2012 new research report - gep value trends: procurement strategy

© Copyright GEP 2012. All rights reserved.

GEP Value Trends: Procurement Strategy Industry Trends and Implications

First in a Research Series on Procurement from

Information Services Group (ISG) and GEP

Research Sponsor:

September 2012

2 © Copyright GEP 2012. All rights reserved.

Introduction

ISG conducted research from January 2011 through June 2012 with support from GEP. The purpose of this research is to provide insights to CPOs and other procurement executives and to give them a better understanding of some of the key issues facing other procurement organizations. Additional goals were to provide insights to steps that they might take to address some of these issues and to move their organizations to the next level in delivering value to their companies.

Respondents to the survey were primarily based in North America with 28 percent of respondents representing other geographies. Respondents included leaders from the financial services, healthcare and pharmaceuticals, business services, manufacturing, energy, government and public sector, media and telecom, retail and travel and transportation sectors. Fifty-nine percent of respondents were from businesses of more than $5B in annual revenue and respondents were generally CFOs, CPOs or their direct reports.

The research focused on three key aspects affecting the procurement function:

• Procurement Strategy: Key Challenges and Transformation Drivers

• Procurement Technology and Implementation

• Procurement Outsourcing

In this three part series, we will share insights from our research which will reflect the voice of numerous procurement leaders across several industries and can be an effective tool in benchmarking your own procurement organization.


Headlines from the Research: Most leading procurement executives believe that their organizations should be playing a more significant role in driving value in their companies. In moving toward a higher-impact role in their companies, leading CPOs are focusing on managing the procurement framework through:

• Sourcing Strategy

• Policy and Process Design to Improve Controls and Manage Risks

• Spend Governance and Transparency

• Transformational Deals

• Supplier Management

• Approach to Technology and Support

These are ambitious goals, and in many cases procurement organizations may try to take on more than they can do well, within their available resources and support within their companies. Enterprises spend 20 to 40+ percent of every expense dollar on external goods and services. Because procurement organizations try to take on so much responsibility, prioritizing activities is often a challenge, with many resources focused on lower-value activities. There are difficulties in freeing these resources to address the highest potential areas of impact to their organizations. Some of the general challenges that we have found among our clients include:

• Many companies lack the skills, expertise and tools to effectively manage spend across all categories, business areas or geographies

• Developing needed competencies internally is both costly and time-consuming

• Procurement can take an arms-length approach to vendors to the extreme, precluding opportunities to drive value through better vendor collaborations

• Some buyers tend to focus on areas of questionable value in negotiations

• Procurement professionals may not distinguish between approaches to commodity procurement and procuring strategic capabilities resulting in a cost or price focus, where this is a relatively minor component of the value sought from the procurement

• Many procurement professionals believe that they have an inability to take ownership of cycle times, especially during the contracting process due to their reliance upon other stakeholders (including legal and various approvers), and thereby often fail to achieve results within a committed timeframe.

These are key issues, and we hope that procurement executives will gain insights into how these might be addressed as a result of this report.


Survey Approach and Respondents Respondents to the survey were primarily based in North America with 28 percent of respondents representing other geographies. Respondents included leaders from the financial services, healthcare and pharmaceuticals, business services, manufacturing, energy, government and public sector, media and telecom, retail and travel and transportation sectors. Fifty-nine percent of respondents were from businesses of more than $5B in annual revenue and respondents were generally CFOs, CPOs or their direct reports. It should further be noted that respondents tended to be from organizations that participate in forward-thinking professional societies and are therefore likely to have a higher degree of awareness of more advanced trends in procurement. Organizations that do not actively participate in such societies may therefore be underrepresented in the survey.


Procurement Challenges and Procurement Transformation Drivers Procurement executives indicated that Resource capabilities, including “Gaps in Skill-sets” were the greatest overall challenge to their organizations, with a significant number of respondents indicating that business unit support was their top challenge. There is a clear relationship between these challenges, as appropriate skill sets are critical to winning the acceptance, and ultimately the support, of business units toward achieving more comprehensive ability to effectively manage spend across the company.

During ISG discussions with CPOs we have consistently heard that proactively addressing and adding value to the spend that occurs within various business units is difficult to achieve, often because procurement organizations are only brought into the contracting process at the time of contract negotiation, if at all. When procurement organizations are brought in, it is often after requirements have been defined, market analysis has been completed and a supplier has been selected, leaving procurement with the challenge of attempting to optimize a contract and mitigate risk with very limited time and leverage. A contributor to this challenge is the resource and skill gap to have the right talent to engage with the businesses proactively and to build strong peer relationships with economic and technical buyers. Those relationships and regular touch points help shape the strategies of defining requirements and approaching the market in a way that will lead to superior business outcomes.

The required skills to achieve these results, and to become trusted advisors to the businesses usually include the same types of skills that organizations seek from a consultant, including business analysis skills covering financial, process and market knowledge, and leadership attributes such as communications and change management skills that go far beyond what many organizations typically associate with a procurement skill set. Business units will only trust procurement to lead strategic business imperatives to the degree that procurement organizations demonstrate that they understand the context and challenges of the business, and are able to articulate procurement’s value proposition in the language of the business and not just in the language of procurement.

Other challenges articulated by procurement executives include analytical and transactional tools that will enable procurement organizations to better define and describe opportunities to the business, to track and manage outcomes, to relieve the amount of apparent “bureaucracy” and clerical work from both procurement and the businesses, and to more accurately demonstrate the business results achieved.

Surprisingly, “Achieving Cost Reduction Target” was the area least commonly cited as a challenge by procurement executives. This indicates that perhaps targets are commonly set at an achievable level for the organization, based on spend already being influenced by procurement. It may also indicate the goal has been an area of focus and improvement for sufficient time that procurement executives simply feel comfortable that it is more under control than other areas. Interestingly however, few procurement organizations tend to track cost reductions or savings on a realized or EBITDA basis, which would bring a much higher degree of unqualified acceptance of their savings contribution to the company and which would clearly be embraced by the CFO. ISG believes that this is a critical area for future focus for procurement leaders, but this point of view was not necessarily reflected by our survey.


In terms of spend influenced by procurement, respondents indicated significant headroom for improvement in addressing marketing, IT, consulting and professional services spend. These are often areas of high spend which tend to be managed within business units and can be more difficult to proactively address, consistent with our discussion above. (Even IT, which has traditionally been relatively centralized within the CIO organization, is increasingly migrating back out to the businesses as it adapts cloud, SaaS and BPaaS solutions for many of its requirements, thereby circumventing the dependency upon, and control by, IT organizations for successful implementation.) Strong domain knowledge is required to effectively address these areas, and price can often be a much less significant decision factor in selecting a solution than the perceived or real business benefits that a higher-quality solution can deliver over a more generic one. For example, marketing is generally less concerned with reducing its spending than it is with delivering superior brand recognition, customer loyalty and ultimately sales as a result of its spending. Similarly IT, consulting and many other professional services are purchased on the basis of business drivers other than cost, although businesses still need to achieve their objectives within their budget. This means that a high degree of business sophistication on the part of procurement professionals is an absolute prerequisite to being able to influence and improve spend in these areas.

Procurement’s Top Challenges

Source: ISG Procurement Technology and Outsourcing Trends Survey March 2012# Please rank the top three challenges that your procurement organization currently faces.

14%

16%

11%

14%

33%

12%

5%

18%

25%

20%

14%

18%

19%

9%

15%

20%

9%

28%

Ability to achieve cost reduction targets

Resource shortage - more demand than supply

Lack of transaction automation

Lack of analytical tools/capabilities

Business Unit support

Resource capabilities - gap in resource skill sets

Rank 1 (n = 57) Rank 2 (n = 56) Rank 3 (n = 54)


Procurement executives also showed a strong belief that there was a need for process improvement and vendor management approaches to drive better results. Process improvement is critical in several areas:

1. Procurement processes often are opaque to end users and stakeholders, with a lack of clarity in terms of what information and approvals are required, what steps are necessary to ensure that best practices are utilized in managing spend and controlling risk, and exactly how long all of this will take.

2. Procurement activities are often perceived as bureaucratic, with unclear turnarounds between when a requirement is provided to procurement and when a contract or purchase order can be executed with the supplier.

3. Delays in the process may often result from incomplete information from the requester, and variable turnaround times for reviewing statements of work (SOWs) or specifications, negotiation times and legal reviews.


4. Inconsistent processes often create perceived delays. For example, the end user may think a requirement is ready to go to contract or PO, and either a contract is executed outside of appropriate controls, or a review of the spend determines that additional steps unknown to the end user must be undertaken prior to the requirement being placed.

5. A large percentage of spend may simply never fall under a consistent approach to management or visibility.

Vendor management is, to a large degree, the greatest untapped opportunity for procurement organizations. There are multiple reasons why vendor management is both increasingly important and difficult to solve.

• Decentralization – Many strategic or critical vendor relationships are managed within an operational business unit, rather than through a central vendor management organization.

• Relationships cross multiple business units – For example a typical company may have relationships with IBM as an IT outsourcer, a BPO outsourcer, a consultant, a hardware supplier, an integrator and a software provider, with each role managed by different entities with limited coordination.

• Financial scale – Vendors have become increasingly important, with external spend representing nearly 47 percent of sales.

• Operational – Vendors have become more operationally and technologically integrated with core processes, presenting both greater risk and greater opportunity for value creation.


Increasing strategic alignment with the business units, and delivering on cost reduction targets are by far the top priorities for procurement leaders at this time. This priority was consistent between large and middle-market businesses. Delivering on cost reduction targets was a much higher priority for manufacturing than other verticals, and strategic alignment with the businesses was a much lower priority in the business services segment.


Future Outlook: Key Focus Areas

Source: ISG Procurement Technology and Outsourcing Trends Survey March 2012# What is your procurement organization’s key focus are for improvement in 2012?

5%

7%

9%

10%

11%

26%

32%

Developing analytical capability

Filling gaps in resource capabilities

Driving transaction automation

Addressing more spend under management

Driving business support for procurement

Delivering on cost reduction targets

Strategic alignment to other business

n = 57


Key Focus Areas by Organizational Size

0%

9%

10%

10%

15%

24%

33%

10%

10%

3%

4%

10%

28%

35%








$1 B - $10 B > $10 Bn = 50Source: ISG Procurement Technology and Outsourcing Trends Survey March 2012

# What is your procurement organization’s key focus are for improvement in 2012?


Key Focus Areas by Industry

Source: ISG Procurement Technology and Outsourcing Trends Survey March 2012# What is your procurement organization’s key focus area for improvement in 2012?

44%

11%

6%

22%

11%

0%

6%

40%

10%

0%

20%

0%

20%

10%

10%

30%

10%

20%

20%

0%

10%

33%

0%

0%

50%

0%

0%

17%








Manufacturing (n = 6) Business Services (n = 10) Healthcare & Pharmaceuticals (n = 10) Financial Services (n = 18)


Spend under management is generally a strong proxy for the influence that the procurement organization exerts on the broader organization. While organizations tend to define “spend under management” somewhat differently, ranging from a strong role in sourcing and contracting at the “more managed” end of the scale to simply reviewing contract terms and conditions or tracking spend on a PO system at the “less managed” end, this measure still is a good indicator of a degree of collaboration between procurement and other functions within the corporation.

Not surprisingly, our analysis showed that procurement had a very high degree of influence on traditional areas such as office supplies and travel, and relatively lower degrees of influence on more strategic areas of spend such as professional services, consulting and marketing, with marketing being the spend category where procurement had the lowest level of influence. Decision making around the latter categories tends to be more complex and less driven by price vs. qualitative or business impact drivers. The lower level of influence in these categories suggests that the organization’s perception of procurement’s skills and insights into decision drivers and how value is perceived in these categories may lag at this time.

Spend Under Management by Category

Source: ISG Procurement Technology and Outsourcing Trends Survey March 2012# What is the current percentage of spend under management for procurement at your organization with respect to the following categories? n = 57

63%

50%

23%

36%31%

37% 36%41%

13% 14%21%

11%

16%

32%

21%

14%

15%21%

22%

22%25%

23%

7%

4%

11% 9%

13%

11%7%

9%

13%

18%

18%

5%

5%

4%

14%

13%11% 7%

16%

22%

18%14%

14%

20%

15%

16%

13% 9% 18%

7%

18%14%

22%

0%5%

15%

4%

16% 17%11%

5%12% 11%

2%

GeneralOffice

Supplies

TravelServices

MRO Facilities &Real Estate

Logistics Direct Spend Temp Labor IT MarketingSpend

Consulting ProfessionalServices

81-100 61-80 41-60 21-40 1-20 0


In implementing procurement operations, most organizations tend to pursue a modest degree of customization, especially for indirect procurement. Areas of uniqueness tend to be confined to approaches to workflow approvals, most of which can be configured in common transactional procurement toolsets. The implications of this are that best practices refined by service providers can be rapidly leveraged, provided that internal organizations maintain the appropriate governance discipline regarding customized “enhancements.”


In developing strategies to bring their organizations to the next level to meet these challenges, both procurement technology and third party procurement services (more frequently referred to as “Procurement BPO”) are key levers being adopted by many companies, and these will be explored in detail in parts 2 and 3 of this report series.

Procurement Operations by Industry

0%

22%

22%

0%

53%

45%

56%

67%

47%

33%

22%

33%

Financial Services (n = 17)

Healthcare & Pharmaceuticals (n = 9)

Business Services (n = 9)

Manufacturing (n = 6)

Largely unique and strategic in nature - a product of high customization.

In line with the industry standard, but requiring a high degree of tactical approach.

Largely in line with the industry standard and operational in nature.

Source: ISG Procurement Technology and Outsourcing Trends Survey March 2012# How would you compare your organization’s procurement operations with the rest of the industry?


Conclusion We will continue to provide research into the increasingly dynamic procurement space.

• Strategic alignment to other businesses is a top priority for procurement organizations this year, followed by cost reduction targets.

• The relatively high degree to which Procurement organizations’ operations are in line with the industry standard practices suggest a significant opportunity to take advantage of standardized solutions in the marketplace.

• Obtaining business unit support is currently the biggest challenge for procurement organizations, followed by lack of transaction automation and gaps in resource capabilities.

• The professional services, marketing and consulting categories present significant scope for increasing the amount of spend under management, reflecting both the need for better business unit presentation and skills enhancement, and pointing to potential “value spots” for procurement service providers.

For more information about GEP, please visit www.gep.com, or contact us at [email protected]. Alternatively, call us at any of our locations listed below: Clark, NJ, USA London, UK Mexico City, Mexico São Paulo, Brazil +1 732-382-6565 +44 (0)20 3008 7471 (52) 55 4777-2251 55 11 2787 6393 Prague, Czech Republic Mumbai, India Hyderabad, India Shanghai, China (420) 233 025 400 91 (22) 6137 2100 91 (40) 4004 4212 86 (21) 6122 1238 About GEP GEP is a diverse, creative team of people passionate about procurement. We invest ourselves entirely in our client’s success, creating strong collaborative relationships that deliver extraordinary value year after year. We deliver practical, effective procurement services and technology that enable procurement leaders to maximize their impact on business operations, strategy and financial performance. Named a category leader in procurement outsourcing by the Black Book of Outsourcing, a Star Performer in Everest Group’s Peak Matrix of service providers, and to the Supply & Demand Chain Executive 100 for seven years, GEP is also ranked as one of the Fastest Growing Technology Companies in Deloitte's Technology Fast 500. Clark, NJ-based GEP has eight offices and operations in North and South America, Europe and Asia. To learn more, please visit www.gep.com. Unauthorized copying, distribution or re-printing in part or whole, without the written permission of GEP is strictly prohibited.

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