Innovation Driven Procurement (IDP) November 2008

Corporate mission, vision and strategy statements stress the importance of innovation as the engine for growth We deliver innovation by investing in world class strengths in end-user insights, technology, design and superior supplier networks Philips The new strategy program, which has been named Vision 2010 – Building on Strengths, focuses on accelerating profitable and innovative growth of DSM’s specialties portfolio. DSM We will be a company of innovative and powerfully branded stores on two continents, rather than a portfolio of stores that distribute supplier brands Ahold We think about the future, but act in the present. We’re passionate about introducing new ideas and developing sustainable answers for our customers. AkzoNobel is an important ingredient for substantiating this. We wish to play a leading role in the transition towards a sustainable supply of energy in the Netherlands. By speeding up the development of activities over the entire sustainable energy value chain – from source to end-user – we will increase the structural value for our shareholders at lower social costs than in our current, more traditional business model. Continuous innovation Eneco Bosch regards innovation as something more than exceptional product quality, functionality and design. Not only our technical developments, but also our commitment to society has an effect on the world of tomorrow. Bosch It is Océ's intention to continue to enhance its position as an internationally active, listed company, quoted on the stock exchange. The aim of its policy is to become one of the top three companies in all relevant markets by means of autonomous growth achieved through technological innovation and commercial creativity- and acquisitions. Oce Source: corporate websites To solve unsolved problems innovatively 3M Innovation Is the Cornerstone of Our Success We place great value on big, new consumer innovations. We challenge convention and reinvent the way we do business to better win in the marketplace. P&G

Innovation Is the Cornerstone of Our Success

We place great value on big, new consumer innovations.

We challenge convention and reinvent the way we do business to better win in the marketplace.

P&G

An example of an innovative company: Procter & Gamble Open Innovation initiatives connect external parties to contribute to new product development Mechanisms An internal network of 70 technology entrepreneurs who think up scenarios and write technology briefs Suppliers’ research teams work in P&G labs and P&G researchers work in supplier labs Interactive prototyping tools to co-invent new product packaging with consumers. Networks connect companies that have a science or technology problem. A network that links over 800 retired but high performing scientists and engineers from over 150 companies. Results Since 2000, share price has doubled and R&D investment as a percentage of sales is down from 4.8% in 2000 to 3.4% in 2006 Launched 100 new products, 35% of which originate externally, up from about 15% in 2000 45% of the initiatives in product development have key elements discovered externally Increased product hit rate to more than 90%, from 70% in 2001 through open innovation Open Innovation with P&G P&G’s Innovation Net Source: (a) “Why companies should have open Innovation”, HW Chesbrough, (2007); (b) “Connect and Develop: Inside P&G’s new model for Innovation”, HBS 58 (2006); (c) Company website R&D Labs Consumer Insights Customer Teams Employees Suppliers Research Institutions Contract Labs Venture Capitals Trade Suppliers

Mechanisms

An internal network of 70 technology entrepreneurs who think up scenarios and write technology briefs

Suppliers’ research teams work in P&G labs and P&G researchers work in supplier labs

Interactive prototyping tools to co-invent new product packaging with consumers.

Networks connect companies that have a science or technology problem.

A network that links over 800 retired but high performing scientists and engineers from over 150 companies.

Results

Since 2000, share price has doubled and R&D investment as a percentage of sales is down from 4.8% in 2000 to 3.4% in 2006

Launched 100 new products, 35% of which originate externally, up from about 15% in 2000

45% of the initiatives in product development have key elements discovered externally

Increased product hit rate to more than 90%, from 70% in 2001 through open innovation

The Innovation Driven Procurement (IDP) Strategy based on the Corporate and Procurement Strategy will transform procurement into a true business partner It is essential to align the Procurement Strategy with the overall Corporate Strategy to ensure Procurement’s efforts are focused appropriately and are consistent with the fundamental direction of the business. This is what makes Procurement a service provider for the business. Whereas innovation is often stressed in Corporate Strategy and open innovation is embraced by many successful companies, many struggle to translate this into the Procurement Strategy. Let alone providing procurement services satisfying the business’ innovation needs. The translation of the Corporate Innovation Strategy into a Innovation Driven Procurement (IDP) Strategy provides focus for procurement. Mechanisms such as those shown in the P&G case need to be formalised and embedded in the organization. IDP will transform Procurement from a service provider into a business partner. Depending on the IDP strategy, new roles and services will be provided by procurement. This can have an effect on the entire procurement function, mainly impacting tactical procurement operations such as sourcing, demand management and supplier relationship management. From Strategy to IDP Support services Procurement Strategy Corporate Strategy Innovation initiatives Corporate Procurement Strategy Innovation IDP

Innovation Driven Procurement is one of the crucial aspects in adding value to your business if innovation is part of your Corporate Strategy Over the past decades, the increased importance of the procurement function has set a development in motion. Nowadays, most companies have spend management strategies, allowing them to leverage economies of scale and managing demand in the organization. Most have gone further with involvement of the business in the procurement processes. This process focus makes procurement a reliable service provider responding to business demand and mitigating risk and costs. Some have successfully gone further recognizing suppliers as a key actor of the end product. This goes beyond responding to business demand with procurement services, mitigating risk and costs. It means pro-actively providing value added services that will help the business reach the corporate goals. IDP services are focused on future client demand and (potential) markets. It encompasses a procurement function which is embedded in new product development, which uses its extensive market knowledge to scout for new opportunities beyond direct business demand, and may even spur new directions for the company. IDP in procurement development Negotiation Consolidation Compliance Eliminating deficiencies Business involvement Performance enhancement Supplier involvement Value extraction and creation Transactional focus Spend focus Process focus Product focus Value focus Procurement maturity level IDP

Negotiation

Consolidation

Compliance

Eliminating deficiencies

Business involvement

Performance enhancement

Supplier involvement

Value extraction and creation

IDP includes mechanisms both internal and external to the product chain for Procurement to contribute to Open Innovation Product chain internal mechanisms Connecting existing suppliers with engineers Searching and stimulating new developments within the existing supply base Set up joint development programs, co-creation, partnerships Provide toll gate services for new technologies throughout the innovation funnel P&G case example: strong internal networks and close collaboration with suppliers Product chain external mechanisms Scouting for new developments outside the existing supply base and in completely different markets Creating flexibility in supplier segmentation and dependency Building scenarios of future markets with boundary spanning networks Connecting with new ventures inside & outside the product chain Changing the market focus or future market P&G case example: prototyping, networking with consumers, engineers and entrepreneurs IDP based on Open innovation Source graphic: Prof Henry Chesbrough UC Berkeley, Open Innovation: Renewing Growth from Industrial R&D, 10th Annual Innovation Convergence, Minneapolis, Sept 27, 2004

Product chain internal mechanisms

Connecting existing suppliers with engineers

Searching and stimulating new developments within the existing supply base

Set up joint development programs, co-creation, partnerships

Provide toll gate services for new technologies throughout the innovation funnel

P&G case example: strong internal networks and close collaboration with suppliers

Product chain external mechanisms

Scouting for new developments outside the existing supply base and in completely different markets

Creating flexibility in supplier segmentation and dependency

Building scenarios of future markets with boundary spanning networks

Connecting with new ventures inside & outside the product chain

Changing the market focus or future market

P&G case example: prototyping, networking with consumers, engineers and entrepreneurs

Beside the natural position of Procurement as the suppliers’ partner, Procurement competences match perfectly with those required for Open innovation Open innovation must be organized and facilitated. Open innovation goes far beyond an internal R&D department developing new ideas. Competences required for Open Innovation are: Critical view on internally developed specifications Boundary spanning communication and collaboration skills Technical and market insight Decision making in the various toll gates in the innovation funnel Critical attitude towards the status quo, and readiness to engage with new parties Curiosity and ambition to investigate and realize future possibilities and potential markets Open innovation required competences A well developed procurement department (maturity level of process focus and higher) has strategic purchasers who can: Challenge business demands Contribute to developments with strong knowledge of the category markets and products Build up a broad vision on markets Develop and leverage relationships between the business and suppliers Manage an open portfolio of suppliers and evaluation their contribution Challenge suppliers develop more value for the product chain Source graphic: Prof Henry Chesbrough UC Berkeley, Open Innovation: Renewing Growth from Industrial R&D, 10th Annual Innovation Convergence, Minneapolis, Sept 27, 2004 Key Procurement competences MATCH

Open innovation must be organized and facilitated. Open innovation goes far beyond an internal R&D department developing new ideas. Competences required for Open Innovation are:

Critical view on internally developed specifications

Boundary spanning communication and collaboration skills

Technical and market insight

Decision making in the various toll gates in the innovation funnel

Critical attitude towards the status quo, and readiness to engage with new parties

Curiosity and ambition to investigate and realize future possibilities and potential markets

A well developed procurement department (maturity level of process focus and higher) has strategic purchasers who can:

Challenge business demands

Contribute to developments with strong knowledge of the category markets and products

Build up a broad vision on markets

Develop and leverage relationships between the business and suppliers

Manage an open portfolio of suppliers and evaluation their contribution

Challenge suppliers develop more value for the product chain

The IDP strategy impacts upon all strategic and tactical aspects of Procurement Translate innovation strategy into IDP strategy Align initiatives with the board of management Develop maturity to at least the process focus level Set up and support for the projects by the responsible CXO’s Set up project organization for multi-functional IDP teams Define roles and responsibilities Evaluate category plans to help identify IDP projects Increase weight of multi-functional teams for IDP categories Increase scope of sourcing strategies Open up portfolio management Extend supplier management outside the supply base Redefine relationships Deal with IP rights Open up networks with the ecosystem Increased partnering, development and co-creation Conduct sourcing within IDP teams Specify needs functionally Specify problems instead of solutions Focus on (future) added value to the product chain Involve legal for good IP structures Fully involve the business in the IDP teams Feed the business with market knowledge and developments Set up networks for new idea creation and scenario building Make use of online tools for networking Connect with suppliers Support boundary spanning project management Select the top resources for IDP projects Recruit your success and change profiles of strategic purchasers Develop project management and collaboration skills Set up internal and external knowledge bases Ensure perfect communication within IDP teams Connect with external knowledge sources Communicate success Provision of Goods & Services Supplier Relationship Management Procurement Strategy Development Governance & Organisational Development Category Planning Sourcing IT People Knowledge & Information Managing the Enablers Supply Planning & Control Procurement Effectiveness Procurement Efficiency Benefit Generation Benefits Delivery Demand Management Set Strategy & Objectives

Translate innovation strategy into IDP strategy

Align initiatives with the board of management

Develop maturity to at least the process focus level

Set up and support for the projects by the responsible CXO’s

Set up project organization for multi-functional IDP teams

Define roles and responsibilities

Evaluate category plans to help identify IDP projects

Increase weight of multi-functional teams for IDP categories

Increase scope of sourcing strategies

Open up portfolio management

Extend supplier management outside the supply base

Redefine relationships

Deal with IP rights

Open up networks with the ecosystem

Increased partnering, development and co-creation

Conduct sourcing within IDP teams

Specify needs functionally

Specify problems instead of solutions

Focus on (future) added value to the product chain

Involve legal for good IP structures

Fully involve the business in the IDP teams

Feed the business with market knowledge and developments

Set up networks for new idea creation and scenario building

Make use of online tools for networking

Connect with suppliers

Support boundary spanning project management

Select the top resources for IDP projects

Recruit your success and change profiles of strategic purchasers

Develop project management and collaboration skills

Set up internal and external knowledge bases

Ensure perfect communication within IDP teams

Connect with external knowledge sources

Communicate success

IDP projects are initiated using the Capgemini Phase 1 approach, with clearly defined activities and milestones Execute IDP Strategy through pilot Detail project charter Set scope Detailed activity plan Agree on project control Build the team Assign client team members Ensure availability Schedule activities Kick-off 5. Build business case Opportunity Workshops Translate IDP strategy to activities Define to-be state and current gap Compile opportunity overview Select pilot project Plan implementation Analyse as-is state Procurement maturity Business requirements People 2. Organisation, process and people assessment 1. Information collection Focus interviews Map innovation strategy & practices Collect market data Model costs - benefits Collect additional data Compile business case 2 Steering Committee decision 1 3 5 7 6 6. Identify implement and embed quick wins 4. Opportunity creation The timeline depends on the nature of the assessment, anywhere between 3 weeks and 3 months 3. Translate Innovation strategy Pinpoint value add opportunities for procurement 4 7. Mobilise and communicate Arrange facilities Agree on project budget (e.g. travel expenses) 1 2 Project charter Detailed plan Team set-up Scope 3 IDP strategy Opportunity matrix 4 5 6 7 Clear view of corporate targets and market Pilot project proposed and planned Business case Current state mapping

Detail project charter

Set scope

Detailed activity plan

Agree on project control

Build the team

Assign client team members

Ensure availability

Schedule activities

Opportunity Workshops

Translate IDP strategy to activities

Define to-be state and current gap

Compile opportunity overview

Select pilot project

Plan implementation

Analyse as-is state

Procurement maturity

Business requirements

People

Arrange facilities

Agree on project budget (e.g. travel expenses)

Project charter

Detailed plan

Team set-up

Scope

The execution of an IDP strategy requires top management commitment, strong project management and the availability of top resources For the execution of an IDP project, it is critical to have full top management support, for all business lines involved in the project. Regular Steering Committee meetings will provide management buy-in and control. Furthermore, the Steering Committee must free up their top resources for the project. A key driver of success is strong Project Management. Implementing the IDP strategy means doing things differently, which requires change management both internally in the team and externally. Secondly, strict time management and complete openness in communication are needed to stay in control over what is a complex project . As noted before, top resources are needed in the Content Team(s) who can think out of the box, are committed to working together and achieving top results. Facilitation of the teams is ideally done by procurement Executing the IDP Strategy Client project manager Capgemini project manager Project Management Steering Committee CPO, COO, CTO ... Content experts R&D Business departments Marketing Procurement Legal (Supplier representatives) Procurement Capgemini consultant Content Team

Client project manager Capgemini project manager

Content experts

R&D

Business departments

Marketing

Procurement

Legal

(Supplier representatives)

Procurement

Capgemini consultant

Contact Consulting Services ir Robbert den Braber Consultant Capgemini Nederland B.V. Papendorpseweg 100, P.O. Box 2575, 3500 GN Utrecht - The Netherlands T. +31 30 689 5056 - F. +31 30 689 55 60 Mob. +31 6 15 03 09 01 [email_address] www.nl.capgemini.com