How World-Class Procurement Organizations Outperform

By Patrick Burnson, Executive Editor

August 18, 2014

World-class procurement organizations outperform their peers by striving to providing unique value beyond cost reduction, including becoming a trusted advisor to the business, driving supplier innovation, and focusing on risk management, according to new research from The Hackett Group, Inc. 

According to The Hackett Group’s research, world-class procurement organizations now operate at nearly 20 percent lower cost as a percentage of spend than typical companies.  They also have 27 percent fewer employees.  But world-class procurement organizations may have reached the limit of their ability to reduce costs, according to The Hackett Group’s forecasts.

World-class procurement organizations now generate purchased cost savings equal to more than 9x the cost of procurement, according to The Hackett Group’s research.  This is more than double the ROI generated by typical companies. But the ability of world-class companies to generate savings declined dramatically in 2014, dropping by more than 17 percent. The Hackett Group expects ROI at world-class procurement organizations to further decline next year.  At the same time, ROI at typical procurement organizations is expected to show a slight upward trend, improving by about 4-7 percent in 2015.

“The value proposition of procurement is clearly evolving,” said The Hackett Group Principal and Global Procurement Advisory Practice Leader Chris Sawchuk. “Top procurement organizations are running extremely lean. Our forecasts show that world-class procurement organizations are unlikely to be able to generate significant additional cost savings or ROI improvements next year. But they are expanding their value proposition in other areas, to better differentiate themselves.

“A key element of this is the focus on becoming a trusted advisor to the business,” said Mr. Sawchuk. “This is a role that procurement organizations have aspired to for some time. But getting there is challenging, because it’s a position that is defined by the stakeholders. Procurement needs to create an environment where the business appreciates and respects the value of the insights they can offer, and reaches out to them proactively for guidance before making key decisions. This is a much more complex relationship than one where procurement’s primary value is generated by delivering savings.”

With a renewed focus on “doing more with less,” many organizations are looking to achieve efficiency and effectiveness in their supply chains, says Becky Partida is a Research Specialist, Supply Chain Management, APQC.

She notes that Data from APQC’s Open Standards Benchmarking in procurement indicates that 27.5 percent of organizations have invested in Lean process development for their procurement functions, and nearly 13 percent plan to invest in Lean process development within the next two years.

The Hackett Group’s research identified five key areas where world-class organizations are adopting procurement strategies to differentiate themselves: being a trusted advisor to the business; driving suppliers to innovate; providing analytics-backed insights; protecting the business from risk; and employing an agile approach to staffing.

Trusted Advisor - World-class procurement organizations are much more likely than typical ones to be considered valued partners by the business, not gatekeepers or administrators. The Hackett Group’s research shows that they have a high level of involvement in planning and budgeting half the time, nearly 4x more often than at typical companies. To achieve this status, world-class procurement organizations make certain to proactively understand what drives the requirements of the business as opposed to simply facilitating the buying process. This makes it possible to reverse-engineer costs and explore potentially less expensive and/or higher-quality alternatives.

Driving Supplier Innovation - World-class procurement groups are very effective at building strong business relationships with key suppliers, enabling them to work collaboratively to reduce costs and sometimes even create customized and unique breakthrough solutions.  Procurement organizations have seen positive results from investing in formalizing the innovation life cycle, from idea formation and evaluation to development, productization, and continuous improvement. In fact, The Hackett Group’s research found that top-quartile companies now drive more than twice as much incremental revenue as typical companies through supplier innovation efforts, demonstrating the value of this supply chain strategy.

Providing Insights - World-class procurement works closely with the business during operational planning and budgeting periods to provide predictive insights on supply markets. This requires having the tools and expertise to turn data into actionable knowledge.  The ability to view spend data by suppliers on a global basis is a building block of more predictive analytics. World-class organizations have a significant level of information available nearly 90 percent of the time, more than twice as often as typical companies, The Hackett Group’s research found. They have also mastered this competency to the point that analytics, market intelligence and benchmarking are offered on demand as a service to key stakeholders.

Risk Protection - World-class procurement organizations have formal risk management programs to ensure supply continuity and regulatory compliance. Organizations with a formal and broadly-applied strategy for assessing risk have nearly 25 percent greater procurement ROI than those without them, The Hackett Group’s research found. This includes completing supplier risk assessments and working with finance and other stakeholders to determine the best mitigation strategy when risk exposure is identified.

Agile Staffing - World-class procurement organizations are distinguished by the way they attract, develop, and retain talent. Their efforts are not limited by geographical borders, as they hire globally and from other parts of the business, opening the door to new sources of skills and fresh thinking. Many are utilizing global business services, or more traditional shared services organizations, and have also established relationships with external entities such as business process outsourcers to support activities such as providing supply-market intelligence. They also provide greater training hours per associate, invest much more in retention planning, and pay higher salaries.