Clyde Dornier, Head of Global Sourcing & Procurement at Visa, Inc. Ian Williams, Regional Head of Global Sourcing & Procurement (CEMEA)
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The role of Sourcing in companies differs based on company needs. Highly regulated industries and those with high net operating margins (e.g., Financial Services, Banking, Software Solutions) are representative of
Control Focused Sourcing organizations, whereas less regulated industries and industries with very tight net operating margins(e.g., Mining, Manufacturing, Food and Beverage) are representative of more
Savings Focused Sourcing organizations.
For many years, sourcing professionals have been discussing the merits and relative value-add of sourcing organizations that focus on controls vs. those that focus on savings. Sourcing professionals have, until recently, believed that Savings Focused Sourcing organizations added significantly more value to their companies than those focused on controls. It appears that one approach is likely not better or worse than the other, they are just of different value to their respective companies.
In Figure One below, the typical role of sourcing in Savings Focused and Controls Focused sourcing organizations is depicted. The Savings Focused sourcing organization often engages the business much earlier in the process lifecycle than the Controls Focused organization. This is perhaps because the Savings Focused organization depends on information about the business strategy and plans. This approach ensures that sourcing strategies, supplier selection, and contracting optimize the performance of the supply base and deliver the most value for money to the business. In the Controls Focused sourcing organization, resources and attention are concentrated on ensuring that (1) company policies and procedures are followed, (2)legal and regulatory requirements are met, and (3) risk to the organization of supplier performance or non-compliance are minimized.
Figure One: Sourcing Savings Focused vs. Sourcing
Figure Two: Resources and Work Activities
Figure Two shows the resource and work activity differences that exist between the two models. While these are not the most pronounced differences, they are key differences and represent the aspects of the organization that are the most difficult to change.
The Savings Focused sourcing organization typically requires strategic thinkers, market experts, relationship managers, and consultants. In addition, resources in the Savings Focused model tend to include: Category Managers, Supplier Performance Managers, and Spend Analysts. Often, these resources spend the bulk of their time managing internal business and external supplier relationships. They tend to insert themselves in the budgeting and planning process and provide guidance and information about the supply marketplace and the capabilities of the company’s key suppliers in order to support new products and initiatives. Sometimes, they help craft, and in some cases, influence strategic decisions being made by the business and/or its functions. They also require significantly more data than the Controls Focused sourcing organization.
The resources in the Savings Focused model often work with large amounts of spend and performance data to determine the best suppliers, best pricing, and trends to support the plans of the business/function. By evaluating more data, engaging earlier in the decision making process, and providing input and expertise that the business typically does not have, the Savings Focused model is able to participate in decision making and manage the flow of projects to optimize savings.
By contrast, the Controls Focused sourcing organization adds value to the company by ensuring that contracts and deals meet internal compliance guidelines, regulatory requirements, and mitigate risk to the company. In this model, skilled Contract Specialists, Legal, Risk, and Compliance Analysts concentrate on contracts being negotiated and/or those that have been negotiated to ensure that risk exposure is eliminated or minimized for the company. Given this concentration, there is little need for an in-depth understanding of the supplier marketplace or expertise in business operations. The business comes to the Controls Focused sourcing organization once decisions about suppliers and projects have been made because (1) Sourcing is viewed as having more expertise in contract negotiations and (2) Sourcing typically has the final sign-off or approval for contracts. Consequently, the Controls Focused sourcing organization is typically the focal point for the execution of risk mitigation strategies and they rely on their experts to move deals through the maze of internal requirements and controls that exist in all companies.
Sourcing and procurement organizations evolve in much the same way. Most, if not all sourcing and procurement organizations begin as controls focused ones. Start up and young businesses are focused on controls related to the payment of invoices. These businesses typically start with the simplest processes to route and approve invoices – securing approval to pay. In these organizations, there are typically few savings focused strategies applied. Over time as these businesses grow and mature, they begin to focus less on back end controls and more on front end approvals – approval to spend. As a result of the focus on approval to spend, organizations are created to support the business’ desire to save more with each transaction. Hence, over time, the sourcing and procurement operations become less controls and more savings centric. This is not to say that these companies compromise on controls, they move the control point earlier in the process, before the decision to commit the company’s funds have been made, a point where the company has more leverage over its purchases.
Which is Better?
The general consensus is that sourcing organizations move along the spectrum of savings and control. As markets change and company strategies prove successful or not, the focus of Sourcing adapts to help the company optimize its position regardless of market conditions. This movement along the spectrum is also influenced by the maturity of markets. More mature markets are typically more savings focused while less mature ones tend to be more controls focused.
Both models are able to add value depending on business needs or requirements. Many Controls Focused organizations also support the budgeting and planning process with data that enables better decision making. And many Savings Focused organizations provide contracting support to optimize terms and conditions and mitigate risk. The vast majority of sourcing organizations, in fact, operate in both camps depending on the deal and market conditions facing the business. When times are good, sourcing organizations tend to focus on improving transparency and enable stronger controls. At other times, sourcing organizations focus on optimizing supplier value. The keys for organizations operating under both models are based on understanding their value-add, their role, and their execution. And being flexible enough to move from one model to the other based on changing business needs is critical to the overall success of the business.