By Robert L. Scheier
Procurement transformation. The phrase does not exactly roll off the tongue, and it is not that easy to put into action, either. For reasons including failing to focus on the most critical changes or more clearly articulate the vision up front, as well as focusing too much on sourcing rather than on associated procurement functions such as contract and performance management, fewer than half of organizations looking to “transform” their procurement functions have been successful or very successful.
An informal poll conducted by Managing Partner John Evans and Partner Conrad Snover of Denali Group during a recent webinar (hosted by the Sourcing Interests Group) on major mistakes companies make in their procurement transformation efforts revealed this low procurement transformation success rate. The other failure factors cited in the poll included focusing too much on cost-cutting rather than on broader aims, and not focusing enough on “soft” areas such as corporate culture and skills.
Evans and Snover defined procurement transformation as “a holistic approach to improving all aspects of a procurement operation for improved and long-term sustainability.” What it is not, they said, is a short-term project-based initiative, done purely to reduce costs, or focused only on sourcing.
Procurement Transformation: Services as Well as Goods
While procurement is often associated with purchasing tangible goods such as raw materials, the lessons also hold for organizations looking to reform how they purchase services such as business process and IT outsourcing, the pair said.
Evans said the exact scope of a transformation will vary by a number of factors, ranging from the maturity of the current procurement organization, the skill level of the current employees, and the level of commitment from internal procurement staff and their managers.
The Devil is in the Details
Evans also recommended companies “be descriptive, measurable and specific” in describing what a transformed procurement process will look like and the benefits it will deliver. Companies should develop a “dashboard” showing the specific metrics and targets they’d like to hit in the coming months and years.
One reason companies might focus too much on cost cutting, rather on broader goals such as improving quality or gaining innovation from suppliers, is that their CEOs demand it. One questioner, for example, complained that senior management sometimes claims to want “transformation” but really only is after cost savings.
Evans countered that, in some cases he has seen, “you get savings in six months to fund an 18-month program” that gives the procurement organization the knowledge and tools it needs to achieve ongoing cost reductions. While short-term metrics such as reduced cost or cycle times or higher quality are necessary to build support for the program, he said, “That is not transformation.” Fundamental change requires a “new operational blueprint that incorporates different elements that comprehensively make the procurement environment, and the sourcing environment, better.”
Some organizations try to “boil the ocean” by reforming all their procurement processes at the same time, said Snover, but others err by doing too little. He cited one client who “just did a reorganization and called it a transformation,” while another merely rewrote their procurement manual. While those both might have been worthwhile changes, he said, they fall far short of a transformation.
As hard as such transformation can be, said Evans, it can deliver “the seat at the (management) table” procurement managers have long sought. While procurement organizations historically dealt mainly with relatively tactical functions such as contracts, administration and clerical support, he said, many companies “want procurement to take a bigger role and add more value to the organization.”