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Procurement masterysignificantly outpacing competitors in areas such as sourcing, category management and supplier relationship management can be immensely profitable. A recent Accenture study1 makes this clear: Procurement masters achieve 30 percent higher savings than companies with lesser capabilities. Yet masters procurement organizations cost about half as much to run. With such stellar potential, its surprising how many companies never move ahead with a major procurement-optimization effort. To some extent, their reticence indicates old school thinking: Procurement is basically a clerical functiona cost center. As long as were reasonably efficient, theres more benefit in devoting our strategic energies to other things. Right?
Not, at all. Like supply chain management in general, procurements potential to foster growth and reduce costs is significantly greater than most companies imagine. The mission of this Point of Viewa collaboration between Accenture and Emptorisis to help readers understand the nature of procurement mastery (how we define it), the rewards of procurement mastery (why the investment and effort are worth it) and, most germane to this paper, the tools and technologies that connect procurement mastery with high performance.
Contents
Procurement Insights, Research and Rewards............................................. 3 Four Technology Keys to Procurement Mastery.......................................... 5 1. How Technology Improves Spend Management................................... 6 2. How Technology Improves Supplier Performance Management...........................................................................10 3. How Technology Improves Sourcing.........................................................13 4. How Technology Improves Contract Management..............................17 High Performance and Procurement Technology........................................19
1High performance through procurement: Accenture research and insights into procurement performance mastery.
Master (16%)
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Survey results confirm that procurement masters achieve significantly greater financial benefits than the balance of the survey population. The right side of Figure 1 shows that survey respondents qualifying as masters achieve savings equal to 10 times the cost of running their organizations, based on controlled normalized spend from one year to the next. By contrast, the savings achieved by procurement low performers are only four times their costs (left side of Figure 1). In effect, masters spend half as much as low performers, yet they save 30 percent more. For a company with US$1 billion in controlled spend, this means a procurement master would incur costs of US$8 million and savings of US$82 million, while a procurement low performer would incur costs of US$16 million and savings of only US$63 million.
10x 4x $63 $82
Accenture also observed that procurement masters enjoy a significant edge in every one of the six procurement specialty areas that were used to segment respondents (Figure 2). For example, 1. Procurement Strategy: Masters are five times more likely than low performers to use a balanced scorecard approach and almost 20 times more likely to benchmark procurement performance against competitors. Masters also were found to be almost four times more likely than low performers to outsource one or several procurement functions. 2. Sourcing and Category Management: Procurement masters are 16 times more likely than low performers to have a dedicated sourcing analyst pool that provides support during the sourcing and category-management process. And procurement management is centrally led at 100 percent of masters organizations, compared to only 26 percent of low performers organizations. 3. Requisition to Pay: Seventy nine percent of masters have successfully implemented a common and automated requisition-to-pay platform, compared to just 3 percent of low performers.
1. Procurement Strategy 2. Sourcing and Category Mgmt. 3. Requisition to Pay (R2P) 4. Supplier Relationship Mgmt. 5. Workforce & Organization 6. Technology
4. Supplier Relationship Management: Eighty four percent of masters use a supply-base segmentation strategy that aligns approaches and types of relationships with specific supply markets and supplier characteristics. Almost no low-performing organization operates similarly. 5. Workforce and Organization: Procurement masters face fewer organizational challenges. And the challenges they do confront are generally less constrictive or severe than those faced by procurement organizations of lesser stature. This implies that a more effective operation structure encourages pursuit of greater savings and increased effectiveness. 6. Technology: The use of technology to support sourcing programs is 10 times more prevalent among masters than low performers. Plus, 87 percent of masters report that they harmonize master data and use common technologies to support their requisition to pay processes. Less than 5 percent of low performers do either.
$8 Master
Savings delivered
Figure 1. Comparing cost savings. On US$1 billion of controlled, normalized spend, procurement masters save 10 times as much as it costs them to operate their procurement organizations.
Vision, mission, core values Operating model Strategic sourcing Category policy setting Transaction processing Assisted buying Supplier performance mgmt . Contract management Having the right network of competent people Technology that delivers right information
Performance management Category strategic planning Category mgmt. framework Compliance monitoring Master data management Fulfillment Supplier development and integration Organization that facilitates working together Systems cover all functions: strategy to operations
Figure 2. The six procurement characteristics assessed for Accenture's High performance through Procurement research.
The Accenture survey makes it abundantly clear that procurement performance paysthat companies willing to invest in better processes and technologies are amply rewarded. Better processes are difficult to achieve but somewhat selfexplanatory. They are: collaborative, information-driven strategy setting; exceptional supplier relationship management; holistic procure-topay cycles, and so forth. But what about procurement technology? We know that procurement masters make better decisions because of technology and that they are more likely to leverage cuttingedge tools to make a financial and competitive difference. But what are the specific challenges that procurement technology can help companies surmount? What do those technologies look like? And how can companies quantify their value? The
remainder of this report looks at some of the key challenges faced by procurement organizations and the technology innovations available to surmount those barriers.
From a technology perspective, exceptional spend analysis is synonymous with two interconnected capabilities: maximizing organizationwide visibility and (then) tracking, monitoring and enforcing spend activity. At most companies, spend visibility is limited to spend by vendor and spend category. This is a complex problem that has only gotten more difficult as companies spend becomes more global. Nowadays, for example: y Spend data is generally dispersed across myriad internal data sources. The ability to draw and consolidate information from multiple locations in an efficient, repeatable manner is rare. y To maximize procurement efficiency, companies need highly accurate and granular classifications of spend data. However, the information available to them is frequently dirty or incomplete. y The most significant shortcomings are often outside the company. Vendors systems may be just as (or even more) 6
limited than those of their customers. Classification and naming schemes may also be different. Visibility problems undermine companies ability to produce actionable business insights. Instead without clean, consistent information on stock keeping units (SKUs), prices, stakeholder preferences and supplier performancethey develop ad-hoc (workaround) processes to manage sourcing events. These companies are similarly ill positioned to quantify savings opportunities to C-level executives, and thus to secure approval for budget increases or improvement initiatives. Not surprisingly, visibility problems sabotage companies ability to track and monitor spend activities and thus attain high levels of compliance. This is actually the heart of the spendmanagement challenge: Businesses must be able to identify opportunities and track savings. Have we chosen the most-fruitful spend-reduction initiatives? Did the program which
procurement leaders recently lobbied for actually produce the 23 percent savings they predicted? How much has rogue spending dropped as a result? What is the exact level (and impact) of leakage and what can we do about it? Most companies lack the datagathering and measurement abilities to answer such questions with certainty.
" Best-in-class applications go beyond providing basic spend visibility by zooming into real opportunities and tracking the results of savings initiatives for those opportunities. Users can make better decisions about what they are buying and what those items actually cost."
These applications extract transaction data from multiple systems and databases, and then represent (normalize) the data in a single format. Best-in-class applications go beyond providing basic spend visibility by zooming into real opportunities and tracking the results of savings initiatives for those opportunities. Users can make better decisions about what they are buying and what those items actually cost. They also can begin quantifying spend for specific commodities or categories, eliminating spend duplication across multiple suppliers, and doing a better job of leveraging discounts and early payment options (some suppliers offer discounts of up to 2 percent for payments made within 10 days). Simply put, spend analysis helps companies make better procurement decisions and build a stronger case for continuous improvement. Complementing these extraction and normalization capabilities are dataenrichment functions: intelligent
databases that consolidate transactions (for example, across parent-child organizations), cluster them (for example, across similar suppliers) and map them to various commodities, contracts and other sources of data. Armed with this capability, companies can discover when multiple business units are sourcing from the same supplier but possibly working with different price and payment terms (this scenario is common in companies that have grown through mergers or acquisitions). Together, extraction, normalization and data-enrichment capabilities help companies attain a single-lowest price for each supplier, along with new opportunities to capture volume discounts.
makers needs with aggregated, normalized and enriched data. Users can parse data in myriad ways to gain greater spend visibility and tap the improvement opportunities that greater visibility provides. Key metrics such as lowest potential cost, percentage of spend under management and suppliers commitments to their contractual obligations shift regularly. Thats why spend analysis also provides frequent (monthly or even weekly) data refreshes that help companies acquire, consolidate and present the latest spend, sourcing and contract information. Procurement organizations that rely solely on traditional data warehousing fall short in this area as well. Most data warehouse reports are insufficiently granular and wait times for the information are often lengthy. Delays also ensue when a different view is requested. Spend analysis avoids this problem by putting the reporting process in the hands of the
procurement organization instead of IT. Reports can be examined collectively rather than sequentially, thus making the company more responsive to market dynamics. Bottom line? Spend analysis provides data enrichment, consolidation, speed, accuracy, granularity and sophisticated, proactive reporting. A related spend-tracking/monitoring issue is contract compliance understanding the extent to which contractual obligations are being followed. Most companies have not implemented a contract management (CM) solution. But those that haveand integrated the solution with accounts payable informationenjoy particularly detailed data that are tightly associated with terms and conditions and service-level agreements.
Segmenting the supply base 1% Partnering with key suppliers on a risk-reward sharing basic 3% Central logging and proactively managing contracts Automatically tracking/reporting supplier performance 46%
84%
80% 8% 83% 1%
Master Low Performer
Figure 3: Percentage of survey respondents (masters versus low performers) that engage in, or perform, specific supplier relationship management activities.
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to make the right moves in response to the supplier information theyve acquired. SPM technologies also are key to the successful application of best practices and improvement methodologies, such as Lean Enterprise and Six Sigma.
" Consider an organization with a total cost of ownership (TCO)-based SPM system. When a supplier delivers a part, a first inspection is performed. If the part is rejected, extra costs are automatically assigned to the relationship, not just the part."
oin g
Ong
Supplier Assessment
On-going certifications Root cause analysis Continuous Improvement
Supplier Qualifications
Who? Meet standards? Risks?
B
o re ef
During
Figure 4: Supplier scorecards also become part of the equation ensuring that buyers can factor quantifiable supplier-performance levels into their purchase decisions. 11
practices. Green supplier management capabilities could even spearhead new component- and materialstandardization programs that extend the life of various products, while making them more scalable, reusable or recyclable. In a larger sense, you could say that increased compliance and (consequently) lower risk are the hallmarks of tomorrows supplier-management technology. Economically speaking, supplier relationships that seamlessly conform to internally and externally mandated rules and key performance indicators (KPIs) will provide a clear competitive edge. Monitoring and pursuing formal certification programs (for example, Lean Enterprise, Six Sigma, Supply Chain Operations Reference) become more automatic, which increases the value and decreases the cost of those programs.
Value tracking & budget integration with full control over non-compliance
Figure 5: Percentage of survey respondents (masters versus low performers) that engage in, or perform, specific sourcing and category management capabilities. 13
constantly refined. It remains intact regardless of turnover and can be shared across the enterprise. An audit trail of what has and hasnt worked is also kept. The net effect is that, as buyers shift from one category to another or new buyers join the organization, they can contribute immediately and meaningfully by leveraging embedded best practices. Even relative novices can quickly grasp a categorys sourcing dynamicsfor example, relevant suppliers and corresponding KPI scores, cost components/attributes and attachments. Inability to see beyond cost. Manual (spreadsheet) systems, and even some of the more-advanced solutions, dont provide the deep analytical information that sourcing professionals really need. As a result, item cost continues to be the sole basis upon which too many of their sourcing decisions are made. Its not unusual, for example, for a suppliers quoted unit price to be prohibitively high due to difficulties procuring a particular raw material. However, that same supplier might be extremely effective at processing the raw material. For this reason, it could be considered a worthy supply candidate if the buyer can purchase the raw material elsewhere and then leverage that suppliers production efficiency and lower manufacturing cost. Of course, without advanced sourcing analyses, none of this will happen. Unable to quantify non-direct costs and requirements, our hypothetical buyer will have little choice but to pay less (in the short term) but get substantially less in the long term. Sourcing it is not just about finding the best price. It is about finding the optimal mix of suppliers to meet all of the buyers needs based on price, performance, purchasing policies and supplier relationships, all in a highly dynamic environment (figure 6). Sourcing technology makes it possible to run hundreds of best-fit scenariosobjective pictures with far more detail than just acquisition
" Summary reports developed by leadingedge sourcing solutions provide both program and projectlevel metrics (e.g., number of programs run; number of events run; total and peritem spend; total and per-item savings)."
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cost. Basically, buyers define their specifications, business needs and preferred options. Suppliers respond with their unique advantages, competencies, prices and even alternative approaches (for example, bundle bidding). New acquisition avenues open up for the buyer, who is also capturing more information in the process. Leveraging the technology, he or she scrutinizes hundreds of complex what-if analyses in a matter of minutes and consequently makes far more holistic buying decisions. Longer term, the buyer has identified a sourcing allocation plan that balances price components with qualitative factors (for example, supplier scores by KPI) or location-specific constraints (for example, 35 percent domestic content for an international plant). In addition, suppliers appreciate the collaborative process and are more inclined to work with the buyers firm in the future. Lack of key performance indicators. Advanced analyses are essential. Without them, buyers have little choice but to overemphasize basic acquisition costs. However, advanced sourcing tools actually do more than gather and track purchase considerations. They also help buyers aggregate, organize and prioritize those considerations. Basically, key performance indicators (KPIs) are developed. Buyers use these KPIs to assess and quantify the relative value of hard and soft costs, such as: y Expedite fees resulting from a suppliers inability to deliver in a timely manner. y Risk to reputation resulting from a suppliers poor product quality and the impact on finished product. y Poor procurement decisions resulting from a dearth of buyers available to scrutinize and make purchases. Consider the many actions involved in analyzing supplier responses to requests for information (RFIs). Armed with the ability to capture and weigh quantitative and qualitative (business constraint and supplier performance)
data, buyers can easily create category-specific sourcing models that are as simple or as detailed as necessary. For example, a particular category model might show 20 pieces of item information and 10 elements of total-cost-of ownership information for a particular strategic category. However, it might capture only one data-point (most likely, price) for an indirect category. Unlimited numbers of unique, template-driven category structures can then be stored in a smart data library. This makes it possible for companies to make more and better decisions about a wider range of contracts and purchases. Theyre also better equipped to take a more commodity-driven approach to procurement in general, and to slice and dice data as needed to make better risk assessments, develop what-if scenarios and negotiate more effectively.
Supplier category and item level Qualification Quality On-time delivery Item attributes (i.e. tolerance)
Scenario Modeling
Budget Limits Award Splits Switching Costs Contractual Obligation Preferred Suppliers
Figure 6: Sourcing it is not just about finding the best price. It is about finding the optimal mix of suppliers to meet all of the buyers needs based on price, performance, purchasing policies and supplier relationships, all in a highly dynamic environment. 15
Superior Sourcing
Wolters Kluwer, a leading provider of business-information services, grew rapidly in the 1990s through several acquisitions. It subsequently moved from a holding company model to a multidivision company, with divisions acting autonomously. This change prompted a need for more formal, company-wide procurement processes that could scale with the business and reduce the cost of Wolters Kluwers US$1billion annual spend. Toward these ends, Wolters Kluwer created a shared-services strategic sourcing department and acquired additional technology capabilities in sourcing and contract management. The company also expanded its technology scope with advanced supplier-selection capabilities. These innovations made it possible for the company to develop more standardized, collaboration-intensive sourcing processes and templates, while reducing the effort needed to draft, review, approve and file contracts. The result is continuous improvements across the contract management and sourcing spectrum: y A more efficient contractmanagement process. y Fewer inadvertent contract lapses or automatic renewals. y Improved contract compliance. y Faster, more precise spend baselining and supplier consolidation. y Improved control of the contracting process. y More thorough contract reviews, resulting in more favorable terms and less risk. y Reduced administrative overhead. y New opportunities to leverage best practice templates. y Better visibility into events in progress. y Collaboration in parallel, rather than in serial.
Another up-and-coming practice is tighter control of prices and pricing opportunities during the sourcing and supplier-negotiation processes. Consider that most allocation decisions are made shortly after the conclusion of a sourcing event. But because price is executed at purchase time, a buyers actual cost may change due to fluctuations in commodity prices. In fact, the actual allocation often changes as market factor values change. Sourcing professionals soon will be able to use technology to specify a range for a particular market value, thereby obtaining allocations that align closely with best price. For example, as resin prices rise or fall, the best allocations across suppliers (Supplier A: 60 percent; Supplier B: 40 percent) should also change. New sourcing algorithms will make this possible, along with the ability to identify which factors/items/suppliers most dramatically affect allocations and costs.
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Sourcing skills, experience and leading practices make procurement opportunities clear. But contract management makes those opportunities real. And leading-edge technology is key to effective (costefficient, accurate, timely, insightful) contract management. Sourcing bids are not legally binding without a contract in place. However, roughly 80 percent of companies still depend on a manual contract management process, which nearly always results in contract delays. Collaboration across departments (for example, procurement, purchasing, legal, IT) also is compromised. And compared to procurement masters (who nearly always log and manage contracts centrally), manual users lack visibility into, control over and compliance with the sourcing awards. They simply have less understanding (and thus less control over) contract terms and conditions, service level agreements and amendments. Most simply follow a file-and-forget
approach: the contract is literally placed in a file cabinet, along with any amendments, and forgotten about until a problem arises. Inefficiency reigns. It also is common for companies contract-documentation mechanisms to not connect with their Enterprise Resource Planning (ERP) systems. As a result, business entities are unable to track all contract terms and conditions (pricing, service level agreements, performance and delivery guidelines) or to monitor compliance with internal and external (regulatory) mandates. This is crucial stepmaking sure that final purchases are compliant with prices and terms negotiated in the contract. Failure to do so makes it doubly hard to enforce compliance to contract terms.
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Efficiency and control also come together in one technologically advanced system. Imagine that the procurement organization needs its legal department to approve changes made to a contract. However, procurement only wants Legal to approve changes that deviate from approved company language. Procurement masters can make this happen quickly and accurately by using a template-based library of preapproved clauses within its contract management system. Without this capability, the wheel must be recreated each time there is a contract clause change. It also becomes less likely that compliance statutes will be adhered to. Improved supplier performance management is another byproduct. When a company and supplier forge a contract, both must approve its requirements and expectations. For example, is the buyer expecting the supplier to respond within 30 minutes of the first call? To make sure, the tech-savvy buyer can load average response times (by supplier or by category) into its contract management system, and thus have an increasingly vast and reliable library of key performance indicators. Per the above example, the buyer can set a baseline measurement to the contract value of, say, 30 minutes. If the supplier fails to meet that requirement, it receives an alert stating that the contract has been violated. In net, contract management is the final piece in the procurementintegration equation: seamless, enterprise-wide data flows that encompass the process and the relationship. Companies can drill down into spend to see how much is on and off contract. They are managing the entire process and ensuring the quality of the entire relationship.
" Procurement technology is all (and always) about visibility. With an automated enterprise content management (ECM) systemfully integrated with ERPcompanies have a single, easily searchable repository for all contracts."
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Research into achieving high performance through procurement confirms that huge disparities exist in the degree to which companies leverage technology. As shown in Figure 7, the six technology-enabled behaviors presented to survey recipients are deployed by an average of 70 percent of masters, but less than 5 percent of low performers. From the data presented in this Point of View, two broad conclusions are inescapable. The first is that high performancethe characteristics exhibited by companies that consistently outperform their peersis more likely to be attained by organizations that excel in procurement. The second is that procurement mastery is largely synonymous with the ability to leverage technology. Process excellence is certainly key. An aligned, committed workforce is vital. Seniorlevel buy-in is essential. And the importance of collaborative, winwin relationships with suppliers and other business partners is undeniable. However, technology proficiency is what spans the entire procure-to-pay cycle. No company can be a Supplier Relationship Management (SRM) leader or a procurement strategy leader or a sourcing leader without the tools to maximize each parts contribution and ensure enterprisewide synergy. Despite these conditions, there is a clear upside: compared to many systems, implementing leadingedge procurement technology is not unusually difficult nor does it take long to build out the infrastructure. In addition, value may be captured more quickly than with other technology
investments. One reason for this is the many forms that procurement technology value can take, including: y Capture savings year-after-year. y Bring more spend under management. y Optimize supply base in order to balance cost, performance and risk y Reduce maverick spending and drive down contract risk. y Maintain auditable supply and contract management processes. y Identify procure-to-pay process violations. y Improve deal quality and optimize renewals.
y Reduce sales cycle time. y Stimulate new product development with supplier innovations. This is not to say that implementing leading-edge procurement technology is a walk in the park or that any company investing in procurement technology will become a procurement master or high performance business overnight. However, its reasonably certain that, without a firm handle on todays and tomorrows procurement technologies, procurement mastery and high performance will remain little more than aspirations.
82%
71%
Figure 7: Percentage of survey respondents (masters versus low performers) that leverage various technology-based capabilities. 19
About Accenture Accenture is a global management consulting, technology services and outsourcing company. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the worlds most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. With 178,000 people in 49 countries, the company generated net revenues of US$19.70 billion for the fiscal year ended Aug. 31, 2007. Its home page is www.accenture.com.
About Accenture Supply Chain Management The Accenture Supply Chain Management service line works with clients across a broad range of industries to develop and execute operational strategies that enable profitable growth in new and existing markets. Committed to helping clients achieve high performance through supply chain mastery, we combine global industry expertise and skills in supply chain strategy, sourcing and procurement, supply chain planning, manufacturing and design, fulfillment, and service management to help organizations transform their supply chain capabilities. We collaborate with clients to implement innovative consulting and outsourcing solutions that align operating models to support business strategies, optimize global operations, enable profitable product launches, and enhance the skills and capabilities of the supply chain workforce. For more information, visit www.accenture.com/supplychain.
Copyright 2008 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture.
About the Authors Rob Woodstock is a partner in the Accenture Supply Chain Management service line. Rob has expertise with helping clients across industries to improve the performance of their procurement operations through process improvement, organization development and system implementation initiatives. Based in London, he can be reached at rob. woodstock@accenture.com. Kevin Potts is the Vice President of Marketing at Emptoris. Kevin works closely with customers, industry leaders, and the business and technology press to share the company's vision for how its innovation can accelerate profitable growth. Kevin has over 9 years of enterprise software marketing experience, including 7 years directly in the supply and contract management arena.
About Emptoris Emptoris is a world leader in innovative supply and contract management software solutions that empower enterprises to realize best value and accelerate profitable growth. Emptoris solutions are used by successful Global 2000 companies in every industry. Customers include American Express, Boeing, ConocoPhillips, GlaxoSmithKline, Kraft, Motorola, Owens Corning, Syngenta, and Vodafone.