Tom Lawrence, Chief Communications Officer, Proxima Group
As technology and communications developed over the last 40 years, large corporations realized and acted upon the ability to operate across borders. They set up country subsidiaries, or grew through acquisitions. Indeed, they became the primary catalysts behind globalization.
At the same time, as supply chains and procurement practices were gaining maturity, these same organizations recognized an ever-increasing opportunity to grow procurement into a global function. Depending on their resources, they either set up global teams or led global sourcing from a centralized function and location.
As a result, global procurement organizations have been in place in one form or another for well over a decade. Looking back at their effectiveness, one thing is certain – there has been failure on a grand scale:
The global super deal with a sole vendor – failed.
The unique service level applicable to all sites – failed.
The plethora of global category managers specializing in a narrow domain of expertise – failed.
Evaluating root causes, we have identified two main reasons for these monumental malfunctions:
The benefits of multinational outsourcing deals are over-estimated.
Political, economic, social, technological, legal and environmental (PESTLE) factors frequently drive differences among locales, requiring independent consideration of each individual market.
Procurement professionals are very often over-optimistic about the benefits of a single provider across countries. They tend to imagine that suppliers will be able to operate at a lower cost due to a reduction in overhead, or will reduce their margin significantly to win a large, multi-region or global piece of business. The reality is that most vendors have local P&Ls to run, meaning they must preserve their margins. And many aren’t global – but are a group of individually run entities. This, in turn, negates some anticipated cost savings for enterprises. Delivering contracts locally can actually be considerably more cost effective for buyer organizations.
Numbers and value aren’t necessarily par. All too frequently, RFPs stifle innovation, and instead force providers to submit global bids with their local businesses simply supplying standard inputs into spreadsheets. We recently worked with a large fleet management provider for a client with needs across North America and Europe. We explained to the vendor’s Sales Lead that although we were addressing the category across seven countries, we were taking a national approach. His first reaction was a huge sigh of relief. What happens too often is that global bids are submitted based on numbers only. The vendor then issues spread sheets to their local business units which would only provide numbers or standard input. In our case, the vendor was delighted that on this occasion he had the opportunity to interact locally and create a customized value proposal.
Services vendors can rarely be the lowest bidder in all in-scope territories.
The global procurement organization is rarely fit for purpose.
Although knowledge of multiple markets across multiple categories is highly important, an understanding of local complexities is the most critical key to success.
Most enterprises’ global sourcing exercises focus on top geographies, rarely capitalizing on opportunities that reside in other locations.
Procurement’s short-term fixation on savings detracts from successful implementation and contract management, which are the long-term, yet rarely pursued, value drivers.
Global deals are infrequently structured in a way that enables rapid adaptation to changing local market conditions.
So how should enterprises build their global procurement teams and functions? In our view, they must shift their views in two vital areas:
First, they must reconsider the way in which they establish their ideal team size. Managing costs happens at so many levels of an organization that the key performance indicator (KPI) “dollar managed by headcount” has become irrelevant. The size and shape of the procurement group should be defined according to the specific needs and maturity of the business, taking into account the complexity of requirements, the level of the requisite business partnering, the organizational culture, the usability of the available procure-to-pay (P2P) suite of tools, etc. And it doesn’t always need a large team, especially if it takes a procurement outsourcing route whereby it can access the expertise it needs only when it is needed. A well-managed, small, agile team with access to flexible expertise can achieve far more than enterprises often anticipate.
Second, they must change their mindset that strategic procurement must be a centralized function. Rather, success lies in having a combination of people on the ground at client sites, feeding into, and supported by, a central function. These on the ground people need to be commercially minded individuals who can think from a business perspective and influence behaviors, generate demand for procurement’s services, transform identified savings into bottom line reality, and who understand and are empowered to shift power away from the center.
One thing is for certain…strategic procurement is coming of age. Businesses’ ability to learn from past mistakes, and flex how they utilize procurement in their organizations’ highly unique environments, will make the difference between the procurement function providing a good, and a great, service.