In today’s competitive market landscape, simply having a centralized procurement organization is only the first step to better managed supplier relationships and spend. Leading organizations are quickly realizing that procurement and sourcing groups can offer far more value than tactical support. World-class procurement groups aren’t focused on processing POs and fulfilling orders. Rather, they’re focused on supporting each business unit at a strategic level.
Enter the role of Procurement Transformation
Procurement transformation is becoming an increasingly popular practice that companies in all industries are pursuing in their efforts to systematically reduce operational costs, streamline purchasing activities, and derive increased value from their procurement team. The process involves assessing existing operations (people, processes, metrics, tools, and technology), articulating the ideal end-state, developing a strategy for achieving initiative objectives, and implementing those changes – all with the goal of leveraging procurement for continued competitive advantage.
Why is procurement transformation occurring more frequently among best-in-class, innovative companies as well as more tactical procurement organizations?
Historically, organizations would pursue a procurement transformation as a reaction to other needs. Quickly growing companies may seek transformation assistance as a way to get a handle on their purchasing operations. Whether it’s due to a recent acquisition or a company merger, rapid growth creates the need to change the way an organization operates to allow for scalability, replication, and traceability of processes. It also increases visibility into best practices applied when managing company spend. In the case of a merger, this coming together of two disparate organizations and sets of procurement rules/practices creates the need for a similar type of evaluation and design processes to merge the needs of the newly combined company to a standard set of operational best practices to be followed by all. Sometimes, the need for procurement transformation is identified in just one particular area (such as staffing, expertise, or technology) to effectively manage contracts or corporate transactions.
More recently however, organizations are preemptively seeking transformation services to stay ahead of the curve and ensure the ever-changing spend management landscape and associated technologies are being leveraged. This is becoming the case due to the financial potential of having a best-in-class procurement organization. Optimizing the procurement function preemptively and reactively creates a tangible bottom-line impact while also improving processes and better enabling the achievement of strategic objectives.
The financial impact of a well-run procurement organization can be realized in many different forms:
- Increasing spend under management will reduce the amount of rogue spending considering the added filter(s) that procurement provides before money is spent.
- Centrally managing contracts enables the team to take advantage of rebates and avoid financial penalties by managing and tracking terms, conditions, and financial incentives.
- Implementing a standard strategic sourcing practice that requires all expenditures over $50K to go through a full strategic sourcing RFP process works to reduce costs through a thorough evaluation and negotiation process. In the end, a dollar saved by procurement has a higher financial value than a dollar earned in revenue when you consider the overhead associated with business development.
While procurement’s tactical focus has allowed them to achieve their goal of managing purchases and cutting costs, solely focusing on tactical efforts is severely limiting procurement’s impact. More companies are choosing to take transformative measures to evolve the function. In the next part of this series, we’ll explore the pieces of the procurement puzzle that must be assessed when capturing the current-state ahead of a procurement transformation Initiative.