GEP Value Trends: Procurement Strategy   Industry Trends and Implications First in a Research Series on Procurement from  ...
IntroductionISG conducted research from January 2011 through June 2012 with support from GEP. The purpose of thisresearch ...
Headlines from the Research:Most leading procurement executives believe that their organizations should be playing a more ...
Survey Approach and RespondentsRespondents to the survey were primarily based in North America with 28 percent of responde...
Procurement Challenges and Procurement Transformation DriversProcurement executives indicated that Resource capabilities, ...
Procurement’s Top Challenges    Resource capabilities - gap in resource skill sets                        12%             ...
Procurement executives also showed a strong belief that there was a need for process improvement and vendormanagement appr...
4. Inconsistent processes often create perceived delays. For example, the end user may think a requirement       is ready ...
Increasing strategic alignment with the business units, and delivering on cost reduction targets are by far the toppriorit...
Future Outlook: Key Focus Areas            Strategic alignment to other business                                          ...
Key Focus Areas by Organizational Size                                                                                    ...
Key Focus Areas by Industry                                                                                               ...
Spend under management is generally a strong proxy for the influence that the procurement organization exerts onthe broade...
14   © Copyright GEP 2012. All rights reserved.
In implementing procurement operations, most organizations tend to pursue a modest degree of customization,especially for ...
Procurement Operations by Industry                         Manufacturing (n = 6) 0%                                       ...
ConclusionWe will continue to provide research into the increasingly dynamic procurement space.     •   Strategic alignmen...
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2012 New Research Report - GEP Value Trends: Procurement Strategy

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Procurement leaders are concerned about gaps between the procurement function and the strategic priorities of the overall enterprise, and its constituent business units, as well as chronic resource and skills shortages. GEP Value Trends: Procurement Strategy examines these and other important findings in greater depth.

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2012 New Research Report - GEP Value Trends: Procurement Strategy

  1. 1. GEP Value Trends: Procurement Strategy Industry Trends and Implications First in a Research Series on Procurement from Information Services Group (ISG) and GEP Research Sponsor: September 2012 © Copyright GEP 2012. All rights reserved.
  2. 2. IntroductionISG conducted research from January 2011 through June 2012 with support from GEP. The purpose of thisresearch is to provide insights to CPOs and other procurement executives and to give them a better understandingof some of the key issues facing other procurement organizations. Additional goals were to provide insights to stepsthat they might take to address some of these issues and to move their organizations to the next level in deliveringvalue to their companies.Respondents to the survey were primarily based in North America with 28 percent of respondents representingother geographies. Respondents included leaders from the financial services, healthcare and pharmaceuticals,business services, manufacturing, energy, government and public sector, media and telecom, retail and travel andtransportation sectors. Fifty-nine percent of respondents were from businesses of more than $5B in annual revenueand respondents were generally CFOs, CPOs or their direct reports.The research focused on three key aspects affecting the procurement function: • Procurement Strategy: Key Challenges and Transformation Drivers • Procurement Technology and Implementation • Procurement OutsourcingIn this three part series, we will share insights from our research which will reflect the voice of numerousprocurement leaders across several industries and can be an effective tool in benchmarking your own procurementorganization.2 © Copyright GEP 2012. All rights reserved.
  3. 3. Headlines from the Research:Most leading procurement executives believe that their organizations should be playing a more significant role indriving value in their companies. In moving toward a higher-impact role in their companies, leading CPOs arefocusing on managing the procurement framework through: • Sourcing Strategy • Policy and Process Design to Improve Controls and Manage Risks • Spend Governance and Transparency • Transformational Deals • Supplier Management • Approach to Technology and SupportThese are ambitious goals, and in many cases procurement organizations may try to take on more than they can dowell, within their available resources and support within their companies. Enterprises spend 20 to 40+ percent ofevery expense dollar on external goods and services. Because procurement organizations try to take on so muchresponsibility, prioritizing activities is often a challenge, with many resources focused on lower-value activities.There are difficulties in freeing these resources to address the highest potential areas of impact to theirorganizations. Some of the general challenges that we have found among our clients include: • Many companies lack the skills, expertise and tools to effectively manage spend across all categories, business areas or geographies • Developing needed competencies internally is both costly and time-consuming • Procurement can take an arms-length approach to vendors to the extreme, precluding opportunities to drive value through better vendor collaborations • Some buyers tend to focus on areas of questionable value in negotiations • Procurement professionals may not distinguish between approaches to commodity procurement and procuring strategic capabilities resulting in a cost or price focus, where this is a relatively minor component of the value sought from the procurement • Many procurement professionals believe that they have an inability to take ownership of cycle times, especially during the contracting process due to their reliance upon other stakeholders (including legal and various approvers), and thereby often fail to achieve results within a committed timeframe.These are key issues, and we hope that procurement executives will gain insights into how these might beaddressed as a result of this report.3 © Copyright GEP 2012. All rights reserved.
  4. 4. Survey Approach and RespondentsRespondents to the survey were primarily based in North America with 28 percent of respondents representingother geographies. Respondents included leaders from the financial services, healthcare and pharmaceuticals,business services, manufacturing, energy, government and public sector, media and telecom, retail and travel andtransportation sectors. Fifty-nine percent of respondents were from businesses of more than $5B in annual revenueand respondents were generally CFOs, CPOs or their direct reports. It should further be noted that respondentstended to be from organizations that participate in forward-thinking professional societies and are therefore likely tohave a higher degree of awareness of more advanced trends in procurement. Organizations that do not activelyparticipate in such societies may therefore be underrepresented in the survey.4 © Copyright GEP 2012. All rights reserved.
  5. 5. Procurement Challenges and Procurement Transformation DriversProcurement executives indicated that Resource capabilities, including “Gaps in Skill-sets” were the greatest overallchallenge to their organizations, with a significant number of respondents indicating that business unit support wastheir top challenge. There is a clear relationship between these challenges, as appropriate skill sets are critical towinning the acceptance, and ultimately the support, of business units toward achieving more comprehensive abilityto effectively manage spend across the company.During ISG discussions with CPOs we have consistently heard that proactively addressing and adding value to thespend that occurs within various business units is difficult to achieve, often because procurement organizations areonly brought into the contracting process at the time of contract negotiation, if at all. When procurementorganizations are brought in, it is often after requirements have been defined, market analysis has been completedand a supplier has been selected, leaving procurement with the challenge of attempting to optimize a contract andmitigate risk with very limited time and leverage. A contributor to this challenge is the resource and skill gap to havethe right talent to engage with the businesses proactively and to build strong peer relationships with economic andtechnical buyers. Those relationships and regular touch points help shape the strategies of defining requirementsand approaching the market in a way that will lead to superior business outcomes.The required skills to achieve these results, and to become trusted advisors to the businesses usually include thesame types of skills that organizations seek from a consultant, including business analysis skills covering financial,process and market knowledge, and leadership attributes such as communications and change management skillsthat go far beyond what many organizations typically associate with a procurement skill set. Business units will onlytrust procurement to lead strategic business imperatives to the degree that procurement organizations demonstratethat they understand the context and challenges of the business, and are able to articulate procurement’s valueproposition in the language of the business and not just in the language of procurement.Other challenges articulated by procurement executives include analytical and transactional tools that will enableprocurement organizations to better define and describe opportunities to the business, to track and manageoutcomes, to relieve the amount of apparent “bureaucracy” and clerical work from both procurement and thebusinesses, and to more accurately demonstrate the business results achieved.Surprisingly, “Achieving Cost Reduction Target” was the area least commonly cited as a challenge by procurementexecutives. This indicates that perhaps targets are commonly set at an achievable level for the organization, basedon spend already being influenced by procurement. It may also indicate the goal has been an area of focus andimprovement for sufficient time that procurement executives simply feel comfortable that it is more under controlthan other areas. Interestingly however, few procurement organizations tend to track cost reductions or savings ona realized or EBITDA basis, which would bring a much higher degree of unqualified acceptance of their savingscontribution to the company and which would clearly be embraced by the CFO. ISG believes that this is a criticalarea for future focus for procurement leaders, but this point of view was not necessarily reflected by our survey.5 © Copyright GEP 2012. All rights reserved.
  6. 6. Procurement’s Top Challenges Resource capabilities - gap in resource skill sets 12% 18% 28% Business Unit support 33% 14% 9% Lack of analytical tools/capabilities 14% 20% 20% Lack of transaction automation 11% 25% 15% Resource shortage - more demand than supply 16% 18% 9% Ability to achieve cost reduction targets 14% 5% 19% Rank 1 (n = 57) Rank 2 (n = 56) Rank 3 (n = 54) Source: ISG Procurement Technology and Outsourcing Trends Survey March 2012 # Please rank the top three challenges that your procurement organization currently faces.In terms of spend influenced by procurement, respondents indicated significant headroom for improvement inaddressing marketing, IT, consulting and professional services spend. These are often areas of high spend whichtend to be managed within business units and can be more difficult to proactively address, consistent with ourdiscussion above. (Even IT, which has traditionally been relatively centralized within the CIO organization, isincreasingly migrating back out to the businesses as it adapts cloud, SaaS and BPaaS solutions for many of itsrequirements, thereby circumventing the dependency upon, and control by, IT organizations for successfulimplementation.) Strong domain knowledge is required to effectively address these areas, and price can often be amuch less significant decision factor in selecting a solution than the perceived or real business benefits that ahigher-quality solution can deliver over a more generic one. For example, marketing is generally less concernedwith reducing its spending than it is with delivering superior brand recognition, customer loyalty and ultimately salesas a result of its spending. Similarly IT, consulting and many other professional services are purchased on the basisof business drivers other than cost, although businesses still need to achieve their objectives within their budget.This means that a high degree of business sophistication on the part of procurement professionals is an absoluteprerequisite to being able to influence and improve spend in these areas.6 © Copyright GEP 2012. All rights reserved.
  7. 7. Procurement executives also showed a strong belief that there was a need for process improvement and vendormanagement approaches to drive better results. Process improvement is critical in several areas: 1. Procurement processes often are opaque to end users and stakeholders, with a lack of clarity in terms of what information and approvals are required, what steps are necessary to ensure that best practices are utilized in managing spend and controlling risk, and exactly how long all of this will take. 2. Procurement activities are often perceived as bureaucratic, with unclear turnarounds between when a requirement is provided to procurement and when a contract or purchase order can be executed with the supplier. 3. Delays in the process may often result from incomplete information from the requester, and variable turnaround times for reviewing statements of work (SOWs) or specifications, negotiation times and legal reviews.7 © Copyright GEP 2012. All rights reserved.
  8. 8. 4. Inconsistent processes often create perceived delays. For example, the end user may think a requirement is ready to go to contract or PO, and either a contract is executed outside of appropriate controls, or a review of the spend determines that additional steps unknown to the end user must be undertaken prior to the requirement being placed. 5. A large percentage of spend may simply never fall under a consistent approach to management or visibility.Vendor management is, to a large degree, the greatest untapped opportunity for procurement organizations. Thereare multiple reasons why vendor management is both increasingly important and difficult to solve. • Decentralization – Many strategic or critical vendor relationships are managed within an operational business unit, rather than through a central vendor management organization. • Relationships cross multiple business units – For example a typical company may have relationships with IBM as an IT outsourcer, a BPO outsourcer, a consultant, a hardware supplier, an integrator and a software provider, with each role managed by different entities with limited coordination. • Financial scale – Vendors have become increasingly important, with external spend representing nearly 47 percent of sales. • Operational – Vendors have become more operationally and technologically integrated with core processes, presenting both greater risk and greater opportunity for value creation.8 © Copyright GEP 2012. All rights reserved.
  9. 9. Increasing strategic alignment with the business units, and delivering on cost reduction targets are by far the toppriorities for procurement leaders at this time. This priority was consistent between large and middle-marketbusinesses. Delivering on cost reduction targets was a much higher priority for manufacturing than other verticals,and strategic alignment with the businesses was a much lower priority in the business services segment.9 © Copyright GEP 2012. All rights reserved.
  10. 10. Future Outlook: Key Focus Areas Strategic alignment to other business 32% Delivering on cost reduction targets 26% Driving business support for procurement 11% Addressing more spend under management 10% Driving transaction automation 9% Filling gaps in resource capabilities 7% Developing analytical capability 5% n = 57 Source: ISG Procurement Technology and Outsourcing Trends Survey March 2012 # What is your procurement organization’s key focus are for improvement in 2012?10 © Copyright GEP 2012. All rights reserved.
  11. 11. Key Focus Areas by Organizational Size 35% Strategic alignment to other business 33% 28% Delivering on cost reduction targets 24% 10% Driving business support for procurement 15% 4% Developing analytical capability 10% 3% Driving transaction automation 10% 10% Addressing more spend under management 9% 10% Filling gaps in resource capabilities 0% $1 B - $10 B > $10 B Source: ISG Procurement Technology and Outsourcing Trends Survey March 2012 n = 50 # What is your procurement organization’s key focus are for improvement in 2012?11 © Copyright GEP 2012. All rights reserved.
  12. 12. Key Focus Areas by Industry 17% Addressing more spend under management 10% 10% 6% 0% Filling gaps in resource capabilities 0% 20% 0% 0% Driving transaction automation 20% 0% 11% 50% Delivering on cost reduction targets 20% 20% 22% 0% Developing analytical capability 10% 0% 6% 0% Driving business support for procurement 30% 10% 11% 33% Strategic alignment to other business 10% 40% 44% Manufacturing (n = 6) Business Services (n = 10) Healthcare & Pharmaceuticals (n = 10) Financial Services (n = 18) Source: ISG Procurement Technology and Outsourcing Trends Survey March 2012 # What is your procurement organization’s key focus area for improvement in 2012?12 © Copyright GEP 2012. All rights reserved.
  13. 13. Spend under management is generally a strong proxy for the influence that the procurement organization exerts onthe broader organization. While organizations tend to define “spend under management” somewhat differently,ranging from a strong role in sourcing and contracting at the “more managed” end of the scale to simply reviewingcontract terms and conditions or tracking spend on a PO system at the “less managed” end, this measure still is agood indicator of a degree of collaboration between procurement and other functions within the corporation.Not surprisingly, our analysis showed that procurement had a very high degree of influence on traditional areassuch as office supplies and travel, and relatively lower degrees of influence on more strategic areas of spend suchas professional services, consulting and marketing, with marketing being the spend category where procurementhad the lowest level of influence. Decision making around the latter categories tends to be more complex and lessdriven by price vs. qualitative or business impact drivers. The lower level of influence in these categories suggeststhat the organization’s perception of procurement’s skills and insights into decision drivers and how value isperceived in these categories may lag at this time. Spend Under Management by Category 0% 2% 5% 4% 5% 11% 12% 11% 14% 15% 16% 17% 7% 16% 22% 20% 5% 14% 18% 16% 18% 7% 15% 13% 9% 5% 14% 11% 4% 4% 11% 14% 7% 9% 18% 13% 11% 9% 7% 16% 22% 11% 22% 18% 13% 18% 21% 21% 15% 13% 32% 14% 63% 23% 25% 50% 22% 41% 36% 37% 36% 31% 23% 21% 13% 14% General Travel MRO Facilities & Logistics Direct Spend Temp Labor IT Marketing Consulting Professional Office Services Real Estate Spend Services Supplies 81-100 61-80 41-60 21-40 1-20 0 Source: ISG Procurement Technology and Outsourcing Trends Survey March 2012 n = 57 # What is the current percentage of spend under management for procurement at your organization with respect to the following categories?13 © Copyright GEP 2012. All rights reserved.
  14. 14. 14 © Copyright GEP 2012. All rights reserved.
  15. 15. In implementing procurement operations, most organizations tend to pursue a modest degree of customization,especially for indirect procurement. Areas of uniqueness tend to be confined to approaches to workflowapprovals, most of which can be configured in common transactional procurement toolsets. The implications ofthis are that best practices refined by service providers can be rapidly leveraged, provided that internalorganizations maintain the appropriate governance discipline regarding customized “enhancements.”15 © Copyright GEP 2012. All rights reserved.
  16. 16. Procurement Operations by Industry Manufacturing (n = 6) 0% 67% 33% Business Services (n = 9) 22% 56% 22% Healthcare & Pharmaceuticals (n = 9) 22% 45% 33% Financial Services (n = 17) 0% 53% 47% Largely unique and strategic in nature - a product of high customization. In line with the industry standard, but requiring a high degree of tactical approach. Largely in line with the industry standard and operational in nature. Source: ISG Procurement Technology and Outsourcing Trends Survey March 2012 # How would you compare your organization’s procurement operations with the rest of the industry?In developing strategies to bring their organizations to the next level to meet these challenges, both procurementtechnology and third party procurement services (more frequently referred to as “Procurement BPO”) are keylevers being adopted by many companies, and these will be explored in detail in parts 2 and 3 of this reportseries.16 © Copyright GEP 2012. All rights reserved.
  17. 17. ConclusionWe will continue to provide research into the increasingly dynamic procurement space. • Strategic alignment to other businesses is a top priority for procurement organizations this year, followed by cost reduction targets. • The relatively high degree to which Procurement organizations’ operations are in line with the industry standard practices suggest a significant opportunity to take advantage of standardized solutions in the marketplace. • Obtaining business unit support is currently the biggest challenge for procurement organizations, followed by lack of transaction automation and gaps in resource capabilities. • The professional services, marketing and consulting categories present significant scope for increasing the amount of spend under management, reflecting both the need for better business unit presentation and skills enhancement, and pointing to potential “value spots” for procurement service providers.For more information about GEP, please visit www.gep.com, or contact us at info@gep.com. Alternatively,call us at any of our locations listed below:Clark, NJ, USA London, UK Mexico City, Mexico São Paulo, Brazil+1 732-382-6565 +44 (0)20 3008 7471 (52) 55 4777-2251 55 11 2787 6393Prague, Czech Republic Mumbai, India Hyderabad, India Shanghai, China(420) 233 025 400 91 (22) 6137 2100 91 (40) 4004 4212 86 (21) 6122 1238About GEPGEP is a diverse, creative team of people passionate about procurement. We invest ourselves entirely in ourclient’s success, creating strong collaborative relationships that deliver extraordinary value year after year. Wedeliver practical, effective procurement services and technology that enable procurement leaders to maximizetheir impact on business operations, strategy and financial performance. Named a category leader in procurementoutsourcing by the Black Book of Outsourcing, a Star Performer in Everest Group’s Peak Matrix of serviceproviders, and to the Supply & Demand Chain Executive 100 for seven years, GEP is also ranked as one of theFastest Growing Technology Companies in Deloittes Technology Fast 500. Clark, NJ-based GEP has eightoffices and operations in North and South America, Europe and Asia. To learn more, please visit www.gep.com.Unauthorized copying, distribution or re-printing in part or whole, without the written permission of GEP is strictly prohibited.17 © Copyright GEP 2012. All rights reserved.

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