Not that long ago, procurement was relegated to a “back office” support function at most global corporations. Fast forward a decade, and procurement and sourcing are increasingly recognized for the value they deliver to the business – and to shareholders and customers.
As we all know, these gains were hard-earned and are essentially based on the recognition that one dollar saved through proficient procurement tends to drop straight to the bottom line. As a result, today procurement and sourcing have expanding roles in mitigating risk, enforcing compliance and driving competitive advantage.
To understand the links between procurement and business performance, IBM’s Institute for Business Value (IBV) conducted its inaugural Chief Procurement Officer Study, one of the largest known surveys of procurement organizations at global companies. IBV surveyed more than 1,100 CPOs and senior procurement executives at Global 2000 companies in 22 countries around the world. The goal was to “harvest insights” into the specific procurement programs and actions that drive business impact.
The results showed a striking correlation between the proficiency of the procurement and sourcing organization and a company’s bottom line. Companies with high performing procurement organizations have profit margins 15 percent higher than the average company and 22 percent higher than those of companies with lower performing procurement organizations.
So how are these top performing CPOs driving this significant bottom-line impact? The study concluded that, to maximize its impact on the organization, the procurement function must have (1) a strong set of
fundamental capabilities, (2) become an influencer throughout the organization and (3) embrace
The study also details specific programs and actions that enable procurement organizations to achieve greater results than their peers. One notable area was Big Data and data analytics. By using analytics to tackle Big Data challenges, companies gain new insights into internal business operations and their supplier networks to identify vulnerabilities and opportunities. 83 percent of high performing companies excel at leveraging analytics compared to just 63 percent of the low performers.
The deployment of Big Data and data analytics becomes even more powerful when the organization excels at applying the right procurement technology in the right way. The study documents a very strong correlation between being a top performing company and effectively leveraging procurement technologies: 94 percent of top performing companies are highly effective in their use of procurement technologies, as compared to 44 percent of all surveyed companies.
Supplier management, contract management and spend analysis technologies were three of the more impactful technologies according to the report.
By using data-driven insights, high performing organizations are in a better position to quickly respond to changing internal and external conditions, such as supplier risks and supply disruptions. The study showed that 73 percent of top performing procurement organizations are effective at gathering insights into the supply base, compared to only 16 percent of lower performing counterparts.
That gives a little perspective on how data can directly impact business performance. And it may explain why CPOs think that supplier intelligence solutions, including solutions providing “a 360-degree global view of supplier relationships,” are expected to be the most important area of technology investment over the next three years.
Another area in which high-performing procurement organizations excel is collaboration. According to the study, 80 percent of high-performing companies report that collaboration across departments, such as IT, legal and sales, is both a key strength and an investment priority. That compares to only 45 percent of low performing companies. High performing procurement organizations also see the benefit of close partner collaboration, and therefore are more likely to create strategic alliances. For example, top performers direct 38 percent more of their annual spend through strategic alliances than low-performing organizations.
High-performing organizations also are turning to technology and social business for more innovative ways to manage their global teams and collaborate with suppliers. The study found that high performers are more likely to use social business tactics such as crowd sourcing (81 percent) and collaborating on product development with suppliers (88 percent), versus their low-performing counterparts (38 and 47 percent respectively).
Overall the study determined that about one half of the procurement organizations in the study were very effective in their
fundamental capabilities; about one-third were deemed influential within their organization; and only 27 percent “exhibited characteristics of an innovative organization.”
So it appears that despite the gains procurement organizations have made, there is still significant room for improvement and greater business impact. Procurement leaders have an unprecedented opportunity to become even more instrumental in transforming their organizations by modeling themselves against the world's most innovative and effective procurement organizations. The
CPO Study can provide some great insight and direction along that path.