World-Class Procurement Generating More Than Twice ROI

Oct 13, 2016MH&L Staff

What is in this article?:

• World-Class Procurement Generating More Than Twice ROI
• Investment

These companies have 18% lower operating costs than typical companies, and operate with 28% fewer staff.

Companies that have world-class procurement organizations enjoy a number of competitive advantages.

According to a new study by The Hackett Group, Inc. these companies generating more than twice the return on investment. They also have 18% lower operating costs than typical companies, and operate with 28% fewer staff.

One key enable of these organization is the ability to employ digital technologies  to transform service delivery, reduce errors, and free procurement staff for higher-value work.

“For many years, world-class procurement organizations achieved dramatically better results than their peers by focusing on process optimization,” explained Chris Sawchuk, global procurement advisory practice leader.

“Technology has long played a role in helping these top performers standardize, simplify, and streamline their operations,” Sawchuk added. “ But today, world-class procurement organizations are focusing much more broadly on digital business opportunities to maintain their performance advantage.  They understand that cloud, mobile, and other digital business tools can allow them to truly transform the way procurement functions, including forecast and plan more accurately, collaborate with suppliers more effectively, and improve the experience for their customers.”

The Hackett Group’s research revealed a total of five strategies used by current world-class procurement organizations to achieve superior results: embrace digital transformation; reallocate resources from transactional focus to value adding; leverage analytics-based decision making; adopt stakeholder/customer-centric service design and delivery; and re-skill the procurement function.

“In just the past couple years, we have seen world class procurement organizations shift towards a complete digital experience for their business users, including a true move to a paperless environment and the ability to work from anywhere on any device, “ said Robert Derocher, sourcing and procurement practice leader.

“The “Amazon effort” on procurement is real and we are seeing it play out with our clients,” Derocher added. “ As a result, companies are implementing new, integrated source-to-settle technology platforms, primarily in the cloud, and adopting new capabilities that enable the agility required by their customers and the marketplace.”

Metrics

World-class procurement organizations are those that achieve top-quartile performance in both efficiency and effectiveness across an array of weighted metrics in The Hackett Group’s comprehensive procurement benchmark.

Highlights from the study include:

As a percentage of total procurement spend, world-class procurement organizations spend 18% less on labor (by far the largest cost in procurement),

These companies also spend 13% more on outsourcing than typical companies.

They also generate a 9.5 times payback on investment versus 4.6 times for typical companies. (However this number is forecasted to rise only slightly for all companies over the next five years, as cost reductions and savings continue to level off.)

In addition to operating with dramatically fewer staff, world-class procurement organizations also allocate their staff very differently. They dedicate a significantly larger percentage of the overall staff to sourcing, supply base strategy and planning/strategic roles, and have a much smaller percentage of people focused on operations and compliance management.

Investment

Looking at investment in technology, these companies are investing in the new wave of cloud-based applications and services ranging from core end-to-end procure-to-pay (P2P) systems to process-specific applications such as risk forecasting and planning, e-sourcing and spend analysis, the research finds.  Cloud-based infrastructure and applications, virtual business and technology networks, and business analytics are coming together with rapidly transitioning employee and consumer bases that are increasingly adept with new mobile technologies and business models.

The research found that world-class procurement organizations spend 23% more on technology per staff person, and the investment yields real productivity gains at world-class procurement organizations, including 71% lower cost per order than typical companies. A high use of automation also allows procurement staff to devote more time to talent development and business performance-related activities.

World class procurement organizations also continue to selectively outsource in areas such as procurement system support, supplier help desks and market intelligence to tap into greater expertise, augment knowledge, and leverage the capacity and capability of third-party providers. This helps to increase agility by providing resources that can scale to demand and frees up procurement to focus on anticipating and responding to critical business needs.

World-class organizations are more effective in how they operate and deliver services. For example, the research found that their percent of transactions requiring post-issuance activity to resolve discrepancies in areas like order quantity, quality and pricing is often two to three times less compared to peers. Fewer errors mean that world-class procurement organizations have higher quality process execution across the board. These differences have real bottom-line impact: The high number of transactions for some transactional processes and the cost to correct errors means the total cost gap between world class and peer organizations can be in the millions of dollars.

Last but not least, world-class procurement organizations are nearly twice as likely to have talent retention planning in place, and see turnover rates that are more than 50% lower than typical companies, illustrating the ability of world-class procurement to generate outcomes that impact business performance.