June 26, 2013
Many organizations are undergoing Procurement Transformation processes with two – to four-year maturity cycles. To help executives plan and lead such initiatives, as well as help those who are contemplating significant Change Management initiatives, we have come across several common challenges and areas of interest and confusion. As a result, we thought it would help our clients and readers if we devoted a series of blog entries to the topic of Procurement Transformation.
This first entry, Why Now?, presents the definition of Procurement Transformation based on initiatives currently underway across various industry sectors and examines the business drivers and priorities for these initiatives. Subsequent blog entries will address:
• Organizational Change
• Change Management
What is Procurement Transformation? Transformation generally implies a change from one form to another where the goal is to end in a better place than you started. Within a procurement organization, the use of the word transformation describes changing more than just one or two processes; it reflects an overhaul of the existing function with emphasis on people, process, technology, and compliance.
While many CPO’s have made substantial progress in advancing procurement as an enterprise strategic enabler, the majority have not yet achieved significant reform with a noticeable, scalable, and sustainable impact on the bottom line.
What does Procurement Transformation look like? In a modern enterprise, procurement transformation consists of a series of initiatives designed to holistically integrate the following components into a cohesive procurement strategy:
• Value-added shifts in roles and responsibilities
• Process Optimization and Automation
• Policy Creation and Compliance
• Technology Application and Integration
• Change Management and Communications • Master Data Management
• Spend Visibility
• Supplier Information Performance Management
• Suppler Risk
What is driving the need for change? Enterprise-wide forces that drive the need for change include: acquisition, global expansion, faster innovation cycles, and the need to consistently improve financial performance. In addition to these universal forces, we have observed the following contributing factors:
Increased Focus on Procurement—Procurement departments already tasked with savings that positively affect the bottom line are now challenged with creating new revenue opportunities. Although this is still a fairly new trend, we suspect it is one that will continue to grow. Additionally, the procurement team is tasked with going beyond manual data entry into requisition. This team is asked to lead, to use its visibility in the relationship between the business owner and supplier, to understand procurement policies and help the business owner comply with these policies, and to identify opportunities that are then communicated to the Sourcing department.
Increased Accountability—In the early days of procurement transformation, the focus was on process redesign and automation. Today, the automation of policy changes and the compliance with those policies has become critical for increasing spend under management and ensuring accountability for success.
Organizational Readiness—Many companies launching procurement transformation initiatives in 2012 and 2013 were founded in the 1980s. For these organizations, it is the right time in the organizational lifecycle to consider shifting away from manual processes, in order to operate more strategically. One CPO mentioned she has been talking about a transformation initiative for three years, but her company hasn’t been ready to devote the time, resources, and focus to the initiative until recently.
Technology Availability—Procurement applications that automate requisitions and purchase orders have been around since the early 2000s. It wasn’t until the middle of the decade that the industry saw the emergence of robust, fully developed applications for Spend Visibility, Contracts, and Sourcing. These new applications allow for improved data management, integration between purchasing and contracts, and automation across all functions within the procurement department. We have finally reached a point where procurement leaders have the confidence in the tools to achieve meaningful change across the enterprise.
Technology Competition—The U.S. market is flush with procurement application providers, including companies from Europe that have recently entered the U.S. market. Over the last three to four years, the industry has seen an influx of procurement application companies from overseas. Greater competition has led to increased awareness and demand for enhanced application functionality, and now, CPO’s have a plethora of technology resources that range from specialized application providers to companies offering a full suite of integrated modules.
Common Transformation Goals: What are the expected results of procurement transformation? While business drivers vary widely, most procurement executives share a common set of goals:
• Define Savings, Visibility, Risk, and Compliance
• Lead the enterprise to bring more spend under management to achieve Savings, Visibility, Risk, and Compliance Targets
• Align the Internal Customers and External Suppliers
• Establish a procurement team as a strategic business enabler for internal and external stakeholders; shift daily activities from tactical to strategic
• Obtain visibility into enterprise-wide spend at “dollar one”
• Identify opportunities and new revenue streams
Enable the procurement team to enforce procurement and contractual policies and procedures and partner with Accounts Payable and the Treasury to optimize cash flow and cycle times.
Are you looking for suggestions on how to get your procurement transformation initiative started on the right track? Contact us directly at email@example.com.
Manager, Procurement Optimization
The Shelby Group