
Process costs
Productivity
Cycle times
Costs per transaction
Staffing levels
Distinguishing procurement performance vs. procurement Value
• 16% lower cost of Procurement as
a % of spend
• 28% lower direct PR cost as a % of
direct expenditures
• 19% lower indirect PR cost as a %
of indirect expenditure
• 32% lower purchase operations
cost as a % of expenditure
• 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 billion of spend
– 39% less direct FTEs per billion
of direct spend
– 29% less indirect FTEs per billion indirect spend
– All cost, FTE and wage rate data
available at a process group
level
World-class performance is not a temporary status, but rather an ongoing journey, as the bar
keeps getting raised on existing metrics. For example, over half of the companies in the
CIPSA study have expenditure-cost savings targets that are increasing over the next two to
three years rather than staying flat or decreasing. Also, new metrics are often added to the
Procurement scorecard in order to measure newer and more strategic sources of value that
Procurement (and the supply markets) can deliver.
Adding new metrics for new value is very different than just setting new targets on the same
old metric. This is an important difference.
Value – the missing element in procurement’s service delivery
Although most people lump the terms together, they are very different:
■ Value is about what you do.
■ Performance is about how well you do it.
A Procurement organisation can perform extremely well on a very narrow value proposition
of PO processing or tactical negotiations – or it can be an average performer across a
spectrum of high-impact procurement processes. Which one is better?
Value is arguably the most overused term in business today. It’s therefore important to clarify
its definition and its relevance to procurement and the enterprise.
■
In the world of economics, value is defined by utility divided by cost. To get better value,
you need fewer expenditures or more expenditures that are used to create enterprise
advantage.
■ Procurement value is therefore defined by Procurement-led improvements that safely tap
supply market power to increase expenditure value, which is about getting more out of
supplier expenditures. There are two options for increasing expenditure value on supplier
expenditures:
– Decrease expenditure magnitude by reducing consumption and total cost of
ownership (TCO). TCO includes price, other landed costs, capital costs, and the
cost of procurement (shown in Fig. 1).
– Increase utility of expenditure to better support end stakeholder objectives.
Utility (and thus value) are defined in the eyes of the customer. A 360-degree view of
customers includes expenditure owners, requisitioners, shareholders, regulators, suppliers,
and Procurement staff. For Procurement to improve expenditure value, it must improve the
value of the services it delivers to the enterprise in order to help it safely tap supply market
power to support its mission and create strategic advantage.
Procurement value is therefore about offering and executing high-impact supply services that increase
expenditure value. How well (i.e., efficiently and effectively) it does this defines supply base
performance and procurement performance.
Distinguishing procurement performance vs. procurement Value
7
So, when the Chairman of the Board asks you in an elevator what you do, you can say in
15 seconds: “I make sure we maximize the value the company obtains for the <insert
expenditure amount here> that we spend on third parties, and I help make sure that we’re
safely tapping supplier innovation to cost-effectively support our core mission of <insert
mission statement here>.” A classic elevator test.
Then use another 15 seconds to explain how much you saved last year and a key project
you’re working on for next year that could use the Chairman’s help in breaking down a few
barriers.
Even if you never get an opportunity to have this 30-second conversation, the Procurement
services you deliver must be driven by a clear Procurement service strategy to proactively
align to the strategy of the enterprise – and then be able to predictably execute (Fig. 3).
FIG. 3 Procurement must be nimble to align to the enterprise response to external
volatility
Operational implications
Business environment the “new normal”
Enterprise strategic response
Decisive in direction
to re-set goals and drive transformation
1
2
3
4
5
Proactive in
Strategy
Responding to
globalization
megatrends
Foresight
to sense
threats and
opportunities
1 Anticipating and responding to risks and
new demand drivers
2 Rapidly redefining and cascading perfor-
mance goals via dynamic EPM
Procurement implications
A global supply base and
a global procurement
organization that is:
• Less costly
• More innovative
• More flexible
• Less risky
3 Retooling labor to multi-skilled global
Moving from
multinational
operating
models to a
truly global
operating
model
resource pools, including outsourced ones
Excellence in
Operations
4 Flexing globally competitive cost struc-
Ability to
execute efficiently and
effectively
5
tures and delivering both operational efficiency and cash conversion efficiency
All designed, built, and maintained within
a holistic and flexible operating model –
powered by equally flexible technology
Reorientation of business support services
to enable the enterprise in the “new normal”
Source: “Service Delivery Playbook,” 2010 The Hackett Group Book of NumbersTM Research Series, Vol. 14, No. 2
This is no easy task, especially in the current volatile global operating environment, but
most procurement organisations are at least up for the challenge. In the 2010 edition of The
Hackett Group’s Annual Procurement Key Issues Study, 73% of Procurement executives said
that they used the recession to recession to influence new spending areas and to put in
place new policies that were not possible before. Many Procurement organisations are being
opportunistic in their major initiatives that not only deliver performance, but also self-fund
the building of capabilities which will take them to the next level of value and performance
(Fig. 4).
8
Distinguishing procurement performance vs. procurement Value
FIG. 4 2010 has been a busy year for procurement to deliver results and build
capabilities
Percentage of companies citing issue as a “major” or “critical” priority
76.8%
Strategic sourcing efforts (e.g., supply base rationalization)
63.9%
Upgrading talent and skills
Driving price concessions with existing suppliers
62.1%
Improving stakeholder alignment via “CRM”/other approaches
50.4%
Reducing supply risk
44.8%
Upgrading information technology tools
44.0%
Re-thinking the operating model (e.g., roles, shared
services, BPO)
43.7%
Reducing cost of procurement processes through continuous
improvement
42.4%
Reducing spend through demand/consumption management
41.7%
Preserving cash
39.8%
Tapping suppliers for collaborative innovation and TCO reduction
39.8%
Supporting enterprise business process sourcing activity (e.g.,
outsourcing, COEs, shared services, variabilization)
32.5%
Green procurement and broader supply chain sustainability
31.3%
PERFORMANCE DELIVERY
CAPABILITY-BUILDING
Source: The Hackett Group 2010 Key Issues Study
Procurement organisations clearly are juggling many balls to deliver results against their
current performance scorecard, but also to build capabilities for new sources of value that
will hopefully show up on future scorecards.
Distinguishing procurement performance vs. procurement Value
9
Aligning procurement, value and capabilities
With all the activity, it’s easy for Procurement to not see the forest for the trees. Therefore, it’s
critical to make sure that the capabilities built are aligned to the current scorecard and value
proposition – as well as the next year’s expanded scorecard and value proposition/service
mix (Fig. 5). The Procurement Value Evolution Model and the Procurement Service Delivery
Model shown in Figure 5 will be discussed later. Also, the term ‘process portfolio’ used in
Figure 5 might be more aptly named a service portfolio because it implies a mix of
Procurement services that are clear, measured, funded, and executed deliberately by design
via a service delivery model (just as a top-performing supply chain is supported by an
integrated supply chain model). This service portfolio and associated performance level then
ensure that the right capabilities are in put place.
FIG. 5 Hackett procurement alignment framework: aligning value, performance, and
capabilities to each other and to the procurement process/project portfolio
Hackett Value GridTM
HIGH
World-class
World-class
EFFECTIVENESS
1D
Performance
(“Scorecard”)
EFFECTIVENESS
1Q
Output
World-class
EFFICIENCY
LOW
HIGH
1Q
1D
EFFICIENCY
Procurement value
A global supply base
(and supporting procurement organization) that is:
Capability
Value
“Do things
right”
• Less costly
• More flexible
• Less risky
Demand
management
Input
TCO reduction
Business requirements
(and investment)
Service
placement
Value management
• More innovative
Purchased cost reduction
2010
Key
Issues and
Priorities
“Do the right
things”
Supply assurance
Hackett Value Evolution Framework
Governance
model
“Be able to do
the right things
the right way”
Organization
model
Process
sourcing
model
Service
Delivery
Model
Functional
process
design
Enabling
technology
architecture
Skills
and talent
requirements
Hackett Service Delivery Model
When coaching Procurement leaders in the Executive Advisory Program, they are asked for
the company’s Procurement vision/strategy (and how it ties to corporate strategy), scorecard,
and a list of transformation projects underway. Their capabilities are then discussed,
sometimes using the Procurement Capability Maturity Model, a diagnostic tool of over 300
elemental capabilities. Gaps are looked for within each of the three elements – and alignment
gaps between these elements.
10 Aligning procurement, value and capabilities
Here are some examples of what happens when these three elements are misaligned.
■ Value/performance misalignment: You are working on higher-value activities, but receive
minimal or no credit for them. To make matters worse, you may not be measured on these
activities but are still held responsible for them. Fifty-seven percent of Procurement
organisations are not measured on supply assurance (and likely do not get many resources,
if any), yet most would probably be blamed in the event of a supply shortage. Seventy-one
percent get no credit whatsoever for avoided profit impact from supply risk management
activities.
■ Value/capability misalignment: You want a seat at the executive table, but stakeholders
do not believe that you have the capability to add value at that level. Conversely, you might
be working on a strategic procurement capability, only to find out that this capability is
neither valued nor able to be funded by the business.
■ Performance/capability misalignment: You have a set of performance targets which are
not aligned to your capabilities, and your operating model does not allow you to effectively
revise your targets
At the end of this white paper, there is some guidance on how to use this alignment
framework to ask some hard questions about your current level of alignment across these
three foundational aspects to running your Procurement processes.
While the discussion to date might make conceptual sense, there have actually never been
any Procurement studies that have isolated, quantified, and compared the notion of
Procurement value to Procurement performance and capabilities. The latter two of the three
are certainly fairly well understood in terms of how capabilities enable per-formance. For
example, does a more evolved Procurement value proposition correlate with improved
performance or do companies talk a good game but fail to deliver (or vice versa)? If there is
a correlation, it means that companies need to perform well enough to earn the right to sit
at the table and then use that performance to self-fund the building of new capabilities to
deliver the new sources of value.
Aligning procurement, value and capabilities 11
Study background and approach
This research is a way to help gain insight on how to compare value, performance, and
capability assessments of your peers (for both average performers and top performers).
However, just as the Procurement benchmark empirically discerns which Procurement
practices correlate to Procurement, this study is a way to help validate our hypothesis that a
higher-level Procurement value proposition is also correlated to Procurement performance
and capabilities (which are basically a higher-level form of best practices). It was found…
Defining procurement value, performance, and capabilities
The study used a Web-based survey instrument with 46 large organisations (averaging
US$1.5B total spending of which US$890M is indirect) across multiple industries. Nearly all
respondents were manager/director/VP level and the study was split 50% between North
America and the rest split between Australasia (39%) and other (11%).
The study created three composite metrics – value, performance, and capability – which
were in turn calculated by lower-level metrics derived from individual questions in the study
(six, eight, and 27 metrics per group respectively). The individual and composite metrics
were normalized to a 100-point scale, and the top-quartile organisations on the performance
dimension were deemed ‘Top Performers’ – everyone else was called ‘Peer’ (i.e., NonTop-Performer). CIPSA participants were also segregated into a group called ‘Australasia Peer’
which contained all CIPSA members – of which some are in the Top Performer group and
also in the Peer group. The average values from the three populations were compared across
all three dimensions of value, performance, and capabilities.
Procurement value – a revolution through evolution
Procurement value is defined as helping getting more value for monies spent on
suppliers – either via less expenditure or more impact from it. Doing so requires that
procurement offer a set of services (and associated service levels relative to the investment
in those services) that are valued by stakeholders. But what are those services and how do
they change over time?
For the analysis to define high value, we utilized The Hackett Procurement Value Evolution
Model, which outlines five main value propositions from supply assurance to cost reduction
(purchased costs and then total costs) and then to shaping demand and finally ultimately
to tapping supply market innovation to support truly strategic objectives of the company
(Fig. 6).
12 Study background and approach
FIG. 6 Procurement value evolution model
Value Proposition
Role of Procurement
Increasing value (and required capabilities)
...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...
...by reducing total supply costs
(not just supplier profits).
...and at the right price...
Right goods and services
at the right time at
the right place...
Value
Management
Demand
Management
TCO Reduction
Purchased Cost
Reduction
Supply Assurance
Safely harnessing the power of supply markets for competitive advantage
Customer relationship management;
money management; demand/
specification influence
Cost modeling; supplier/market
analysis; supplier management and
SRM; supply planning; project
management; risk management
Negotiations
Site-level tactical
sourcing, ordering
and expediting
The value levels were then used in the first three of the six value metrics used to determine
Procurement value:
Value evolution metric
Companies with a more evolved
value proposition…
Percent of non-transactional FTEs by value level
Dedicate more of their non-transactional FTEs
to higher levels on the value pyramid
Importance the business places on the value levels
Have higher expectations placed on them by the
business
Degree that value levels are measured
Measure Procurement value elements formally on
their bonus-dependent scorecards
Percent of total FTEs dedicated to
non-transactional activities
Have fewer procurement FTEs allocated to
transactional activities
Clarity of operating model
Have a clear model that determines who delivers
what aspects of procurement value
Involvement in high-value enterprise projects
Have the procurement organisation highly involved
in strategic initiatives such as working capital
improvement and the enterprise process sourcing
decision
In order to make the research data easily collectible, we did not try to ask for a litany of business
financial metrics and then ask for data on difficult-to-collect metrics such as improved margin percent
due to Procurement-led early supplier collaboration activity. While we’ve conducted studies to capture
performance on such higher-value Procurement metrics, the difficulty in collecting reliable respondent
data and the highly multi-variate nature of trying to prove Procurement causality (not just correlation)
with business outcomes is out of scope for this study – and left to academia to pursue.
Study background and approach 13
The data revealed firstly, that, Top Performers had a demonstrably more highly evolved value
proposition than Peers (Fig. 7).
FIG. 7 The top quartile in performance is basically also top quartile in value evolution.
This group is doing better things, and doing them better, than peers.
Average value score (normalized to 100%)
54%
51%
55%
Top Quartile
Value
Top Performer
33%
34%
Peer
Australasia
Peer
The first reason is that they spend 41% of their total Procurement FTEs on non-transactional
activities compared to 33% for Peers (and 30% for the CIPSA Peer Group). Assuming roughly
60 FTEs per US$ billion in spending (a figure from the 2010 Hackett Procurement Benchmark
database), the 10% difference means that the 60 FTEs that a Peer company could liberate
could then focus on generating value instead of generating transactions. It is often said that,
the largest cost in Procurement is the opportunity cost of not freeing up staff to perform
higher value activities.
The question then becomes how the remaining non-transactional FTEs spend their time, and
Figure 8 clearly shows that the Top Performers are allocating proportionally more to higher
value activities than the CIPSA group. Additionally, they are more likely to be measuring their
diverse value contributions via performance metrics on their primary Procurement scorecards
(Fig. 8). The best way to systematically deliver higher value services – and to get resources
and other support – is to get measured on those services (aka service levels). This often starts
as a successful pilot in a certain expenditure category or part of the business – and is then
rolled out as a broader capability, served up as a service, measured by associated KPIs, and
hopefully accompanied by additional resources.
14 Study background and approach
FIG. 8 Nearly half of non-transactional effort is for supply assurance and purchased
cost reduction, but companies want it reduced to a third. Top performers align metrics
to efforts better than peers.
Percent of firms measuring value
on primary scorecard
Current FTE allocation
19%
27%
Value
management
58%
31%
16%
22%
16%
17%
Demand
management
42%
20%
20%
21%
18%
40%
TCO reduction
73%
69%
19%
23%
21%
27%
Purchase cost reduction
92%
33%
13%
38%
29%
20%
19%
Supply assurance
50%
13%
15%
AUSTRALASIA PEER
TOP PERFORMER
DESIRED ALLOCATION
This virtuous cycle needs to be deliberate and it must be repeatable so stakeholders begin to
constantly expect more from Procurement and then also give Procurement increasingly more
leeway in the transformation (Fig. 9).
FIG. 9 Top performers have stakeholders who expect more (and get more) value from
procurement – beyond supply assurance. TCO reduction is the biggest gap for all.
Importance placed
by stakeholders
How well procurement
performs
Important vs. performance gap
(percent difference – less is better)
3.33
Supporting strategic
initiatives
2.92
31%
2.58
3.67
2.45
55%
3.33
2.91
2
3
4
Somewhat
Very
Critical Strategic
important important
to
to
operations business
30%
2.92
2.24
3.45
1
8%
2.24
3.42
Assuring supply
42%
1.58
3.58
Reducing and avoiding
purchased costs
25%
1.79
2.35
Reducing total
supply costs
34%
2.67
3.33
Managing demand
and customers
14%
1.76
2.35
1
Not
Well
2
Good
17%
54%
3
4
Very
Good
Excellent
TOP PERFORMER
AUSTRALASIA PEER
Study background and approach 15
However, it’s not just getting more of the same thing. As Procurement’s services evolve, so
will Procurement’s role (Fig. 10) and its brand. While brand management might seem a little
far-fetched, Procurement is a professional services organisation and needs to deliberately
create and executed against the promise of its brand. Otherwise, the brand will be created
tribally, perception will become reality, and Procurement may in fact doom its ability to
transcend its historic role.
FIG. 10 Evolving the value proposition means changing stakeholder perceptions of
procurement’s role and “brand”
Stakeholders’ perception of procurement’s primary role
13%
15%
3%
50%
69%
ADMINISTRATOR
GATEKEEPER
NEGOTIATIONS/SOURCING EXPERT
38%
13%
World-Class
VALUED BUSINESS PARTNER
Peer
Source: Hackett Procurement Stakeholder Satisfaction database (from Hackett Procurement Benchmarking
projects and from Hackett Procurement Executive Advisory program members), 2010
The differences of the brand promise, or role, of different Procurement organisations makes
it difficult to compare an internal customer satisfaction score across companies, because it
depends on the services offered. A company with a stakeholder saying Procurement is
excellent because it scrambles well and places POs well is worse than a company where a
stakeholder is saying Procurement is merely doing a good job on its broad array of strategic
supply services. In other words, internal customer satisfaction is an effectiveness performance
metric focused on the quality against a service level – not the quality of the Procurement
service portfolio itself. It’s a good metric, but can’t be used in isolation.
This evolution is not an easy process, especially when Procurement’s desire to perform
higher-value activities conflicts with stakeholders’ perceptions of what it should do. Many
stakeholders do not want Procurement to be anything more than the ‘bad cop’ negotiator
or buying concierge. They don’t want procurement to play a role in demand management,
specification management, or continuous improvement activities. Two examples that were
measured in this study are procurement’s involvement in:
■ Working capital improvement: While 58% of top performers work proactively with
Treasury and Accounts Payable to optimize cost (e.g., discounts, reduced capital costs for
suppliers), cash (e.g., DPO), service (supplier satisfaction), and risk (supplier solvency),
only 10% of peers did the same (25% for the CIPSA peer group). Part of the issue here
again deals with measurement, with 55% of Procurement organisations not getting any
hard savings credit for negotiating early-payment discounts1.
1 “Lessons from Leaders 2010, Part I: Defining Procurement’s Value Contribution,” Hackett Procurement Executive Insight,
August 3, 2010
16 Study background and approach
■
Enterprise process sourcing decisions: The process sourcing (Figure 5) decision to
optimally source business processes (e.g., insource vs. outsource; onshore vs. offshore)
would seem to be an obvious candidate for deep Procurement involvement. But, while a
manufacturer might have Procurement involved in a make vs. buy process for a product
component in the supply chain, the sourcing of back-office processes is a very different
matter. Only 33% of top performers have Procurement involved up front in a crossfunctional process (compared with only 19% for peers) versus the typical role of
Procurement merely helping negotiate the outsourcing contract.
There are many others examples of strategic projects: pre-merger planning, post-merger
integration, asset rationalization, product/service design rationalization, etc., which
Procurement should constantly be looking for to support and add to its arsenal of
capabilities. This expansion of Procurement’s circle of influence2 should occur for all stakeholders in a 360-degree view, including operating units, regional groups, functional partners,
senior management, regulators, suppliers, and Procurement staff (Fig. 11). Stakeholders are
not just budget owners.
FIG. 11 Expanding procurement’s circle of influence and level of value
Shareholders, Board of Directors, Regulators
Level 5 : Val ue management
Competitive advantage
(i.e., via innovation)
Demand/ cust omer management
Level 4 :
Spend reductions;
support of initiatives
Level 3 : TCO reduct i on
Cost savings;
proactive risk reduction
Level 2 : Pri ce reducti on
Price savings
Assurance of sup
pl y
el 1 :
Lev
Protect
“Hit my
targets”
“Free up
budget”
“Get it
cheaply”
“Get it
influence e-PO
quickly” Increasing
and value
Awarded
business
Joint cost
reduction
Joint
business
improvement
Joint
strategic
development
Suppliers
Customers
supply and profits
“Improve
my
business”
A paycheck
Expedite
A decent job
Basic
self-service
Training ground
Guided
buying
Career in procurement
Requisitioners
Career in business
Employees
2 Stephen Covey, The 7 Habits of Highly Effective People
Study background and approach 17
This process should be a continuous evolution (some insights on how to use the
Procurement Alignment Framework as part of your annual Procurement planning process
are included in the final section of this paper), and there are many barriers to push through.
In the study, respondents were asked to what extent they agreed that various barriers were
holding them back from evolving their procurement value proposition (Fig. 12).
FIG. 12 Broadening the procurement charter and operating model are the biggest
barriers
To what extent do you agree that these barriers are preventing higher Procurement value delivery?
Difficult to change years/decades of perception
about what procurement can and should do
Procurement/Supply does not own the resources
performing key activities and we do not mandate
anything for resources not owned by Procurement
29%
41%
12%
Technology support for higher-value activities is weak
24%
Misalignment in performance metrics/incentives
18%
Procurement itself is having a hard time thinking
of itself as a "service provider/professional
services vendor"
18 Study background and approach
24%
24%
12%
35%
12%
12%
12%
18%
12%
12%
6%
12%
6%
18%
29%
STRONGLY AGREE
AGREE
SOMEWHAT AGREE
SOMEWHAT DISAGREE
DISAGREE
STRONGLY DISAGREE
TOP PERFORMER
AUSTRALASIA PEER
6%
12%
12%
41%
29%
6%
18%
18%
29%
35%
12%
12%
12%
18%
6%
29%
24%
29%
Not a very clear and agreed upon operating model
6%
between procurement/supply and the business
18%
24%
35%
12%
18%
18%
47%
Procurement/Supply does not have the
current capabilities to provide needed higher levels 6%
value to the business
We do not have enough budget to get the tools
and talent that we need
6%
29%
We are running into turf barriers from the business
as we push into innovation, strategy, risk, 6%
Lean-Sigma, and other strategic areas
18%
18%
24%
Operating model is clear, but it is too narrow in scope.
Procurement not responsible for enough high-value
activities/services
Not enough urgency in the business - things
are going generally well as a business
6%
41%
6% 6%
18%
12%
6%
12%
NEUTRAL
Although information technology was a barrier for many organisations (but not for Top
Performers), the biggest issues for the CIPSA Group of respondents involved Procurement’s
ability to create an operating model that allowed them to evolve their value in and create
substan-tive change in their organisations. The biggest issue for Top Performers was
Procurement running into turf barriers as it stepped into processes that other stakeholders
within the organisation were performing. This issue is only getting more complicated with
the emergence of Global Business Services organisations that are continuously pulling more
processes into them (P2P transaction processes, analytics, continuous improvement, etc.) and
even pulling Procurement increasingly into them.
Procurement performance – quantitative and qualitative
In this analysis, a Top Performer methodology was used to segregate the study population
into a group with top-quartile performance across a limited set of metrics (below) that could
be easily gathered for the Web-based survey instrument.
Procurement performance metric
Which measures…
Expenditure influence (by involvement stage)
The quantity and quality (e.g., earliness) of
expenditure influenced by procurement best
practices
Annual cost savings (vs. previous baseline) as
a percent of spending
Ability to reduce price, non-price landed cost
elements, and broader TCO elements
Maverick spending percentage
Compliance to contracts to ensure negotiated
savings translate to realized savings
Perceived performance relative to industry peers
(by value level)
Qualitative "wisdom of the crowd" of performance
relative to peers
Business perception of procurement performance
relative to business expectations (by value level)
Perception of procurement's performance by the
business
FTEs/US$ billion expenditure* (not used)
Procurement workforce productivity
*It was originally intended to use this metric (which, combined with cost of Procurement as a percent of expenditure,
makes up our two most heavily weighted efficiency metrics), but the number is just not reliable unless an organisation
uses the Hackett bottom-up activity-based methodology for collecting process costs per the Hackett Procurement process
taxonomy and its associated requirements and assumptions.
While this methodology is relatively crude it was still sufficient to demonstrate how
Procurement performance is correlated to Procurement value and Procurement capabilities.
The simplest singe metric of procurement performance is Procurement ROI, which is the
ratio of traditional expenditure cost savings as a percentage of supplier spending divided by
the annual investment in procurement processes (again as a percent of supplier spending).
For world-class procurement performers, the ROI is 7.0% expenditure cost savings divided
by 0.62% cost-of-procurement – yielding 11.3x payback. For non-world-class performers,
the ratio is 3.1% divided by 0.74%, or 4.1x. Both are substantial and compelling, but the
world-class vs. peer gap is equally compelling, albeit against a traditional procurement value
proposition (Fig. 13).
Study background and approach 19
In this CIPSA study, the savings figures were very similar (Fig. 14). Rather than 7.0% and 3.1%
savings for World-Class and Non-World-Class, the study Top Performers saved 7.4% and Peers
saved 3.7% (the CIPSA Peer group posted a respectable 5.2% figure). Of course, our 2010
benchmark year represents calendar year 2009 and it’s been somewhat of a banner year for
delivering cost savings then due to the global economic slowdown.
Another metric that was included in the performance calculation was maverick spending,
which is in essence a yield loss on the negotiated savings figures cited in Fig.13. Top
Performers claimed a maverick spending rate of 16% of their negotiated savings, while
Peers had a much higher 25% rate (the CIPSA group came in at 21%).
Additionally, the Peer groups might even be overstating their savings because of their
inability to track savings to the bottom line. While only 9% of Top Performers were not on
the hook to monitor actual realised savings hitting the bottom line, 58% of companies in
the Peer group (and 44% of the CIPSA participating companies) did not validate the savings
back to the financials. While one can argue that it might not be worth the effort versus
attacking new deals, it certainly is not going to improve Procurement’s credibility with the
budget owners in terms of the validity of Procurement’s claimed savings.
FIG. 13 Procurement ROI illustrates high performance, but a value stream with
limited potential since you can’t save your way to zero
Return on investment
Ratio of total spend cost savings to the
cost of procurement, 2010
11.3
176%
4.1
Peer Group
World-Class
Source: The Hackett Group Procurement Benchmark,
2010 – excerpted from World-Class Procurement:
An Evolution of Value and Capability, Chris Sawchuk,
ISM 2010 Annual Conference, April 26, 2010
20 Study background and approach
FIG. 14 Get the money and keep the money
Year-over-year cost savings (purchased
costs reduced from baseline to new price)
What percent of strategically sourced spend
actually goes to those preferred suppliers?
7.4%
84%
75%
79%
5.2%
3.7%
Spend cost savings
(as a % of total spending)
Contract adherence rate
(100% minus maverick spending rate)
TOP PERFORMER
PEER
AUSTRALASIA
Finally, in terms of quantitative metrics, expenditure influence by the percentage of spending
influenced by procurement during three stages was evaluated: 1) planning/budgeting of
the spending, 2) requirements/specification setting, and 3) contract tendering. As Fig. 15
illustrates, the quality of expenditure influence, at least in terms of earliness, clearly drops
off as one moves earlier in the spending life cycle.
FIG. 15 Peers touch about half their expenditure, but less than a third do so during
stakeholders’ planning and budgeting processes
Percentage of your spend influenced/managed by procurement in each stage
63%
59%
53%
45%
50%
43% 43%
30%
26%
At the time of
planning/budgeting
At the time of
specification/requirements
setting
TOP PERFORMER
PEER
At the time of
negotiation and contracting
AUSTRALASIA PEER
Study background and approach 21
Top Performers are not immune to this loss of leverage by late-stage Procurement
involvement, but they do have a reasonable advantage over the Peer group – and to a lesser
extent the CIPSA group. Still, times are changing and Procurement is increasingly influencing
new spending areas. In fact, in our 2010 Key Issues study, we found that 73% of Procurement
organisations used the recession to influence new spending areas and put in place new
policies that were not possible before.
Procurement capabilities – to deliver valued procurement services
So far, the value of offering better Procurement services and then performing those services
better has been discussed. Procurement capability is now the focus. Measuring capability is
simply about measuring your ability to execute. It’s the ‘how’ rather than the ‘what.’
The study questions were organized into four major categories: organisation, process,
technology, and people/talent (Fig. 16). The average capability scores were then compared
among a Top Performer group and Non-Top-Performer Group (“Peer”) and CIPSA group.
FIG. 16 Study questions were organized into four categories: organisation, process,
technology and people/talent
Process
Organization
• Quality of highest-level
Procurement Steering
committee
• Alignment of resource
control to accountability
• Alignment of metrics
across functions
• Support from IT, Finance, and HR
• Use of services delivery
structures (e.g., shared
services, COEs, etc.)
• Performance measurement rigor
• Savings tracking capabilities
• Enterprise ability to accept change
• Maturity of continuous
improvement methodologies/adoption
• Level to which organizational barriers were
removed
Service
placement
Process
sourcing
Level of capability in processes such as:
• Product Development Support
• Customer Management
• Sourcing & Supply Base Strategy and
Execution
• Supplier Management & Development
• Purchase-to-Pay
Technology
Governance
Service
Delivery Model
Components
Process
design
Enabling
technology
Organization
Skills
and talent
People / Talent
• Level of budget for hiring needed talent
• Formal job rotation program
• Sophistication of talent management
process
• Level of budget for technology tools
• Level of alignment with IT
department
• Strength of ERP and
Spend Management application environment
• Degree of electronic selfservice
• Level of supplier B2B
integration and supplier
portal functionality
• Strength of analytics
environment
• Support for Knowledge
Management
• Quality of master data
management
• Adoption of “Web 2.0”
technology
Measuring capabilities and their supporting best practices is a rich topic, and although the
study is introductory, it does still highlight the differences between Top Performers and the
others.
22 Study background and approach
The capabilities that matter
When the capability scores across the four major categories were aggregated, the scores were
relatively consistent across the categories except for technology, which was the weakest area.
Top Performers had roughly 25%-50% higher capabilities than their peers, and within the
Top Performer group, it was clear that technology-enabled process excellence was the key
differentiator (Fig. 17).
FIG. 17 Top Performers are strong against all capability dimensions. Technology is the
weakest capability area for all groups.
Average Capability Score (normalized to 100%)
Lagging
Achieving
Exceeding
Leading
34%
Organization
33%
47%
32%
Process
30%
52%
33%
People/Talent
35%
44%
AUSTRALASIA PEER
27%
Technology
PEER
28%
48%
TOP PERFORMER
To get more insight, let’s drill down into the four capability areas.
Organisation: the bedrock of procurement capabilities
The organisation category involves much more than organisation structure. It also includes
where to place processes, how those processes will be measured, and the governance
structure that ties any hierarchical or matrixed organisation structure to the end-to-end
procurement processes that must be delivered.
Although a deep analysis of all the best practices relating to procurement organisational
design is beyond the scope of this white paper, the general idea is embodied in Fig. 18.
The capabilities that matter 23
FIG. 18 Slightly more than half of companies have a CPO and a strategic sourcing
group separated from transactional activities, but other organisational practices are
lacking
63%
Strategic sourcing group separated from
transactional purchasing group
58%
64%
56%
Formal CPO that is responsible
for all spend
48%
64%
38%
An internal strategy/transformation/
metrics/systems group
36%
45%
31%
A supplier management group working
as a peer group (or sub-group)
to strategic sourcing
21%
18%
19%
Transactional purchasing group that
owns not just POs, but also payables
18%
9%
A formal "customer management"
group which owns relationships
with budget owners
19%
AUSTRALASIA PEER
PEER
9%
18%
TOP PERFORMER
The general organisational trends were:
■ There should be a single formal CPO (although some manufacturers have some success
with one Procurement leader for indirect spending reporting up to the CFO/CAO and one
for direct spending in the supply chain). In terms of governance, the CPO should chair a
cross-functional steering committee comprised of executive stakeholders to gain their
requirements, feedback, and commitment/support. Sixty-seven percent of Top Performers
find them to be highly useful versus 27% of Peers (and 37% of CIPSA Peers).
■ There should also be a customer management3 role that aligns to the budget holders,
independent of their organisation structure, and ensures that they are getting the best value
from the supply markets and from Procurement itself. This role is performed by the CPO
at the highest level and also by the category managers (e.g., an R&D category manager
who manages the overall relationship with R&D – not just regarding R&D-specific spending
categories such as lab supplies, design sub-contractors, etc.). The study found that 50% of
Top Performers have this role (16% for Peers and 31% for the CIPSA group) and another
8% take it one step further and have a formal customer account management organisation.
3 Customer management refers to the set of processes for primarily managing internal customers – i.e., the expenditure owners
who use Procurement services to get more value from suppliers. It is however more than a stakeholder management process
embedded in a commodity-centric sourcing process.
24 The capabilities that matter
The option of having a separate group tends to exist in very large, complex global
organisations.
■ In terms of supply services, the first is a category management group which organizes
around major supply markets and performs strategic sourcing activities. This group may
also own supplier management, but supplier management can be run equally well as a
peer function, as long as there are formal alignment mechanisms between sourcing and
supplier management. This is analogous to the link-age between the sourcing and customer
management roles. Supply risk management may sit within this group or elsewhere.
■ The other major procurement service line is focused on delivering the transactional
Purchase-to-Pay (P2P) processes – sometimes called Requisition-to-Pay processes. It is
usually split between Purchasing Operations (i.e., transactional purchasing) and Accounts
Payable in Finance. The organisational best practice here is having a single accountable
P2P owner, but even Top Performers lag here. Two-thirds of them have separate groups
that coordinate highly with each other (with 42% of Peers and 31% of CIPSA companies do
the same). The P2P organisation itself may sit within Procurement, Finance, or increasingly,
in an enterprise Global Business Services organisation. The actual reporting lines do not
matter (and segregation of duties and other controls must always be present) as much as
the end-to-end process design, which must be formally linked back to sourcing via a
methodology that we call “optimised P2P transactional channel design.”4 The study revealed
that 42% of Top Performers have a standardized P2P process design across the businesses
versus only 13% for Peers and 6% for the CIPSA group.
■ Finally, there should be some type of internal ‘Procurement excellence group’ that focuses
on accelerating the Procurement transformation. This group performs activities such as
training, benchmarking, performance measurement, methodology development, analytics,
market intelligence, and continuous improvement activities. In the study, 58% of Top
Performers claimed to be using a toolbox much broader than a basic sourcing methodology
(versus 13% for Peers and 25% for the CIPSA group), including techniques and tools like
Lean, Six Sigma, Value Engineering, scenario planning, innovation/ideation, and even CRM
techniques. It might be a stand alone group or coordinate closely with other business
support service groups.
Coordination between Procurement and its functional partners is critical. They are budget
holders and internal customers, but they are also internal suppliers to Procurement for
technology support, people support, legal support, etc. Although the capabilities of business
functions like HR, IT, and Finance may vary, Top Performers do enjoy higher value delivery
from their functional partners compared to Peers (Fig. 19).
4 “Using an Optimized Transaction Strategy to Achieve P2P Efἀciency,” Hackett Process Perspective, June 8, 2006
The capabilities that matter 25
FIG. 19 Procurement gets mixed support from functional partners. Finance is actually
the best. Top performers have better interactions.
Top Performer
Peer
3%
8%
17%
22%
33%
28%
33%
33%
8%
6%
16%
25%
31%
22%
25%
19%
17%
42%
25%
8%
IT
13%
22%
25%
17%
HR
38%
25%
31%
8%
Finance
IT
HR
Finance
NOT JUST A VALUED INTERNAL CUSTOMER AND SUPPLIER, BUT ALSO AN INTEGRATED
PARTNER SERVING THE BUSINESS
A GOOD INTERNAL CUSTOMER AND VALUED INTERNAL SUPPLIER
A GOOD INTERNAL CUSTOMER, AND A TACTICAL INTERNAL SUPPLIER TO USUALLY
GET ME RESOURCES I NEED
A GOOD INTERNAL CUSTOMER, BUT A SOMEWHAT BUREAUCRATIC INTERNAL SUPPLIER
SILOED. WE EACH HAVE OUR OWN SEPARATE OBJECTIVES AND OUR INTERACTIONS
ARE ON AN AS-NEEDED BASIS.
Procurement can’t necessarily solve the problem of functional silos, but it can take a leadership role in bridging some of the gaps that might exist. In one example, a large resources
company’s Procurement organisation demonstrated its closed-loop procurement planning and
measurement process, and also its talent management process, to such an extent that the
CPO was promoted to head the Corporate Optimisation group. In terms of performance
measurement, roughly 40% of respondents have a performance measurement process that tie
to stakeholder objectives, but less than 10% have forward-looking predictive measurements
which could have targets cascaded down – and then performance rolled up. Seventeen
percent of Top Performers have this capability.
Process capabilities – the differentiator for top performance
The largest capability differentiator of top Procurement performance is in the specific core
Procurement processes, whether on the demand side (e.g., customer management, new
product development support), the supply side (strategic sourcing and supplier management),
or on the transactional dimension with P2P processes. It’s also an area where there are not
only large differences between Top Performers and Peers, but also across the various
Procurement process areas. For example, sourcing execution, from requirements definition to
supplier identification and to RFx and tendering, is an impactful process where nearly all
companies are competent. On the other hand, demand management is much less robust for
average companies (only 20% of CIPSA companies have implemented), even though the
majority of Top Performers have mastered this capability (Fig. 20). The same goes for supplier
26 The capabilities that matter
FIG. 20 Spend analysis and sourcing execution competent, but SPM/SRM, market
intelligence, and support for enterprise BPO need improvement
Strength of capabilities
Use of offshore BPO or captive shared
services centers/centers-of-excellence
53%
44%
Global sourcing/Low-cost
country sourcing
25%
Supply risk management
6%
33%
31%
6%
20%
13%
44%
47%
Demand management
13%
31%
31%
Supplier performance measurement/
management
7%
25%
27%
44%
Supply market intelligence
27%
25%
40%
Supplier collaboration and
development
Weaker
13%
19%
7%
38%
13%
13%
6%
Stronger
Cost management
19%
Sourcing execution
(eRFx and contracting)
19%
Expenditure analysis
19%
38%
31%
13%
63%
44%
13%
6%
25%
13%
WEAK. AD HOC, FRAGMENTED, INCOMPLETE
ENTERPRISE-LEVEL FOCUS, BUT PARTIALLY/NARROWLY
IMPLEMENTED
SYSTEMATICALLY IMPLEMENTED. OPERATIONALLY
BENEFICIAL, BUT NOT TRULY STRATEGIC
PREDICTIVE, MULTI-TIER, COLLABORATIVE. CREATING ADVANTAGE
BY SEEING AND SEIZING MORE OPPORTUNITIES THAN PEERS
IMPLEMENTED - AUSTRALASIA PEER
IMPLEMENTED – TOP PERFORMER
performance measurement, and it seems that the further that the Procurement process pushes
the ‘bookends’ of the end-to-end procurement process out to internal customers and external
suppliers, the more difficult the capability is to build.
This is one aspect of true category management, where there is not only a higher level view
of globally managing supply markets, but also a broader end-to-end life cycle view. In the
study, it was clear that 42% of Top Performers said that they have cross-functional supply
teams that integrate relationship management roles on both the customer and supplier sides
in order to perform both demand management and supply/supplier management – as
compared to 16% for Peers and 19% for the CIPSA group.
The capabilities that matter 27
The biggest improvement opportunity areas for the CIPSA group are twofold: spend analysis
(only 38% have implemented) and supply market intelligence (only 26% have implemented).
Without solid internal and external intelligence, Procurement will struggle to find all of the
leverage points it needs to identify opportunities and exploit them commercially.
Finally, an area for all participants to improve is utilisation of offshoring capabilities for
supply chain and for back-office processes – whether done internally or via a BPO provider.
The size and scope of an organisation certainly plays a factor here. The larger and more
global a company is, the more that it will utilise offshoring and Centers of Excellence (COEs)
– whether the latter are knowledge-based (i.e., analytics) or transac-tional. Although the study
found that most organisations are using some form of COE for transactional processes or
master data management, Top Performers extend this explicit service model to areas such
as tactical sourcing and supply market intelligence – both of which are very active areas for
progressive Procurement organisations right now.
In fact, explicitly addressing ‘one-time buys’ (i.e., non-recurring busi-ness critical spending)
via a reengineered tactical sourcing process supported through a COE and optional BPO
component can deliver upwards of 2% annual spend savings.5
5 “Reducing Non-Recurring Business-Critical Spending,” Hackett Process Perspective, July 22, 2009
28 The capabilities that matter
Purchase-to-Pay – a hidden opportunity
The Purchase-to-Pay (P2P) process provides a deceivingly strong payback opportunity – to
the tune of 1.8% savings on a spend basis.6 P2P is where savings are lost to non-compliance
(internal or supplier), requisitioners get frustrated, payment discounts are missed, suppliers
are not paid at the optimal time, and Procurement squanders its internal investment on
creating orders instead of creating value. In fact, average performers spend 50% more on
their internal transactional purchasing processes than world-class performers do.7 These are
funds that could be much better spent elsewhere to improve capabilities, performance, and
value.
This capability study focussed on the effectiveness dimensions of P2P performance. Clearly,
there were some opportunities for all companies to improve, namely in supplier connectivity
and supplier payment optimisation – the latter of which represents $11.6M in early payment
discounts for an early-payment top performer.8 Perhaps the most interesting finding was the
capability gap between the Top Performers and Peers in terms of ‘guided buying’ – the
process by which requisitioners are guided to preferred supply sources and associated
transaction channels (e.g., requisition-based, P-card, evaluated receipts settlement, invoiceonly assumed receipts) for buying and paying for goods and services. Very few organisations
deliver a truly guided buying process, but Top Performers are obviously focusing on it 60%
more than Peers (Fig. 21).
FIG. 21 Supplier integration and payment optimisation are the biggest shortfalls in P2P
P2P Capability Score
Top Performers are 60%
better than peers at
“guided buying”
2.63
Intuitive buying process that guides spend
owners and requisitioners to preferred
sources of supply and buying channels
2.71
4.33
2.56
Generation of detailed an accurate
spend visibility
3.42
3.67
2.75
All processes tied back to a good "system
of record" in order to help guarantee
transactional compliance
2.87
3.58
1.75
Working capital optimized to support both
DPO requirements while also aggressively
taking early payment discounts
2.13
3.08
AUSTRALASIA PEER
2.00
Intuitive and flexible communication
with suppliers via supplier portal
and third-party connectivity
0
None/poor
PEER
1.84
TOP PERFORMER
2.92
1
Fair
2
Average
3
Good
4
Very good
5
Excellent
6 “Purchase-to-Pay Alignment: The Missing Link to Delivering on Spend Cost Reduction,” Hackett Process Perspective,
August 28, 2008
7 Hackett Procurement Functional Benchmark database, 2010
8 “Optimizing the Supplier Payment Strategy Can Generate Substantial Beneἀts for an Organization,” Hackett Process Perspective,
May 30, 2009
Purchase-to-Pay – a hidden opportunity 29
In fact, 75% of top performers said that they either already “create an intuitive, compelling,
and fail-safe process to guide end-users to preferred supply channels” or are “looking at ways
to use technology and other means to create a better end-user experience.” In comparison,
only a quarter of Peers said the same. This difference is due to Top Performers wanting
to ensure that Procurement’s hard work gets utilised/realised at the moment of truth,
i.e. , when someone in the organisation has a need for a product or service. It also allows
Procurement to extricate itself from the P2P process and focus on truly differentiated areas
such as supporting new product and service innovation and development.
Yet, since most don’t free themselves from the lower-value activities, Procurement’s
capabilities for supporting the new-product and service introduction process are a work
in progress. Only 18% of Top Performers use advanced supply market intelligence, strategic
supplier partnering, and ‘design-for-supply’ methodologies to help create breakthrough
products and services (only 5% for Peers and 0% for the CIPSA peer group). Even in terms
of procurement involvement during the concept/design stage, 64% of Top Performers are
involved, as compared to 38% for Peers and 46% for CIPSA peers.
Talent and technology capabilities: the resources powering capabilities
There is an old adage that says performance ultimately comes down to its people. This
statement is actually empirically true based on the years of studies that the Hackett group
has done in terms of correlating talent management processes to functional outcomes and
business outcomes alike – including in Procurement.9 In the Procurement capability study,
the results are no different. As we saw earlier in the study, Top Performers enjoy a higher
level of collaboration with their HR counterparts. Although this is only one causal factor, Top
Performers have much higher capabilities in their formal talent management processes and
then their peers (Fig. 22).
FIG. 22 Talent management capabilities are all over the map. Top performers are better
at talent management partly because of strong HR support.
How effective is your Talent Management process in Procurement?
42%
41%
42%
31%
28%
31%
28%
25%
17%
13%
3%
0%
Weak. Job designs and
career development path
not keeping up with new
Procurement skill set needed.
Weak support from HR
Basic. Promotion
opportunities beyond
transactional purchasing
towards strategic sourcing.
Some level of HR support
Good. Formal talent management
processes and metrics in place,
designed with HR and external
experts. Formal skills/competency
assessments, training, succession
planning, etc.
TOP PERFORMER
Excellent. Customer-focused
competency development. Highly
scaleable training & knowledge
management capabilities. Seamless
use of external resources. Strong
competencies in soft skills: culture,
change management, leadership, etc.
PEER
AUSTRALASIA PEER
9 “Addressing the Talent Management Imperative in Procurement,” Hackett Procurement Executive Insight, June 9, 2008
30 Purchase-to-Pay – a hidden opportunity
This is a worrying finding. Organisations need to realise that if they are not being deliberate
in architecting their capabilities explicitly in terms of skills and competencies, they are going
to have a difficult time hitting shorter term objectives, and an equally hard time in the longer
term in retaining the top talent needed to transform the procurement organisation.
Technology
If you are going to have the best people, you also need to give them the best tools.
While most procurement organisations have access to basic applications such as ERP and
e-procurement for P2P automation, the utilisation of technology in higher-value areas is the
biggest differentiator between top performers and others (Fig. 23).
FIG. 23 Other than basic ER /spend management, procurement does not exhibit strong
information management capabilities
Information management capabilities
Web 2.0 using consumer-like web innovations
within the business
Supplier B2B integration (including
robust supplier portal)
6% 6% 6%
81%
Analytics (ease-of-use, forward looking,
linked to external data, dashboards, etc.)
50%
Self service functionality for internal business
users to guide them to proper buying channels
38%
19%
13%
44%
44%
Master data management (data modeling,
cross-referencing, enrichment, etc.)
19%
13%
69%
Knowledge Management (i.e., managing
internal/external Procurement knowledge)
Strong ERP and Spend Management
foundation (i.e., integrated
13%
87%
13%
38%
13%
44%
31%
44%
6%
6%
WEAK. AD HOC, FRAGMENTED, INCOMPLETE
GOOD APPROACH, NARROWLY IMPLEMENTED
WELL IMPLEMENTED, AND OPERATIONALLY BENEFICIAL,
BUT NOT TRULY STRATEGIC
A STRATEGIC CAPABILITY
GOOD-TO-GREAT - AUSTRALASIA
GOOD-TO-GREAT – TOP PERFORMER
Purchase-to-Pay – a hidden opportunity 31
As Procurement focuses increasingly on managing knowledge and intelligence (e.g., supply
market intelligence), its required IT competencies change from transactional process
automation to a focus on knowledge management, analytics, external trading partner
integration, and the use of emerging supportive Web 2.0 technologies that support this new
focus.
These capabilities, like others, are built over time, with effective internal collaboration, in a
self-funded way (i.e., tied to process outcomes), to align with Procurement’s evolving value
proposition. Technology is like any supply market, and true differentiation will come not
in the form of purchased commodity-like applications that sit on the shelf, but rather, by
utilising the commodity technology for commodity processes like P2P to then freeing
resources to focus on technologies that truly make a difference in terms of analytics and
intelligence.
32 Purchase-to-Pay – a hidden opportunity
Aligning value, performance, and capabilities
in practice
In this white paper, much resource was focussed upon exploring the details of where
organisations stand in terms of value, performance, and capabilities, and some practical
implications of these findings. The relationship and the need for alignment among these three
elements has been discussed. Guidance about how to use the relationship among the three
elements is now key.
When we plot study respondents by order of increasing capability and then overlay value and
performance on top, we can see that as organisations evolve to a higher level of capability,
they in essence are building excess surplus capacity (Fig. 24).
FIG. 24 While capabilities are correlated with value and performance, ‘excess
capability’ is due to difficulty in measuring higher value and value of pre-building
the capabilities
Procurement capability vs. value and performance
Excess capability
Performance
r2 = 0.81
r2 = 0.72
Value Prop
Capability
r2 = 0.62
VALUE SCORE
PERFORMANCE SCORE
CAPABILITY SCORE
They are doing so not to build the curricula vitae of staff members – although keeping staff
members engaged is certainly a key to retention. Rather, they are pre-building capabilities
that can be used when formal service definitions and scorecard measurements catch up to
be systematically built. It also creates a level of agility, allowing Procurement to respond
better to external volatility. In a physical supply chain, supply chain agility is a function of
Aligning value, performance, and capabilities in practice 33
good planning and flexible high-capability manufacturing and logistics resources. In the
Procurement services value chain, it’s a very similar story in terms of managing demand, but
also in terms of having high-capability, multi-skilled resources (internally and externally) that
can flex as the broader organisation responds to volatility.
The supply base must be agile. For that to happen, Procurement itself must be agile. It can’t
be agile if it has a narrow value proposition, if it overpromises and under-delivers, or if it’s
not pushing itself to develop new capabilities. It will also fail if these three components are
not aligned. With this in mind, we next offer some recommendations to help you stay
aligned. During your annual procurement planning process, ask yourself the following
questions:
1. Is your current value proposition to stakeholders clear? Do they know what to expect
from the Procurement organisation?
2. If so, is it also compelling to them? Does it link to their objectives?
3. How do you ask them the above questions? Is this requirements-gathering part of your
planning/monitoring processes with them?
4. Is your current value proposition clear and articulated within the entire Procurement
organisation? Is everyone ‘on message’ about the promise of Procurement’s brand and
their role in delivering on that promise? Are you internally aligned and do you have
formal linkages between customer management, sourcing, supplier management, and P2P?
5. How compelling is your current value proposition to you? Does your organisation’s service
portfolio offer the types of services that you would like to perform, and which you think
will drive most value for the enterprise? If not, how are you overcoming this?
6. How well do you link your Procurement scorecard and your supply base scorecard to
each other and to the value that your stakeholders expect? Are all the value elements
being measured? Conversely, are the metrics on your current Procurement scorecard tied
explicitly to the voice of the customer? How?
7. To what extent do you use a service metaphor to help clarify the services offered (value)
and the service levels (performance)? Do you run yourself as a professional services
organisation and the best practices associated with that?
8. How do you tie your capability levels and your capability-building (based on a gap
analysis of needed vs. current capabilities) back to value and performance? Can you
connect your current capability improvement projects to a customer requirement and/or
service offering?
9. How well have you been able to assess your diverse internal capabilities, and then use
your pockets of excellence to drive similar capabilities across the rest of Procurement?
How well can you take a new capability and get it baked into your overall value
proposition and scorecard?
10. To what extent have you aligned Procurement’s efforts to those of your functional
service partners (and any cross-functional internal service organisations) in order to
find alignment opportunities? Similarly, have you done this with any suppliers
(e.g., technology or service suppliers)?
This list is only a start, but a good answer to most of these is a strong start to aligning and
evolving your value proposition to your stakeholders and to yourself in terms of your ability
to execute.
34 Aligning value, performance, and capabilities in practice
Summary findings and conclusions
The research study has validated the hypotheses and has also provided some deeper insights
on specific capabilities. The study has shown that:
■
■
■
■
■
■
■
Value proposition, performance, and capability all highly correlated. Capability does indeed
enable performance, but also value. Additionally, value (the utility of what you do) and
performance (how well you do it) being correlated means that Procurement must
continually perform to not only earn its seat at the table, but also turn that seat into a
driver’s seat and deliver ever-broader services.
Conversely, misalignment creates issues:
– Vision (of a high-value proposition) without performance is an empty promise.
– Capability without performance is an opportunity missed and an investment
perhaps with little return unless focused on a customer-driven service.
– Performance against a lower value proposition is comfortable today, but will
increasingly become a commodity tomorrow.
– Performance without capability is usually characterised by unsustainable heroics
and isn’t very scalable and repeatable.
Top Performers have the greatest relative strength in core process capabilities – supported
by technology. Much current technology is a commodity and supportive of lower-value
streams. Top Performers go beyond this to use newer, higher-impact technology to support
higher-impact processes.
Both the business and Procurement want activity shifted to higher-value propositions, but
current measurement systems and metrics don’t encourage this. Procurement is executing
well to purchased cost savings and supply assurance, goals, but is only middling at
higher-value services.
The biggest process-related capability gaps are in working capital management,
involvement in the enterprise ‘process sourcing’ decision, and in tapping supply markets for
innovation.
Overall operating model (i.e., role/measurement clarity and alignment) is varied and needs
improvement. Stated barriers for average performers include: no historic permission, no
mandate/accountability, and weak IT support. For Top Performers, it’s primarily about the
positive tension of expanding into broader areas.
There’s a need to push beyond basic supply-centric n-step sourcing methodologies. Spend
analysis, cost modeling, and sourcing execution capabilities are the strongest capabilities.
Customer/demand management adoption is encouraging, but top Performers lead the way
in earlier and deeper involvement in stakeholder processes that includes external suppliers
as much as internal customers.
Summary findings and conclusions 35
Looking forward
Whether personally or professionally, everybody needs a vision of where they will be in three
years, five years, or even a decade from now. The same holds true with Procurement as
a function. Procurement in the year 2020 will likely be substantially different than today.10
However, 20/20 vision can also mean ensuring that your vision is clear – and doable – even
if it might lead to some serious stretch goals.
At The Hackett Group, we believe that the white-collar internal services value chains
(source-to-settle, customer-to-cash, time-to-pay, account-to-report, etc.) will undergo a
transformation as substantive as the global reconfiguration of physical supply chains. Since
the work is knowledge-based, this allows it to become virtualised and globalised. The idea
of ‘everything as a service’ will make its way into these internal end-to-end processes via
a clear trend toward Global Business Services (GBS) organisations – to which Procurement
will increasingly report – or at least have to coordinate closely with.
The deliberate design of these value chains requires a vision, a service delivery strategy, and
a supporting service delivery model and associated capabilities to make sure that the vision
can be implemented. As Procurement broadens its vision, rethinks its strategies, tunes its
service delivery models, and shores up its capabilities, it needs to do so while continuing
to execute and also to perform this transformation as efficiently and effectively as it can.
This research is designed to offer some insights into accelerating your transformation.
10 ”2020 Vision for Procurement: A Revolution through Evolution of Capabilities and Value,” Hackett Procurement Executive Insight,
April 15, 2008
36 Looking forward
Index of figures
FIG. 1 Doing more with less is nothing new to procurement
5
FIG. 2 The hackett group’s procurement benchmark empirically defines world-class
procurement performance on a balanced set of effectiveness and efficiency metrics
6
FIG. 3 Procurement must be nimble to align to the enterprise response to external volatility.
8
FIG. 4 2010 has been a busy year for procurement to deliver results and build capabilities
9
FIG. 5 Hackett procurement alignment framework: aligning value, performance, and capabilities
to each other and to the procurement process/project portfolio
10
FIG. 6 Procurement value evolution model
13
FIG. 7 The top quartile in performance is basically also top quartile in value evolution.
This group is doing better things, and doing them better, than peers
14
FIG. 8 Nearly half of non-transactional effort is for supply assurance and purchased cost reduction,
but companies want it reduced to a third. Top performers align metrics to efforts better than peers
15
FIG. 9 Top performers have stakeholders who expect more (and get more) value from
procurement – beyond supply assurance. TCO reduction is the biggest gap for all
15
FIG. 10 Evolving the value proposition means changing stakeholder perceptions of
procurement’s role and “brand”
16
FIG. 11 Expanding procurement’s circle of influence and level of value
17
FIG. 12 Broadening the procurement charter and operating model is the biggest barrier
18
FIG. 13 “Procurement ROI” illustrates high performance, but a value stream with limited potential
since you can’t save your way to zero
20
FIG. 14 Get the money and keep the money
21
FIG. 15 Peers touch about half their expenditure, but less than a third do so during stakeholders’
planning and budgeting processes
21
FIG. 16 Study questions were organized into four categories: organisation, process, technology
and people/talent
22
FIG. 17 Top performers are strong against all capability dimensions. Technology is the weakest
capability area for all groups
23
FIG. 18 Slightly more than half of companies have a CPO and a strategic sourcing group separated
from transactional activities, but other organisational practices are lacking
24
FIG. 19 Procurement gets mixed support from functional partners. Finance is actually the best.
Top performers have better interactions
26
FIG. 20 Spend analysis and sourcing execution competent, but SPM/SRM, market intelligence,
and support for enterprise BPO need improvement
27
FIG. 21 Supplier integration and payment optimisation are the biggest shortfalls in P2P
29
FIG. 22 Talent management capabilities are all over the map. Top performers are better at talent
management partly because of strong HR support
30
FIG. 23 Other than basic ERP/spend management, procurement does not exhibit strong information
management capabilities
31
FIG. 24 While capabilities are correlated with value and performance, “excess capability” is due to
difficulty in measuring higher value and value of pre-building the capabilities
33
Index of figures 37
About the authors
Pierre Mitchell
Senior Director, The Hackett Group
Piere Mitchell is responsible for leading the development of research and other intellectual
property within Hackett’s Procurement Executive Advisory Program, where he also serves as
an adjunct business advisor. He has over 20 years of industry and consulting experience in
procurement, supply chain and information technology. Previously, he was vice president of
supply management research at AMR Research and a manager at Arthur D. Little, where he
led numerous supply chain and procurement transformations at Fortune 500 companies.
Other industry positions include manufacturing project manager at The Timberland Company,
materials manager at the Krupp Companies, and an engineer at EG&G.
Peter Dowling
Director, The Hackett Group
Peter Dowling is responsible for managing the Australasian region for Hackett’s Supply Chain
and Procurement transformation service lines. He has nearly 30 years of industry and
consulting experience, including supply chain experience at ExxonMobil and consulting
partner experience at various top tier consulting organisations. He holds a Bachelors Degree
in Civil Engineering from the University of Queensland and a Masters in Engineering Sciences
from The University of New South Wales.
www.thehackettgroup.com
38 About the authors
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