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2 PROCUREMENT
Procurement Transformation: A Holistic Approach to Best Practice Procurement
A reliance on systems and technology alone will not provide optimum business results. A holistic approach that places human expertise at the core of the procurement model is a requirement for world-class procurement.
http://laub.ASCET.com Richard Laub Rob Woodstock Martin Sjberg
Accenture

Imagine a self-financing solution that could transform your companys procurement capabilities, realize savings, and sustain improvement over time. By combining human performance with strategic sourcing, process excellence, and deep category knowledge, procurement transformation will help companies realize greater benefits from their procurement programs. Just a few years ago, e-procurement was viewed as the simplest route into the brave new world of e-commerce and, in terms of balancing risk against potential benefits, a no-brainer. But in a recent survey with 30 eprocurement pioneers, Accenture learned that many of these early adopters were still in the pilot phase of their implementations. Even the few that had fully implemented their systems were still significantly short of their original usage targets. Despite admitting to some substantial cost overruns, particularly in the area of e-requisitioning, most of the companies surveyed expressed satisfaction with the progress they had made and the savings they had realized, and were confident that they would ultimately achieve their original objectives. Accenture found only one organization out of the 30 surveyed that admitted their e-procurement initiative had completely failed to meet expectations. Despite these optimistic findings from pioneers, the fact that so few had moved beyond the pilot stage meant that the jury was still out on key aspects of the e-procurement case. This has done little to dispel a growing perception that the enthusiasm for e-procurement in the late 90s was based

on a naive trust in the ability of a magic bullet to resolve complex and long-standing procurement problems. The same could be said of strategic sourcing. By focusing on total cost of ownership and taking into account quantitative and qualitative processes, as well as service improvements, strategic sourcing has been shown to facilitate better internal and external customer service. These improvements not only reduce costs, but also directly increase revenue. However, the suspicion has grown that many strategic sourcing programs have delivered results that, while initially impressive, are unsustainable in the longterm. This is due at least in part to a failure to transfer the expertise of the external consultants, who renegotiated the original contracts, to the clients own procurement team. These impressions were confirmed when Accentures recent survey asked respondents what they could have done differently. Many of the companies interviewed actually became involved with e-procurement in response to senior management pressure to do something almost anything with an e in front of it. So, business cases were

often limited or nonexistent. For example, the study concluded that companies focused on building working catalogs, rather than on ensuring that underlying supplier contracts would produce a compelling business case, and auctions resulted in business failure even though the technology worked well. The report argued that the key to success lies, as always, in being businessdriven rather than technology-driven. Most significant was the recognition that these early e-procurement initiatives had often run into trouble in the implementation phase resulting in cost overruns of 20 to 30 percent of the implementation budget, which were already 40 percent or 50 percent of the total because they failed to recognize the human factor. They had underestimated or ignored both the fundamental contribution made by human expertise to the procurement process and the potential disruption e-procurement implementation could wreak on organizational structures. This does not mean that e-procurement cant deliver valid, measurable benefits. E-Requisitioning offers the potential for increased contract compliance, increased buyer productivity, and better quality information. Similarly, e-sourcing has delivered improved market intelligence, reduced purchase prices, and compressed cycle times. On the downside, as we have witnessed, are the very real problems encountered in implementation. In the case of e-requisition-

Richard Laub, a partner in Accentures Supply Chain Management Service Line, oversees the companys procurement work in Europe. He joined Accenture in 1999 and has worked on multiple procurement engagements across a variety of activity sectors. He can be reached at richard.laub@accenture.com. Rob Woodstock is a senior manager in Accenture's Supply Chain Management Service Line, focusing on procurement. Rob's experience in procurement spans outsourcing, e-procurement, and strategic sourcing. He has delivered a number of large-scale procurement programs over his nine years at Accenture, and can be reached at rob.woodstock@accenture.com. Martin Sjberg is a manager in Accenture's Supply Chain Management Service Line in France. Most recently, he worked in the Accenture Supply Chain Center of Excellence in London on sourcing and procurement. He can be reached at martin.sjoberg@accenture.com.

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personnel strategy requires the development of an organizational structure that is both Results category-focused and capabilities-driven. In such a context, technology still has an important role to play, but only to the extent Set aggressive Processes that it supports and enhances the ability of targets to drive the Target Setting and Performance Monitoring need for change the organization to deploy, support, and Strategic Sourcing Requisitioning exploit the buyers expertise. Increasingly Realize benets Supplier tight financial resources must be focused on through best Strategy Contracting Ordering Receiving Paying Mgmt. practice sourcing Development the option that is most likely to deliver the Development and requisitioning greatest sustained benefit, and technologies must be matched to the needs of specific Enablers spend segments. With senior management Sustain benets People no longer dazzled by the e factor, funding by developing best -in-class capabilities Organization Systems will only be available for projects that promise measurable results in rigorously Deploy buying resources Recruit, train, and Equip these resources with developed business cases. Moreover, those optimally in the organization develop the best accurate and timely information to promised results will only be delivered if the buying resources support superior decision-making focus shifts from simply making the technology work to achieving the rapid user Figure 1 A procurement transformation program rests upon re-engineering all the drivers of procurement value creation. adoption on which they depend. Accenture has coined the term procureing, implementation costs can amount to as supplier and customer adoption, supplier ment transformation to describe this holismuch as 70 percent of total cost. Unforeseen content integration, and integration with tic approach. Whereas strategic sourcing or underestimated problems interfacing with their own ERP systems. and e-procurement deliver step changes in legacy systems are the most common cause In light of the growing body of research performance (which tend to fade over time of difficulties. Despite these technical proband anecdotal evidence, there is an urgent since they fail to sustain the best practice lems, the most intractable difficulties seem need to rebalance the procurement value processes they are based on). Real transforto center on people issues. A total of 21 percreation model, replacing what has become mation occurs when an organization invests cent of the companies surveyed reported a traditional focus on one-off systems or in recruiting and developing top-flight user acceptance difficulties, while many strategic sourcing initiatives with a holistic professionals to manage its categories. more acknowledged that users take far view that places the human factor at its To that end, procurement transformation longer than expected to embrace and adapt core. Such a model would include, as a key starts with an experience-based diagnostic to new technology. Given that the majority resource, highly skilled buyers with expertthat is designed to identify and prioritize of the companies surveyed had not ise in procurement processes and deep cost-saving opportunities. The diagnostic is advanced beyond the pilot stage, more attencategory knowledge. The role of the organused to assess the procurement capability of tion needs to be devoted to cultural change ization would be to deploy that resource to the organization in terms of its processes, issues and change management procedures maximum internal and external effect, human resources, and organization strucwhen projects advance to full implementausing technology to provide the necessary ture and systems, as well as develop the tion. Even then, e-requisitioning systems selinformation for the procurement team to business case and define an implementation dom fully address more than 20 percent of exploit its expertise and enhance its plan. That intensive eight-week phase is the an organizations indirect spend and deliver own productivity. preliminary step to prepare for a 15- to 24benefits that are difficult to quantify. This expert buyer model, which combines month implementation, in which strategic Similarly in e-sourcing, the area where process excellence with deep category sourcing and capability development the companies in Accentures survey seem knowledge, demands that buyers focus on a proceed in parallel. In essence, strategic to have achieved the most success initially, limited set of categories and are somewhat sourcing drives the realization of the benethere are real concerns about an increasing protected from operational demands. fits identified in the business case by applyreliance on auctions impacting supplier relaSimilarly, the value of their more on the Web ing successive waves of best tionships, and whether price benefits are expertise can only be practice sourcing processes. Read more about best practices sustainable over the long-term. Even commaximized when categories in Better Metrics Improve These savings in turn fund the panies that had sought to share costs and requiring similar buying tech- Performance by Larry Lapide development of best-in-class risks through participation in e-marketniques are grouped together. It et al. in this book and on the capabilities, which ensure that places continue to encounter difficulties of follows that a successful Web at lapide.ASCET.com the benefits are sustained and

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Procurement Transformation Best practice sourcing process + Process enabled by e-sourcing solutions + High-caliber buyers deployed optimally Enabled Strategic Sourcing Best practice sourcing process + Process enabled by e-tools - Cycle time reductions - Better information - Automated transactions Traditional Strategic Sourcing Best practice sourcing process - Total cost of ownership - Multifunctional team

Procurement Transformation

Degree of Transformation

Benefit

Enabled Strategic Sourcing

Traditional Strategic Sourcing Benefits may fade over time due to the difficulty of sustaining the best practice process Time

Figure 2 The procurement transformation journey combines strategic sourcing with the development of world-class procurement capabilities to sustain benefits over time.

8 weeks Diagnostic Identify and prioritize opportunities, develop the business case, and dene the implementation plan Diagnostics

15-24 months Strategic Sourcing

Capability Development

Strategic Sourcing Realize the benets of the business case through applying best practice sourcing processes in successive waves

Capability Development Sustain benets by developing best-in-class capabilities, creating the right organization structure, and maintaining program with effective system support.

Figure 3 The procurement transformation delivery model begins with an experienced-based diagnostic,
followed by the parallel delivery of savings and capabilities.

further enhanced in the longer term. Not the least attractive aspect of the approach is that, if correctly managed, it should be entirely self-financing. The purpose of the diagnostic phase is to

develop a transformation plan tailored to the specific needs of the individual organization. As such, it comprises detailed analysis of the total spend portfolio and of the organizations procurement capabilities in

terms of its processes, organization and human performance, and technology, including its existing e-procurement systems. That analysis provides the basis for the identification of potential improvements and the means by which those improvements may be realized. This forms the basis for the development of a business case and implementation plan. After the initial diagnosis phase, the client can then structure the program according to the identified opportunities, choosing either to embark on the full transformation journey or to focus the program around a few key modules. Either way, the program is driven by the business case and is focused on results. Once the diagnostic phase is complete and the recommendations accepted, strategic sourcing and capability development run in parallel throughout the remainder of the transformation project. On the strategic sourcing side, the focus is on total cost of ownership where commodities are prioritized and executed in successive waves of spend categories as part of a coordinated program, rather than a series of line projects. In

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the specific area of supplier development and management, the aim is to identify and prioritize the relatively small number of suppliers that have the most significant impact on cost and service performance. Supplier confidence and cooperation is best fostered by the organization that is willing to change and improve its own performance; there shouldnt be any sacred cows and organizations should embrace out-of-the-box thinking. Key to the capability development phase is the development of best practice target setting and performance monitoring processes, which will ensure that the realization of previously identified benefits are tracked and

participation and agreement of all other levels within the organization. Target setting and performance monitoring provides the framework where organizational design, human performance, and systems issues can be addressed. The optimal organization for procurement transformation is one that is based on spend segmentation and is logically designed around these segments. The resulting structure gives the required focus on categories and enables the implementation of specific solutions by category. Such an organizational design allows for proper identification of key processes and tasks, and in turn

Arguably the most important parameter to measure is the organizations ability to learn, change, and continuously improve.
sustained. The ultimate aim must be to ensure common goals by developing measures that are consistent both vertically and horizontally across the organization. Arguably the most important parameter to measure is the organizations ability to learn, change, and continuously improve. Procurement transformation is a process that demands the involvement, commitment, and sponsorship of senior management, and the feeds into logical roles and job descriptions. It recognizes that no one organizational model can meet the needs of all organizations or, indeed, the differing needs within any one. The design also strikes a balance between external leverage and internal responsiveness. Most importantly, by creating a category-focused model, it provides the environment within which buying expertise can be developed.

That buying expertise is the focus of the human performance component of capability development. Its aim must be to attract, retain, and develop the best people by determining the competency levels needed for the different roles within procurement, identifying where gaps exist between current and targeted levels, and developing the necessary strategies for filling them. That requires the early involvement of the human resources department to ensure consistency with wider policies and procedures, and an objective assessment of capabilities by neutral and experienced outsiders. It also requires strong and effective communication in order to carefully manage expectations. Finally, there is no suggestion that any of this can be achieved without an investment in systems. However, the aim must be to determine how to best leverage the current technology investment, and to take advantage of new technology options. System investments need to be selective and based on rigorous business cases. The overall aim is to increase the effectiveness of the expert buyer through the provision of better information and more effective tools, while automating transactions and reducing the need for human involvement in low-value tasks. I

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