By Alex Klein, COO at Efficio
In part one of this series, I made the case for a solid, well conceptualised procurement transformation plan – the importance of which cannot be understated in any attempt to reduce cost. But, it’s equally important to note that this is only step one. After all, a plan without action is just a speech, and you can have the most revolutionary idea for your organisation, but without buy-in to facilitate that plan, nothing will happen.
For this reason, the Chief Procurement Officer (CPO) must pitch transformation to the board as a business proposition – something along the lines of, “If you give me X, I will bring you Y in savings.” And that begins with a baseline savings plan.
The hardest part is deciding where to start – which part of third party spend to attack first, with so many enticing options on offer. For example, you could approach it by business unit, or you might do it supplier-by-supplier. With the first option, you’ll forgo any scale opportunity and the advantage of leveraging spend across the business; but with the second, you’ll have no competition in play. The best, most effective way to go, however, is to implement it by category. Travel expenses could be one; and devices, laptops and desktops could be another.
This method of plotting out spend into categories – that include the annual spend, an estimate of addressability and a potential savings range, divided into “sourcing waves,” – paves the way for a clear, direct, and focused and savings plan. This plan can then be used as a skeleton to flesh out your approach to spend, addressing five to 15 categories at a time.
By addressing spend in this way, you are provided with a natural portfolio effect that works by spreading risk across categories, since you are attacking many different categories with different budget-holders and suppliers at once. Some of these categories may not generate the outcome you’d hoped for, but another couple could provide a hefty 25% saving, which would counterbalance the shortfall of another. Whilst this is certainly a simple enough logic, in order to make it a success, there are a number of factors that must be taken into account first:
- Measuring spend on the addressability scale
First on the agenda is addressability. Failing to factor this in and declaring that “we can deliver 10% savings across 100% of the spend” is a classic mistake. The problem is not the 10%, it’s the erroneous assumption that 100% of the spend will be addressable. Not only will you never include the various one-off purchases in your tail spend, but spend will also ‘disappear’ on you as you progress down the sourcing process. We jokingly call this Shrinking Spend Syndrome (SSS).
For example, you have a big outsourcing contract with IBM for 10 years that can’t really be touched, business unit X has pulled out of the effort, and it turns out that about 30% of the purchases in your category are bought on behalf of customers on a pass-through basis, therefore lowering savings. These situations will creep up on you, and you still end up saving the projected 5-10% – but on a hopelessly smaller base. To account for addressability, this risk should be anticipated at the start by discounting each category by at least 25%.
- Category prioritisation
There will be as many as 40-50 categories for most businesses, so where do you start?
Enter the “category bubble chart”. By plotting categories on a chart based on savings potential and implementation difficulty, CPOs can have a clear view of the categories easiest to pursue, while also providing the biggest rewards. These rewards – or rather ‘savings potential’ – should be based on several factors, including the addressable spend, the current state of procurement sophistication, the competitiveness of the supply market, and the existence of concrete supply and demand-side improvement opportunities. For the other axis of the chart, to determine the implementation complexity, the CPO must consider the following:
Are there credible supplier alternatives?
How complex and costly is it to switch suppliers?
Are there any internal obstacles that must be overcome to push this through?
In addition to picking high-value, quick-win categories in the first instance, it is also important to consider the categories that have strong budget-holder buy-in and iterate your chart depending on business priorities.
- Managing expectations
Finally, timing is a crucial consideration when building a sourcing savings plan. Often, the time it takes to execute such a plan is vastly underestimated. On average, it takes six months to strategically source a category, two months for developing the baseline and agreeing the strategy, and four months to issue the RFP, conduct negotiations, and select suppliers. There is no denying it is a lengthy process, and it needs to be thorough – cutting corners or rushing simply isn’t an option. Yes, you will have push-back from the wider business during this time, and yes, you will have to fight your corner. But if a transformation doesn’t feel uncomfortable, then is it really transformation?
Building a procurement investment business case
Once your sourcing savings plan is in place, you need to estimate the level of investment required in the procurement function to achieve those desired outcomes. When building such a business case, you must consider the various costs associated with hiring additional strategic procurement resources, upskilling, or training existing employees, new IT systems or tools – and, finally, any external consultancy support that might be needed.
The procurement transformation business case then consists of pledging to deliver a specific savings target in return for these investments. If your spend is of reasonable magnitude, then the return on investment (ROI) should make for an attractive proposition.
Ensuring program structure and governance
Delivering on a procurement transformation plan is a cross-functional effort – it requires engagement at all levels, and this is where a solid programme structure is essential. The transformation programme is typically divided into several workstreams. On one side, there are the sourcing teams responsible for executing the new strategic sourcing process. On the other side, there are the functional improvement workstreams – organisation and operating model redesign, recruitment, sourcing, supplier management and P2P process design, roll out and training, as well as IT system partner selection and implementation. The sourcing teams, in particular, should be well resourced and truly cross-functional in nature. The most successful transformation projects are co-driven by the business, rather than just procurement driven.
Turning a plan into action
If you’ve followed the above steps, then congratulations – you’re ready to embark on your procurement transformation journey. All the aspects should now be lined up, ready to pull into an 18-month programme timeline. Most crucial to its success, however, will be executive sponsorship – not only with regards to financial sponsorship, but in C-suite time and effort.
Making sure that every player is in agreement – the CEO, CFO, COO, CIO, and the various business unit heads – you can proceed with a united front towards your goal, ensuring the necessary approval en route. This is what facilitates true engagement.
But you can’t relax just yet. Once your plan has received sign off, you’ll need to act quickly – it’s not enough for your plan to be revolutionary, it must be detailed in the extreme so that you can get off the start line without hesitation. Delivering the plan to any success will rest upon buy-in and visibility across the business, which, ultimately, will depend on cross-functional alignment. Once this is in place, the true profit potential of procurement and can reached.
