6 steps to successful procurement transformation
Once a back-office, transactional department in many firms, procurement must now, increasingly, deliver across a much broader set of strategic objectives. Recent changes underpinning a need for transformation include:
- Supporting growth by developing scale-able and future-proof procurement functions, ‘fit for purpose’ and ready to support much larger businesses
- Addressing market conditions, economic uncertainty and relentless pressure on margins
- Creating a group approach to procurement, particularly where sub divisions had previously acted autonomously
- Providing an effective response to a world of ever increasing regulation
- Being the best – using procurement excellence to create competitive differentiation
Consequently, organisations throughout the world are increasingly regarding enhanced procurement capability as a crucial component of change and transformation.
Where to start
All organisations have a unique procurement proposition. In certain instances, often within smaller firms, there is limited internal procurement resource – or none at all. Procurement has little influence within such organisations; the focus is about being ‘on time, on budget’ and any savings are limited – in fact, such arrangements often result in firms paying well over the odds.
At the other end of the spectrum, larger organisations in certain sectors (such as car manufacturing for example) tend to have highly advanced procurement operations, with an excellent level of internal influence and focus on value creating activities.
As demonstrated in the diagram below, over time, functions should (in theory) journey someway up this procurement maturity curve from ‘operational’ to ‘excellent’, shifting from an availability focus through price focus to cost focus and finally a value focus.
Determining exactly how far a specific procurement function should progress along this maturity curve and ensuring the end game is implemented (and sustained) requires effective transformation planning and activity.
The following 6 steps provide examples of activities that have been guiding successful procurement transformation.
Step 1 – How is the existing procurement function performing?
The first step in developing procurement capability lies in understanding exactly how the existing function is currently performing. Areas to explore can include:
- how effective the function currently performs against existing business requirements
- how it compares, benchmarked against sector comparisons
- what areas might require enhancement in the light of longer term strategic aims
Procurement performance assessment provides an effective way of creating a useful, early stage view on the effectiveness of an existing function, its positioning on the maturity curve and areas for development. The diagram below provides an example of how a procurement function in a public-sector organisation compared against industry level best practice.
Step 2 – Creating spend transparency, savings potential – and budget for investment
Undertaking a Spend Analysis and Opportunity Assessment to provide spend transparency and define savings potential - now and in the future - is an excellent way of grounding transformation planning in real, hard numbers.
With cost reduction possibilities defined (sometimes running into significant, recurring, seven figure numbers) budget that is derived from these savings can be released to invest in an overall programme of transformation.
In essence, an effectively delivered procurement transformation project can be self-funding and deliver a sustained return on investment.
Step 3 – Building the future vision for procurement
With a ‘starting point’ defined (based on the current capability of the procurement function and cost saving opportunities) an informed view can be made on how procurement can support the wider business strategy.
Areas for consideration might include:
- what % of non-pay spend should be actively managed through procurement
- the structure and size of the team required to support this
- what cost saving/cost avoidance/value-for-money objectives should the team deliver
- the role of procurement collaboration (e.g. across NHS Trusts in their STP areas)
- options for supplier relationship management, category management and contract management
- the role of e-procurement
- what opportunities exist for supplier collaborative cost reduction
Step 4 – Creating a transformation roadmap
With the future vision defined and a clear stating point in place, a road map can be created with a clear transformation plan in mind - mapping out the journey to procurement excellence.
Using the performance assessment tools and models (outlined above) has enabled organisations to define staged targets for improvement and enhanced financial performance.
In essence, the ‘Enablers of Success’ are defined and created.
Step 5 – An effective implementation model
Each unique organisation will require a unique approach for implementation. In instances where the existing procurement function has a lower maturity level, the emphasis is likely to be on upskilling, perhaps utilising a ‘mentor’ structure where internal teams work side by side with external category specialists. This ensures:
- expert management of the Transformation Roadmap / delivery of the ‘Enablers of Success’
- direct support in sourcing activity to deliver target savings - a “Co-Sourcing” approach embeds capability and delivers savings
- an end game where internal experience and capability is raised while cost reduction is delivered
Step 6 – Creating lasting change
Embedding sustainable improvement is crucial. The “Co-Sourcing” example highlighted above is an excellent basis for:
- Ensuring savings delivery
- Category knowledge transfer
- Supplier knowledge transfer
- New processes and approach embedded
- Demonstrating, coaching and guiding
- Creating engagement and buy in
Points to consider
- Procurement transformation is an increasingly crucial component of strategic change
- Identifying the current ‘starting point’ is an important first step in any process
- Build in cost saving targets to ground transformation in hard numbers and help fund activity
- Learning through real experience is a highly effective way of creating engagement