While many sourcing and procurement organizations pursue strategic transformation and continual performance improvement, the majority might never achieve the best possible performance because they:
Fail to set enterprise-level strategies for identifying and systematically working toward desired business outcomes
Follow silo approach across geographies, functions and processes
Overemphasize process efficiency measures – for example, cycle time and productivity – while underemphasizing measures of real S2P process effectiveness such as cutting costs and optimizing working capital
Overemphasize technology, while underemphasizing process
What is S2P 2.0 performance?
Best-in-class sourcing and procurement organizations achieve focus on process effectiveness at an enterprise wide level, which enables them to extract maximum value from virtually every aspect of their source-to-pay (S2P) process. This is the next level of S2P or S2P 2.0 performance.
Both empirical research and qualitative evidence show that best-in-class sourcing and procurement organizations achieve performance levels that are – at a minimum – two to five times higher than average organizations. For a typical US$5 billion revenue company, that can mean
a spend reduction of US$50 million to US$150 million over three years
a margin increase of between 100 and 300 basis points
Everything is connected
Focusing on enterprise level effectiveness ensures that every sub-process – every activity the organizations perform – is consciously and specifically designed to help the enterprise achieve its desired business outcomes.
Let’s say that a sourcing and procurement organization sets out to achieve the business outcome of reducing its TCO. But in its approach, the organization makes the common error of treating its source-to-pay sub-processes as discrete rather than interrelated parts of a connected whole. In doing so, it risks losing value at virtually every process handoff, as shown in Fig 1. So while the organization might succeed at delivering a lower TCO, it falls far short of delivering the lowest possible TCO.
While cost savings is a primary focus of many procurement organizations, freeing up working capital is increasingly the focus of many businesses. Businesses that follow a silo approach are destined to achieve suboptimal performance while best-in-class performance can unlock significant cash. For every $1 billion in spend, a business that transitions from median to best-in-class, can unlock $200 million in cash – a significant business impact.
A Smart Enterprise Approach to S2P 2.0 performance
Genpact introduces a new approach to S2P that enables organizations to deliver best-in-class performance across sourcing, procurement and supplier payment processes. It addresses the challenges by looking at source to pay processes at an enterprise wide level while focusing on process effectiveness and key business outcomes –
Reduction in total cost of ownership (TCO)
Optimizing working capital
Higher availability of material and services
This new approach leverages Genpact’s Smart Enterprise Processes (SEP) methodology and substantially improves financial performance by breaking down organizational silos and making source-to-pay business processes truly effective.
For example typically in large companies with complex buying needs, only 60-70% of supplier invoices are paid on time. This approach evaluates the efficiency of the accounts payable function to determine and improve its readiness to pay from the day an invoice is received. By paying on time, companies place their sourcing and procurement organizations in a strong position to negotiate extensions of payment terms, reducing their working capital requirements by as much as 2-3%. For a company with an annual spend totaling $500 million, this would amount to $15 million more cash in hand.
By going one step further and paying suppliers early, companies employing this new approach can very often negotiate additional price reductions of 1-2%. Typically 10-15% of a company’s existing supply base is willing to provide early payment discounts rather than borrowing capital at high interest rates.
As these examples illustrate, this approach goes far beyond simply assembling cross-functional teams to foster cooperation among discrete corporate functions. Rather, it seeks a true integration of formerly discrete functions into a seamless end-to-end process view. It digs deep into S2P processes and process gaps, and uses metrics and analytics to make certain that the value achieved in one process step is fully preserved and carried through to the next.
Linking activities to outcomes
Strategic sourcing and procurement groups also typically neglect to systematically – and scientifically – draw linkages between their many daily activities and the business outcomes they are trying to affect. While they may achieve a certain level of success, their achievements come more or less by trial and error, and so are not predictable, replicable, or sustainable over time.
What’s more, without establishing clear lines of causality between activities and outcomes, it’s virtually impossible for the organization to set aggressive (but realistic) performance objectives, track progress against those objectives, and actively undertake the initiatives that will achieve the objectives in the desired timeframe.
Lack of Benchmarks
Another critical challenge, organizations typically face is lack of access to competitive benchmarks or gold standards for S2P process performance by which sourcing and procurement organizations can set objectives and mark their achievements.
This approach solves this challenge by drawing upon – and continuing to populate – a deep knowledge base that includes - already includes sourcing and procurement benchmark data for:
Benchmarks for 20 S2P performance measures and 70 performance drivers
A compendium of 200+ leading practices
Nine discrete diagnostics tools
Business impact delivered
By applying the methodology correctly and completely, it’s possible for a company to achieve:
A 30 to 40% increase in addressable spend visibility
A 20 to 40% reduction in maverick spending
A 5 to 10% reduction in working capital requirements
Incremental ROI on existing IT and ERP investments
All this can lead to a 2 to 3% increase in year-over-year cost savings. For a very large company, achieving or even approaching S2P 2.0 performance levels through SEP can translate into millions – even billions – of dollars to be either banked or strategically reinvested.