CFOs continue to feel pressure to reduce costs and maximize available capital
As reported by Deloitte in its Q4 CFO Signals survey, improving finance’s ability to be an effective partner to business units continues as a top priority and challenge into 2013. Among CFOs’ top worries is how to help facilitate growth through funding the development of innovative new products and services – both internal and external facing.
Translation: CFOs will continue to feel pressure to reduce costs and maximize available capital. This isn’t news by any means, but what is notable is that CFOs will continue to overlook procurement of “indirect” goods (those which make production of goods/services possible, but not raw materials) as an opportunity for material savings.
According to the Hackett Group, every dollar invested in the procurement function can yield up to three dollars in spend savings. Our customers who outsource or co-source the procurement function typically see between 10% and 15% savings. So why would a CFO overlook such an obvious, significant source for savings? The general perception is that, while such savings are achievable and traceable in the procurement of “direct” goods (those core to product/service delivery, e.g., raw materials), identifying and tracking those opportunities in indirect procurement is very difficult.
But it needn’t be. Therein lays the value of the sourcing maturity model, a must-have for any CFO looking to pinpoint avenues for continuous savings. Examining the model and the characteristics of each level will help to analyze a company’s sourcing and procurement practices. Coupling this with an interview process of key players involved and spend analysis will help a CFO determine his or her company’s current maturity ranking.
Once it is determined where a company fits in on the ranking scale, the process of determining potential for savings becomes objective and fact-based, rather than based on gut feel and experience. This exercise matters because it can quickly and sustainably lead to new funds that can be spent on strategic, innovative projects.
In this two part series, I’ll first examine the ranking scale, and then look at the interview process, detailing who to talk to and what to ask to get the answers you need.
So let us begin with the attributes that are considered while making a determination of maturity. They can be broadly classified into:
Enterprise awareness is a measure of visibility that the C-suite has to the actions and successes in sourcing and procurement. In organizations on the lower end of the maturity model, the CFO’s office does not expect, nor examine, any savings from sourcing and procurement. In the best-in-class organizations, not only are targets set at a business unit and P&L level, but they are on the agenda of board meetings and quarterly earnings reports. You must have buy in at the top to achieve your goals.
The attributes that contribute to enterprise awareness are:
- Spend under management: Determine whether your sourcing, contracting, buying and spend decision-making are influenced by procurement professionals. Compare that figure with how much of the enterprise spend gets penetrated through partnerships with business units and stakeholders.
- Spend under management can range between 15% (on the lower end) to 85% on the highest end.
- Linking of savings targets to business outcomes: Any savings achieved at the business unit or;
- P&L level must translate into an increase in earnings-per-Share, operating profit and working capital of the organization.
- Use of best practices: Of course, there are best practices in the industry on people, processes and technology but determine if your company is aware of these practices and if they are being implemented across the organization. You will be surprised at how often we see a major divide between awareness and actual implementation.
Visibility Of Spend
This is about whether an organization is aware of how much they are spending; with whom are they spending; on what they are spending; who within the organization is spending; what opportunities exist to spend smarter; and how spending habits can be transformed. The four attributes that should be considered are:
- Spend classification: Create a common taxonomy to use for classification of spend. Also, instill quality assurance processes and implement monthly checks to ensure the taxonomy is accurate and done as planned.
- Spend analytics: It’s imperative for your organization to study the classified spend and to run reports and analytics on it. In doing so, CFOs can track spend matrixes by source and commodity in order to find synergies and opportunities.
- Supplier dynamics:Don’t miss opportunities to align strategic supplier engagements for harmonization and maximizing return on your contracts. Fragmentation between suppliers and buyers can lead to lower ROI.
- Opportunity identification: Building from my first tip in this category, double check that your organization uses the intelligence gained from spend classification to identify savings opportunities.
Companies on the highest end of the maturity scale classify up to 95% of spend with 95% accuracy.
Closely related to spend visibility is the actual sourcing process, and companies should measure how sourcing professionals in a company provide services to stakeholders in various business units and their strategy for doing so.
The attributes that need to be considered for an effective evaluation of sourcing maturity are:
- Category management: Overall, category management should be viewed holistically and from a long term perspective around annual planning or budgets. From there, your team can then break each project into a short term mode and make decisions with the bigger picture in mind.
- Sourcing approach: Consider sourcing activities with respect to their relative merits on specific products or services. For example, if a category lends itself extremely well to a reverse auction, then that avenue should be explored with the stakeholders. Also, identify what percentage of addressable spend is sourced strategically through a competitive process and if that percentage can be increased.
- Supplier selection: It is imperative to have a formal process for selecting a supplier i.e. long term view of suppliers, negotiation of rates, terms and conditions, to secure continuous improvement provisions in contracts.
Companies at the higher end of the ranking scale typically source between 70-80% of their spend through a competitive environment and even have advanced methodology for spot buys, low dollar spend and capital expenditure.
Post-Contract and Compliance
While sourcing process lays the foundation for negotiating favorable contracts that have the potential to deliver savings, it is what happens after contracting that is important in realizing the savings. There are various aspects to consider in this category:
- Contract implementation and organization: Firstly, identify the average time needed to ramp up savings off of the contract, retaining and saving price lists, and store the contract in a searchable, indexed repository for easy retrieval.
- Internal compliance: Educate your internal team on new contracts to combat against procurement outside of contract. To further facilitate compliance, implement requisition and purchase order processes.
- Supplier Management: Create a formal process to manage suppliers and their compliance to pricing, services, delivery and warranties. Include the ability for your stakeholders and the consumer of services to rate and rank suppliers, qualitatively and quantitatively.
Companies that rank high in the maturity ranking scale have contract compliance rates upwards of 50%.
Procurement technology plays an important role in enabling all the factors described above. A good spend analysis tool can bring spend classification and accuracy to the 95% level. A robust sourcing tool can cut down the cycle time in sourcing by as much as 65% and reduce the cost of acquiring goods by up to 25% (Gartner). Such numbers prove that a procure-to-pay platform can bring about significant increases through contract compliance and invoice accuracy. By implementing the appropriate technology, it makes it easier for buyers and stakeholders to see the deals and make their purchase decision.
Originally Published via Wired Insights