It's well known that Procurement functions can provide significant value to the organizations we support. Unfortunately, with strong competition for limited funding, Procurement teams often are often unable to gain access to the investment necessary to deliver this untapped value. There is no single answer in solving these concerns, as each company has their own revenue and expense priorities to navigate. All that being said, there are some effective levers that procurement functions can tap in order to enable strategic improvements.
Understanding the Procurement Return on Investment (ROI), being careful about how and when to invest, and capitalizing on various revenue sources is a start.
Return on Investment
What are world-class companies doing that minimizes their operating costs, and yet increases procurement's return to the business?
Where and When to Invest
As noted in the 2014 Hackett Study, World Class companies spend less (-43%) by reducing operational/tactical costs and make investments in strategic activities (+36%).
Enhanced investment in Sourcing Strategy (category management, market intelligence, spend analytics, and supplier partnering/innovation) informs proactive opportunity assessments. Category/Commodity Management skills are expensive, and absolutely necessary to identify, influence, and deliver enhanced value. Therefore, it is critical to focus their valuable time on the right opportunities.
Some procurement organizations tout success when the businesses reach out to them to support contract negotiations. Unfortunately, if procurement is being engaged at that time, there is little value that can be delivered. You are simply too late in the process to drive significant value. The businesses have already identified what they want, who they want it from, and at this point, just need it done. Sourcing has therefore missed the opportunity to broaden or change the question and there are far fewer â€œleversâ€ that you can pull to effect change. Category planning enables the collection and analysis of information necessary to identify cross-functional/cross business opportunities and consider a range of TCO levers (specification optimization, demand management, insource out source, etc.). Best Practice organizations utilize category planning to identify proactively opportunities and bring them to the business vs waiting to be engaged. As a result, fewer resources are focused on bigger and more strategic initiatives vs reactive/tactical activities. More for less!
How are World Class Functions Reducing Their Execution Costs?
Stated simply, World Class Functions are driving end-to-end process improvements, automating requisition-to-purchase order processes, considering alternative geographies and leveraging global business services and offshoring.
When to invest
It's equally as important to be careful about when and where you make your investments. The end-to-end procure-to-pay and sourcing methodology encompasses a wide array of processes which are enabled by people, information, and technology.
Begin with a diagnostic. What do you have, what don't you have, and what return could you deliver back to the business if an investment is made?
It generally takes about three years to cover all your external spend and get all appropriate categories "under management." Prioritize your initiatives and associated staffing based on those categories that are most fruitful and anticipate the greatest long-term value to your business.
Data drives strategy: investment in spend analytics tools will enable your category planning activities and help appropriately prioritize, and sell your efforts. In my opinion if you are going to make one information investment, this is the one.
There are a number of levers that can/should be utilized to support or offset the incremental procurement investment. Includingâ€¦
Pull-in Procurement Related Activities and Associated Resources and Budgets into the Center
Run Procurement as a Charge-back Allocation
Buy what you can't make - tap into External Consultants to accelerate savings
Card and Payment Programs
Pull-in Procurement-related Activities to the Center
In a non-mature, decentralized procurement environment, there is work being done, it's just fragmented, inefficient, distributed throughout the business, and generally less effective. It's amazing how many people love to engage and negotiate with suppliers. So find them.
Run Procurement as a Charge-back Allocation
There are a variety of charge back options available including per transaction, commitments to ROI, and per project chargebacks that can be utilized to enable functional investment.
Charge the businesses a cost per transaction (like a travel management company) to offset your current operational costs, drive efficiencies, and make other investments.
Promise a specific return on investment and in turn the business will allocate funds for the function. The key based on this scenario is "don't fail". Be careful to get business and finance buy-in on the savings assumptions and deliver on those promises.
Lastly, like IT functions, charge-out your resources on a project by project basis similar to an internal consultancy. That also has a way of aligning you and your stakeholders as they are paying for the activities that they deem most worthwhileâ€¦.
Companies often have mixed feelings about supplier-funded functions as they may work under the assumption that 100% of the value from our work should accrue to the business with which we support. I see their point, however, if you can't even get started to deliver that value, this may be an opportunity for you to find the resources necessary, and in part, increase and share in that return.
This framework has existed for some time in areas like Travel Management Programs, Contingent Worker Programs, Facilities Management Programs, and Managed Print Programs.
Travel Management Companies provide the travel booking technology (which automate booking, preferred provider and policy compliance, and online approvals), air, hotel, and car category management and negotiations, resources, and information and reporting. These services are funded by transaction fees and revenue from the carriers.
Similarly, Contingent Worker Programs are supplier funded and provide the automated technology for requesting, screening, and paying contract workers, they also provide category management information and expertise. Contract help is a significant area of risk, and while cost management is critical and enabled through these programs, more significant is the risk considerations associated with poor management of this portion of your workforce. Critical information from these managed service providers and their technology/reporting will drive compliance to background investigations and mitigate co-employment concerns.
Facilities Management providers will manage all facilities maintenance and repair related suppliers including utilities. These companies provide sourcing expertise to optimize the various suppliers and services and at the same time drive consistency and improvements in proactive maintenance to reduce long term costs.
Managed Print Services can bring in revenue by centralizing the current budgets for these expenditures, rightsize and upgrade the equipment, and drive demand reduction through automated print standards and elimination of abandoned print. The delta between the prior costs/budgets and the future costs can be reinvested elsewhere.
Take Advantage of Sign-on or Yearâ€“end Volume Rebates
Include annual or sign-on incentives as part of your negotiations. Negotiations can provide both rate reductions as well as annual incentives. Deliver the rate reductions back to the business, and keep annual incentives to fund your investment to drive incremental value. The risk in this area is that reduced volumes and next deal arrangements could diminish over time, and impact the long-term revenue assumptions for your function.
Obviously, you don't want your suppliers to fail, but if your function is providing critical compliance and SLA monitoring, consider keeping any associated penalties and make an investment to improve your function or support change management concerns for the failing supplier.
Vendor Funded Operations
Lastly, there are also some companies (one example, MetaProcure) which are supplier funded programs that provide all tactical activities and enabling technologies. This is a new business model, which eliminates transactional work, implements change management and delivers sourcing capabilities across categories. Internal resources can then focus on high-value solutions. This model is particularly beneficial for procurement organizations with limited bandwidth and budgets, because the upfront investment is minimal. It will be interesting to see how it evolves in our space.
Under certain circumstances it may make sense to augment your team by capitalizing on external consultants. Under the following circumstances it could make sense to utilize consultants
If you have a short term skill or category deficiency
If you believe the time it will take to get the team up to speed to deliver value will delay delivering significant or immediate savings to the business.
You have a language, geographic or cultural deficiency
Contingency based programs (consultancy takes a portion of the savings they delivery) can get you results without an upfront investment, however make sure the consultancy gets only a % of the first year savings, keep the shared savings below 20%, and cap the total value.
In a non-contingency based program, keep in mind the return should align in the same fiscal year the expense for their services is accruing. Make sure you receive at least a 9-10x return, and take advantage of their skills to model/train your existing staff for future efforts.
Card and Payment Programs
Card programs can deliver efficiency, cash flow improvement, and financial return to your business. T&E card programs generally deliver smaller financial return, however there is value in the information, efficiencies, and controls that can be realized by implementing a T&E card program.
Pcard programs however, provide greater financial return, support cash flow improvements, reduce low value high volume transaction costs, and are appealing to end-users to support speed to buy for low risk categories.
All that being said, there are significant risks and considerations that you should understand in embarking on implementing a true card program. Some highlights include:
Maintain policies and annual training for both cardholders and approvers
Automate and monitor online review and approval of transaction and card parameters (limit changes, mcc code exceptions, changes in approvers)
Automate processes to review active employees to cardholders and establish terminated employee process
Establish clear responsibilities and separation of duties.
Ensure suspicious activities and declined transaction notifications are given to broad audience including to cardholder, manager, administrator
Buyer-initiated payment automate payment processes, improve cash flow, and deliver the highest financial return. Here is how it works:
Internal payment processes and approvals remain unchanged.
The suppliers enroll in the program with the financial institution, and in return, are offered speed and automated payments (eliminated checks). The suppliers do pay a transaction fee based on the size of the transaction and overall relationship with that financial institution.
When payments are due to the supplier, a file is sent to the financial institution and they pay the supplier on your behalf.
At the close of the cycle, your company pays the financial institution for any payments made to all BIP suppliers within that cycle. Cash outlay is extended by taking advantage of the days remaining in the cycle and the days to pay the financial institution.
Annual rebates back calculated on a portion of the fees collected by the institution with other associated volume incentives.
Highlights on Iron Mountain Global Procurement
At Iron Mountain, we have capitalized on most of these opportunities with great results.
Direct and indirect headcount grew from 28 to 50 FTEs primarily as a result of investing in enhanced sourcing competencies, moving our outsourced operational capabilities to our captive in India, and capitalizing on indirect resources to support our travel, facilities management, and contingent worker programs.
Investment in information and enabling technology increased 3X in the areas in market intelligence, analytics and reporting, contract management, and RFX/Auctioning/Supplier Performance Management tools.
Incentives including rebates increased by 75%, and at the same time the function significantly increased savings and other incentive programs to benefit the businesses we support.
Overall, the procurement budget was reduced by 25% and the summary savings achievements were 7X ROI and 144% of goal.