If COVID-19 has taught us anything, it is that too many procurement organizations fall short when it comes to addressing unplanned sourcing events. If your organization still views procurement from a tactical standpoint…if you judge the function as simply “3-bids-and-a-buy” price negotiation and purchasing…then you may find yourself at a disadvantage and you could be losing out on significant savings and strategic contributions. The role of procurement has evolved substantially in an increasingly global business environment. Understanding your procurement organization’s maturity is essential to improving sourcing effectiveness and efficiency. Where your procurement team stands in its maturity matters.
To help companies assess where their team stands, from laggard to world-class, Corcentric recently hosted an on-demand webinar, “Addressing the Maturity Gaps in Procurement – Approaches to Improved Sourcing Efficiency and Effectiveness,” in which I was a participant, along with my Corcentric colleagues, David Pastore, Senior Director, Sourcing Operations and Mike Croasdale, Senior Director, Group Purchasing Organization (GPO). We were also fortunate to include The Hackett Group’s Chris Sawchuck, Principal & Global Procurement Advisory Practice Leader and Jonathon Fehring, Director, Procurement & P2P Executive Advisory.
When it comes to procurement maturity, the numbers don’t lie.
The Hackett Group’s 2020 Procurement Benchmark measured how best-in-class, mature procurement and sourcing organizations stood in contrast to their peers and the results are striking: Best-in-class organizations realized:
- 8 times higher spend savings than their peers
- 17% lower sourcing cycle time
- 66% lower supply base size
- 2 times higher ROI
For many companies these benefits are tied to “service partnering,” working closely with third-party providers, from BPOs, like strategic sourcing companies, to GPOs, that function as a service arm of the procurement organization. Working with these third-party service partners provides benefits far beyond tactical functions like negotiating prices and terms, especially for less mature organizations. These benefits include, but are not limited to, access to technology and innovative ideas, supplier consolidation, and the ability to achieve economies of scale. GPOs also make the buying process easier, avoid supplier cost increases, and ensure benchmarking saving results.
So, when is it time to engage with a service partner?
Procurement organizations may face certain sourcing challenges that precipitate their engagement with a third party, including:
- Subject matter expertise gaps, with less category experts and more generalists
- Increased complexity as responsibilities increase
- Strategic sourcing teams are stretched too thin
By leveraging indirect GPO programs or working with an outside sourcing resource, procurement can dramatically improve realized savings for tactical sourcing and tail-spend.
What’s your organization’s maturity level?
How your procurement and sourcing function is viewed by leadership, stakeholders, and suppliers is very much tied to the role it plays within the organization. Many organizations still view procurement at its most tactical level, as a purchaser and price negotiator with little impact on the organization’s growth. But as procurement moves up the maturity scale, that perception…and procurement’s role, changes. When we look at the maturity scale for procurement organizations, we have identified four levels of that maturity:
- Laggard – This level is transactional in nature, focusing on the tactical function of purchasing with little to no contribution to strategic involvement. Reactive in nature, this level often still uses manual rather than digital processes and lacks substantive metrics that can be tracked and reported. At this stage, the Laggard may even have a negative impact on the organization.
- Traditional – Moving up one level still reveals a mainly tactical focus; however, those at this stage do assess the market prior to purchasing, utilize some level of automation, and may measure simple metrics. Less reactive than the Laggard, this level still has low impact when it comes to helping the enterprise reach its goals.
- Augmented – More proactive, this level is considered to play a value-added role in the company. Where the two lower levels have minimal involvement with executive stakeholders, this level gets executive support and investment. Likely fully automated, this level utilizes data, both internal and external, to derive market intelligence. With TCO metrics defined, measured and leveraged in decision-making, augmented procurement definitely plays a role in moving the business forward.
- World Class – Once a procurement organization reaches the top of the scale, it then plays a significant strategic role in the organization commanding a seat at the table with other stakeholders and even the C-suite and Board. The staff is composed of highly qualified professionals with an organizational structure balanced with strategic and tactical roles, and have a laser-like focus on higher-value spend management activities. Technology is utilized in every function, resulting in metrics that are well defined and often drive cross functional business decisions.
Regardless of where a business falls on the maturity scale, however, there is usually a point where procurement’s core competency is maxed out. Whether that is due to uncontrolled tail spend, a growth in niche categories, a need for improved management of indirect spend, or other issue, that is the point where a company should look to leverage external resources like a strategic third party and/or GPO.
Download our on-demand webinar to discover how to move your procurement and sourcing organization up the scale.