Bonus material: Procurement Team Builder
Are you tasked with building the procurement team at your organization and wondering where to start?
Whether you are an experienced procurement professional or just getting started with setting up a procurement department, this guide would serve as a step-by-step process for building a procurement team from scratch.
In this guide, we will cover:
1. Procurement team roles and responsibilities.
2. How to build the procurement function and set up the team.
3. Typical structure of a procurement team
4. How to set the expectation of different stakeholders
5. What skills to look for while hiring for the procurement department
Then follow along to determine the right procurement team structure that works best for your Company.
Procurement plays a critical role in helping an organization in achieving its cost-savings goals. Whether it is through finding a capable supplier or partners who can help deliver a competitive product or reducing cost and helping increase cash flow for the business.
Any business needs certain essential functions to operate, such as payroll and benefits. Procurement is one among them and generally gets lumped into many administrative functions.
But suppose companies consider Procurement as a source of innovation and cost savings. In that case, it is not merely an administrative function, and hence you need to be strategic about setting up your procurement team.
So who should be reading this guide?
This guide is a step-by-step process for designing the procurement team that can support business goals. So it is for anyone who is looking to use Procurement as a strategic lever to reduce cost or drive innovation. But this guide would be most beneficial for the following audience:
• You are a chief administrative officer or chief legal officer and looking to streamline the procurement operations at your Company.
• You are hired to build a procurement team from scratch.
• You are new to Procurement and have been tasked to set up a procurement team.
No matter what your situation is, we hope that you will find this guide helpful.
How to read this guide?
Chapters organize this guide; if a chapter doesn’t apply to you, feel free to skip it.
So what is the role of the procurement team, and what should be its key objectives?
That should be the first question you should ask when you embark on the journey of building a procurement team.
Let’s first look at some key benefits a procurement function can deliver, and then we will look at how an organization should adopt these functions.
Following are some of the main functions of a procurement team:
When the organization is small, very few employees purchase products and services. As the organization grows, the purchasing becomes decentralized within different departments.
For example, if you manufacture a product, the production department purchases the raw materials (often called Direct Spend).
IT department would purchase all the hardware and software required to run the operations.
Office managers generally purchase everyday things like office supplies and so on.
As the organization grows, this approach creates more silos from a purchasing perspective, and each department starts to develop relationships with its vendors.
Having a central procurement team ensures that purchasing is centralized in one place, and you can gain productivity improvements by having one department conducting all the purchasing activities.
The sooner you think about centralizing purchasing, the better it is. If you wait for too long, it becomes a change management nightmare.
The longer people have made their purchases, the longer it will take for a procurement team to standardize and centralize the process.
Even though you have multiple locations, having a standard function can drive efficiencies and productivity improvement across each site. You could think of a central procurement function but decentralized enough so that each location can make decisions that are good for the business.
The apparent benefit of centralizing Procurement is cost savings and cost control.
When you don’t have a procurement team, there is no standardized purchasing process or approval process.
Employees purchase products without a proper purchase order.
The finance teams know about the Spend is when the invoice shows up.
By that time, it is too late for the organization to control the Spend.
The role of a central procurement function is to drive the standardization of the purchasing process and implement basic cost controls like approvals before empl0yees can make the purchase. That allows the management to review the Spend before it happens and reduce avoidable costs.
As per research by SpendMatters, companies can easily save 2-3% due to cost reduction by implementing basic purchasing controls and purchasing systems.
Once the basic purchasing controls are in place, the team can benefit from understanding the purchase synergies, resulting in cost savings.
Cost savings is a topic in itself and which we have covered earlier. But there are primarily two types of cost savings the procurement team can drive.
Soft savings – also called cost avoidance. These savings are because of tighter purchasing controls and negotiating down YOY cost increases by the vendor. Though it doesn’t decrease the budget, it does help the organization to allocate the capital and avoid any budget surprises effectively.
Hard savings are tangible savings and result in a reduction in budget. For example, a company purchases a raw material widget at $X/ Unit, and the new reduced cost is $X-1 /Unit. Then if the volume remains the same, you can see the impact of cost reduction in the Cost of Goods Sold (COGS) line item.
The cost reduction should improve your unit economics.
As you grow your organization, purchasing compliance becomes an important issue. Purchasing compliance happens at various levels, but you need to have proper purchasing controls at a fundamental level.
The goal of purchasing controls is to prevent procurement fraud.
It is easy for an employee to conduct procurement fraud if there are no controls and segregation of duties. For example, the same person can create a purchase order, input an invoice, and pay the supplier.
The other benefit of having tighter controls is that it is an essential requirement for Sarbanes Oxley (SOX) compliance. These basic controls are a must for your organization if you plan on bringing investors.
Depending on how your procurement team is structured, A company should centralize the contract management function with Procurement.
If you don’t have a Procurement team, each department might be managing its contracts.
There are a couple of issues with that.
Having a procurement team enables central management of the contracts, and they can ensure that standard contract guidelines are followed by coordinating with the legal department.
The other essential function a procurement team handles is risk management. There are different types of risk, and based on the nature of the business, this may or may not be necessary to you.
A supply chain is open to many types of risk, but let’s look at some common dangers.
A contract with a supplier is of no use if the supplier can’t deliver the product or deliver the product on time.
The procurement team can mitigate this risk by thoroughly evaluating the supplier, including factory visits, quality surveys, and talking to reference customers.
Ensuring supply also includes ensuring that the contract has penalties for suppliers if they cannot meet the committed timelines.
Procurement can also mitigate this risk by holding regular business reviews to track continuing performance and surface potential issues and risk mitigation plans.
In a perfect world, everything goes as per the plan; well, we don’t live in a perfect world!
You have to ensure that your business is not taking over undue liability because of entering a contract or lack thereof.
Let’s take an example; let’s say you have hired a contractor to fix the ceiling lights in the Company’s lobby. The contractor sends one of his technicians to fix the light.
While working on it, he drops the light fixture, which falls on one of the visitors. The visitor, in turn, sues the Company for negligence and expense due to hospitalization.
Who is liable for the damages, the Company or the contractor?
The Procurement team can help mitigate this risk by ensuring an established contract with the third-party contractor. Limiting liability defines who owns the stake of potential damages.
We all heard about child labor issues at Foxconn, one of Apple’s leading suppliers. But reputation risk is not just for big companies.
Do you as a company wants to be associated with such a business?
I believe nobody does.
We are not saying that Apple doesn’t care about things like this, but this can happen to any company. Whether dealing with an international supplier or local suppliers, you want to ensure that your Company’s reputation is intact, especially in the community in which you are working.
No buyer wants an increase in raw material cost; of course, any product or service supplier would love that.
But cost increases are part of the regular buying cycle. For example, the cost of raw materials can increase, which increases the supplier’s cost of producing the product for you. Now, of course, you don’t have these things in your control.
Procurement teams, however, can structure the contract in a way that prevents the supplier from increasing the cost for a fixed number of years or months.
In some cases, a reciprocity language allows buyers and suppliers to share the risk and reward. For example, if the cost increases, the buyer and supplier share a fixed percentage of the total cost increase. In case the cost decrease, both buyer and supplier would share the benefits of reduced cost.
When it comes to mitigating cost increase risk, you need to take a practical approach. A fixed-cost contract will be of no use if it drives the supplier to bankruptcy.
Procurement teams not only help in mitigating liability risk but can also help with tracking supplier financial performance, especially for your critical suppliers.
There is a lot of public information that Procurement can use to track the financial health of your suppliers. It needs a disciplined approach and a dedicated focus from procurement teams.
Bonus: We have put together a template that helps you set up a team that can handle these risks for your Company. Click here to download it for free.
So now you know what the different benefits of having a procurement department are but what role procurement should play in your organization.
Understanding Procurement’s role is vital for two reasons:
The next obvious question is to define the objectives of the procurement department. If you are an experienced procurement professional, you already know this, correct?
We request you to think again.
At a tactical level (operations, process), etc., it doesn’t change from Company to Company, but how Procurement is perceived does change from Company to Company.
It would be best if you did not assume that what worked in one Company will work in another.
Start with interviewing your key stakeholder to understand the expectation for the procurement department.
The logical next step on this is to start with the person who hired you.
Let’s say a chief administrative officer or chief financial officer hired you to start a procurement department.
So start by asking them this question.
“What incident triggered you to take the initiative on starting a procurement department”?
Then shut up and listen carefully!
The goal is to uncover the underlying issues in the organization, whether it is people or processes.
Let say they come back to you with an example about unauthorized spending and how it costs unplanned expenses. Then you know the primary need is for compliance.
Let’s take another example – they talk about how the increasing costs are shrinking the EBITDA margins, then you know that the main focus is cost savings.
You can ask a more clarifying question to understand the situation better, but this exercise should provide you with a good starting point.
Next, you should talk to key operations stakeholders. The goal is to identify what are the key expectations from Procurement. Here is why you should do this
Start with the Chief operating officer (COO) or equivalent designation in your Company. The goal here is to identify the key expectations they have from Procurement.
Please keep in mind that at this time, you should not be telling them how you can help, but the goal is to understand what help they need.
Some common scenarios are as follows.
With this, you are ready to move to the next step, defining the team structure.
The next step is to define different sub-teams/departments within the procurement team.
Please remember that this is a mere depiction of what functions your team is responsible for, but you could easily have one person doing all the functions, though not advisable.
Your procurement team should serve the following functions.
Let’s cover each one of them.
Then follow along to figure out what procurement team structure works best for you.
The primary function of purchasing is to enable the end-to-end procurement transaction. Generally, a purchasing team is responsible for:
Strategic sourcing involves working with vendors to negotiate better pricing. The key activities of the strategic sourcing process are as follows.
The contract management function is responsible for the following duties:
When we say contract management, we refer to the job function, but contract management can be in Procurement or the legal department.
There are pros and cons to both approaches. For example, having a contract management function within Procurement helps increase collaboration with the procurement team and faster turnaround for contract review. On the flip side, if there are not many contracts to review, you cannot utilize that resource optimally.
We suggest discussing with your chief legal officer to find the optimal model which works for everyone.
Nothing works better in selling the procurement value to your organization than the spend visibility. Hence, we strongly recommend that you have a data analytics and reporting function responsible for the following.
Generally, this responsibility is with the strategic sourcing team to identify saving opportunities and execute them. Still, the sourcing team is usually busy managing the opportunities, and they generally don’t have time to mine the data to find more opportunities.
Think of this as a sales function. You have an inside sales team working on identifying and qualifying new sales opportunities, and then you have a field sales team responsible for taking those opportunities forward.
By ensuring that you have a different individual identifying saving opportunities, the sourcing team can be more efficient in executing those.
Following is a good model from Booz and Company that defines an optimum Procurement model.
It talks about the four aspects of any good procurement team, we have covered some of these sections in detail, and we will cover the rest in the following areas. Here are some suggested readings
We talked about the role of the sourcing function in the overall procurement function. Now we talk about the best way to structure the sourcing team.
The goal of this exercise is to align your team and resources based on the requirements of your stakeholders
Based on the requirements of your business, there are primarily three ways to structure your sourcing team.
Bonus: We have put together a template that gives you the best practices for structuring your sourcing team. Click here to download it for free.
In a department-based approach, you have a sourcing team member assigned to each department. She is then responsible for conducting sourcing for each of their departments.
Here are some pros and cons of this approach
A following approach is a category-based approach where you organize your sourcing teams based on categories. They support the sourcing activities for one or more than one category.
The basic assumption here is that you can divide your spending into big chunks of categories. Too few categories lead to unequal distribution of work. Too many defeats the purpose of organizing your Spend by categories because it is unmanageable
1. It is not a good approach for stakeholders if the stakeholders are purchasing multiple categories. For example, you have an IT hardware and software owner, and you have an owner for professional services. So your stakeholders always have to remember to reach out to two different sourcing team members based on what they are procuring.
2. It is not a good model for resource utilization unless you have a steady stream of sourcing activities. If an individual doesn’t have enough categories, then that could lead to inefficient resource use.
As the name suggests, a hybrid approach combines both a department-based approach and a category-based approach.
This approach would work best if the category-based process doesn’t lead to sufficient work for individual category managers.
In this approach, you have an individual assigned to one or more departments. However, that individual is also responsible for a category or a set of categories.
That individual sourcing/category manager is then responsible for working with other category owners to satisfy the requirement of the department or set of departments assigned to them.
Unfortunately, there is no one correct answer to this question, and it depends on the needs of the business.
By now, you understand the critical requirements of your stakeholders. Based on that, you can choose a model that works best for your situation.
Following is an excellent model to think about how engaged your team needs to be. For example, in specific categories where you might not have domain knowledge, you are providing support.
However, for generic commodity items like office supplies, Procurement is driving the vendor selection because the specifications are standard,
If you are just starting the procurement department, you could always start with a department-based approach. By doing that, you can build a strong relationship with your stakeholders.
A hybrid model might be a good start if your stakeholders expect strong category expertise from the sourcing team. In that case, you can hire people with those skills, assign them to a department and let them coordinate the sourcing activities with other team members.
Another aspect to consider is whether you spend Direct or Indirect Spend. If your Spend is primarily Indirect, you should be able to support your organization’s needs through a department-based model because Indirect generally doesn’t need strong category expertise.
A critical aspect of building the procurement team is hiring the correct skillset. When looking at hiring, you have to take a balanced approach to find the right mix of skill sets.
So, what skills you should have in the procurement team, and how to judge those skills during the interview process
There are hard skills and soft skills. As per the recent Deloitte survey, CPO’s are investing in both Hard and Soft skills
For this discussion, we will split the skills into major categories. Hard skills and soft skills categories. Hard skills are specific to the procurement function, and soft skills are essential for day-to-day interaction with stakeholders.
When evaluating your next hire, focus on hard skills and soft skills because they are equally important.
Not every function within the department should be good at negotiation. For example, the purchasing person should be more focused on transactional metrics than negotiating with vendors.
The strategic sourcing group primarily manages negotiation.
However, if you are building the team, you probably would have limited resources, and the same person may be wearing multiple hats. You should specifically assess the negotiation skills while hiring.
There are two types of negotiation styles
Tactical – give me the lowest cost
This is day-to-day negotiation where the focus is to get the lowest cost. If you are purchasing a standard commodity item and there is enough supply in the market, you just need basic negotiation skills to get the best price possible.
If your primary Spend is commodity items, then a simple sourcing process and basic negotiation skills should suffice.
Ask your potential candidates how they approach negotiations, and you might be surprised how many candidates tactically approach negotiation.
Strategic negotiation – Increasing the pie
We call this strategic because you are not always in a situation where you purchase commodities and have an abundance of suppliers.
There might be cases where you are single-threaded with your suppliers or looking for a new supplier who can provide a unique product.
Whatever the case, you need to approach strategic negotiations with the intent to create the best value for your Company and your strategic partner.
Notice we said value, not cost. When you think value, think TCO (Total Cost of Ownership) and how the partner can help achieve your revenue and growth goals.
Getting to Yes is an excellent book on this subject
As per CIPS, strategic sourcing is
“Satisfying business needs from markets via the proactive and planned analysis of supply markets and the selection of suppliers to deliver solutions to meet pre-determined and agreed business needs'”
Some key aspects which are essential here
a) Strategic Sourcing process
This is the foundation skill set for any good strategic sourcing professional. Now you can support your team by providing a good strategic sourcing process. In Simplifying your purchase process, we covered how to create an effective strategic sourcing process. If you start with something simple, have an essential process covering the steps from requirements gathering to awarding a contract to the vendor.
b) Market research skills
In most cases, your stakeholders would provide the list of suppliers to be included in the sourcing process. This is a prevalent scenario for commodity items or services, but what if your stakeholders don’t know enough suppliers for you to run an effective RFP?
In that case, your market research skills can help you identify new sources of supply for your next RFP.
Some critical skills in this area include using google for supplier search and common publications, etc.
For more on this, read seven free ways to find suppliers for your next RFP
c) Understanding business needs
Another key aspect of strategic sourcing skills is to understand business needs.
Yes, it is straightforward; ask your stakeholders for business requirements!
Though that is the preferred method, it doesn’t give you complete requirements unless the sourcing team member can help shape them.
Let’s consider a few scenarios.
A stakeholder only wants a widget from manufacturer A, and that limits your negotiation power. Simple demand and supply.
If the sourcing professional accepts that as a requirement, then there is limited leverage; however, if the sourcing team member tries to dig deeper into why only that manufacturer can better understand the business needs.
Asking why questions can help you better understand business requirements and increase the vendor based on the RFP.
In today’s day and age, Procurement works hand in hand with finance to drive cost reduction targets, whether that is reducing EBITDA or reducing the working capital requirements.
We are not suggesting that Procurement needs to know all finance jargon, but they need to understand how their work impacts companies’ financial goals.
For example, what items are considered COGS (Cost of goods sold) and how the reduction in COGS leads to an increase in revenue.
How reducing expenses increase the EBITDA margins.
Understanding these key metrics would help your team better appreciate the role they play in helping meet the corporate goals.
To summarize, they should understand the impact of cost savings on the Income statement.
Analytics skills are a must for sourcing professionals to analyze the spend data to identify savings opportunities.
Not only does it help with spend analysis, but it also helps in better presenting the cost savings data to the senior management.
Now, as your team grows, you can think about having a dedicated team member doing data analysis so that the whole team doesn’t need to have those skills. Someone very good at data mining and procurement knowledge could be a terrific asset for your team.
We have added domain knowledge as a complex skill because sometimes, certain categories need specific domain knowledge for your procurement team to be effective.
Of course, your new hires don’t need to be domain experts from common commodity items. Still, if you are handling specialized categories like telecom, healthcare, network management, then that requires domain knowledge.
In the later section, we will cover how to hire for domain knowledge.
I’m not telling you anything new here, but Empathy is the most underrated skill for procurement professionals.
Like any other department, Procurement is trying to implement the best practices for purchasing by working with the stakeholders. However, it is vital to have Empathy towards your stakeholders for Procurement to be considered a trusted partner.
We would explain with an example:
Let say that you have a user who is not entirely in sync with the purchasing policy, and they are always used to doing their “own thing.”
If you approach that person in a confronting fashion accusing them of violating the policy – would that help your cause?
However, if the same person is approached with some empathy so that you try to understand their needs and why the process is not working for them, you would get a very different result.
While hiring procurement professionals, you should pay special attention to this. If you employ a negotiation superstar, it will not help your cause, but they can’t effectively work with different stakeholders.
Ask them how they deal with difficult situations where a stakeholder is not cooperating, and you would learn a lot on whether they have the empathy element or not.
Effective Procurement needs strong collaboration with various departments. Strong collaboration skills are required in all aspects of Procurement. Some examples where a strong partnership is required.
In our experience running procurement teams, no one person is good at all skills. Collaboration is usually a weak area for intellectual brains. So they might be very good at data analysis and defining the strategy, but when it comes to execution, they can’t collaborate with others.
Bonus: Want to know how to put this all together, don’t worry; we got you covered. Download our procurement team build checklist for free.
Hiring good procurement talent is a challenge for many procurement organizations, especially in today’s changing environment.
Procurement needs a different set of skill sets which is required, say a decade back. The focus is shifting more on enabling innovation and not just cost savings.
As per a recent survey by Deloitte, 51% of Chief procurement officers don’t have the right capabilities, which include talent to deliver value for their organization.
As we discussed earlier, both hard and soft skills are equally crucial for procurement professionals.
The challenge is finding unicorns who are equally good at procurement skills (hard skills) and good at stakeholder management (soft skills).
In our experience, it is best to prioritize the skill sets into must-haves and nice to have. The must-haves become your baseline which your potential hire should meet, and nice to have skills that potential hire can develop later with additional training.
For example, you might need an excellent negotiator to focus on cost control; however, if that person is not good at soft skills, you can probably bridge that gap by working directly with stakeholders.
Again it depends upon how much bandwidth you have and what you can live with.
With that said, that are two standard hiring models for hiring for procurement talent. In the techniques below, we mean strategic sourcing when we say procurement talent.
Procurement leaders are trying to address the procurement talent issue by hiring domain knowledge and then training for procurement skills.
The rationale is that you can always train individuals on procurement skills later.
Suppose you are just starting a procurement department, and you need strong domain knowledge (direct Spend). In that case, this might be a good approach to jump-start the procurement initiative at your organization.
Where it makes sense?
These hires are more common for categories where domain knowledge is essential, and hiring a person without domain knowledge won’t work.
This is a common case for highly technical categories. Most of the time, these are internal hires.
Since you are hiring for domain knowledge, it is always better to hire someone from the stakeholder team you support.
For example, you are supporting an engineering department, it makes sense to hire someone from engineering and then train them on procurement skills.
The other common scenario is areas where Procurement has limited engagement, and this could be used as a tactic to increase stakeholder engagement.
For example, you have never supported the marketing department before and you want to get engaged with marketing Spend.
The best approach would be to hire someone from the marketing department and then train them on procurement skills.
The approach works best when the procurement professional must have domain knowledge for effective engagement.
In both cases above, hiring someone internally makes sense because you get the domain knowledge and immediate engagement with stakeholders.
A word of caution with this approach, make sure that the internal hire completely handover their operational role before transitioning into a procurement role.
It is not uncommon for employees to transition to Procurement and keep on supporting part of their old operational roles.
In this case, you are hiring procurement talent from outside who might or might not have domain knowledge.
The key assumption here is that domain knowledge is important, but it is not super critical for the functioning of the procurement department.
The other key assumption is that the new hire can pick up the required domain knowledge in a reasonable amount of time.
Where it makes sense?
When you start the procurement department, your focus mostly would be Indirect commodities.
If you are in a service industry, most of your spending would be in the Indirect spend bucket, which means you can live without specific domain knowledge to begin with.
When you are hiring a generalist, the goal should be that they can get some quick wins so that you can establish procurement value.
You can always hire later for specific domain knowledge if you need a specialist to bring more Spend under management.
One word of caution here: if you plan to train your procurement team later on domain knowledge, then make sure they have done similar work in the past.
Notice, we said similar, not the same. For example, if the person you are hiring has a strong background in sales and marketing, you should not expect that person to become an expert in clinical research.
However, a person who has done sales and marketing can easily handle legal sourcing with enough training.
You got your objectives; you got your team. Now let’s look at what procurement technology you need to run the organization effectively.
Technology plays an integral part in enabling the procurement organization and enabling the stakeholders. There are different areas in which digital technologies are helping in enabling procurement organizations to deliver better value.
When starting a procurement department, your immediate focus is on transaction management, ensuring that basics are in place.
For example, orders are shipped on time and reduce the transaction cost, reducing the purchase order cost.
Then the focus gradually shifts to ensuring compliance with your preferred vendors.
In these areas, a good purchasing system can help you automate different pieces of the purchasing process. A good procure-to-pay system can help you automate the purchasing process, automate the invoicing process, and enable e-invoicing from vendors.
With that said, we will cover a basic overview of the most common procurement technologies available to Procurement. These are sometimes referred to as Source to Pay tools.
Spend analysis tools are primarily meant for sourcing and data analyst teams to analyze historical spend data to identify patterns and saving opportunities.
Any good spend analysis tool helps you classify the historical spend data into category buckets and then provides analytics to support the decision-making process.
Now a spend analysis tools make sense when you have disparate systems and good line descriptions. The tool can then harmonize the data into one standard classification schema and provide granular visibility at the line item level.
If you are starting with a procurement team, the chances are that you have limited data. You probably have supplier-level visibility, and in that case, you don’t have a spend analysis tool to evaluate your supplier Spend. You can use our free spend analysis template here.
eSourcing technologies help strategic sourcing professionals automate the RFI/RFP process and enable them to handle more volume.
Also, eSourcing tools can help you run e-auctions, both reverse auctions and forward auctions.
When you are starting the procurement department, you would probably have limited opportunity to run RFP’s. This is for two reasons:
We usually see organizations investing in sourcing tools when they have a large volume of RFP’s and a large number of stakeholders.
Contract management technology serves two purposes.
1. It allows you to store Contracts in one single place with rich information. Having rich data about contracts helps you track key renewal dates, understand contract risks, and so on. The most significant benefit is that you don’t have to keep looking in people’s drawers for the contracts.
2. It allows you to draft new contracts quickly. If you always like to use your contract copy, this is a good option. Having a contract tool for creating new contracts enables the legal department to provide standard clauses and fallbacks.
Once the sourcing team has this information, they can include your legal team for further review.
Contact management technology makes sense for the following reasons
Most companies start with creating a simple structure on their internal storage systems and then evolve from there. If you can invest in a contract management repository from day one, it would make it easier to manage the contracts.
As your supplier base grows, you need to maintain better information about suppliers and track their performance.
Supplier information management tools allow you to store more information about your suppliers. For example, your accounting system might have primary fields like tax id, name, and locations. However, using a supplier information management system, you can store information like insurance certificates, diversity certificates, capability information, etc.
Some supplier information tools also gather news in real-time and analyze the impact of the information for you.
Supplier performance management tools help you create, measure and track performance scorecards for your suppliers.
However, it is a good practice to track performance for your key suppliers.
Should you invest in Supplier information and performance management tools?
It depends on whether you need more information about your suppliers and whether you need to track supplier performance.
Supplier performance tracking is critical for raw material suppliers because that directly impacts the product you are producing.
In our experience, we see companies investing in such tools at a later stage of their procurement maturity curve.
Procure to pay, or e-procurement automates your end-to-end purchasing process, including invoices and, in some cases, payments.
There are multiple use cases for implementing procure to pay technology but here are the two most common use cases.
Purchasing use case
This use case covers automation of the purchasing process, which includes
For more details on the procure to pay process and its pros and cons, check the details on Procure to pay use cases.
Purchase and Invoice use case
This case covers the automation of the purchase order and invoice process. The idea is to have the end-to-end process in one system to be efficient for the Procurement and Accounts Payables team. The entire process is streamlined, and that ensures faster processing of the documents. This use case needs close collaboration with your Account payables team.
This use case covers the steps mentioned in the purchasing use case and the following steps.
The standard mechanism includes EDI (Electronic Data Interchange), email, and cXML. Don’t worry about the jargon; your procurement system vendor should be able to take care of this for you.
Why should you invest in Procure to pay from day 1?
Other than our obvious bias towards this recommendation, here are some reasons why you should think about investing in procurement technology from day one.
1. It helps you socialize the value of Procurement through better data and visibility.
2. A modern procurement system helps you better understand the Spend trends and delivers line item visibility. That visibility not only drives better decision-making within the organization; it also helps the procurement department to drive better cost savings.
3. When you are starting the department, you have limited resources. Bu automating the purchasing process, you can focus on more value-add activities rather than tactical activities of pushing the order outs.
4. There are tangible cost savings by reducing the cost of processing purchase orders. Please don’t take our word for it; calculate your own cost of a purchase order.
5. Procurement technology is inexpensive now, so why not give your stakeholders a better experience and elevate the procurement department’s value?
When it comes to investing in technology, Procurement is constantly dealing with limited budgets. You would need to prioritize what technology components make sense initially and what can be implemented later.
A lot of factors would drive the prioritization. For example, if you have a large volume of purchase orders, it makes sense to automate the purchasing process.
We have covered different areas of building a procurement team, but the essential part of team building is to have an approach to increase stakeholder engagement
Your stakeholders need to see Procurement as a value-added partner vs. a necessary evil. That would help you deliver long-term value for Procurement and help elevate the role of Procurement in the organization.
There are different ways to engage your stakeholders, and we have already covered this subject in detail – how to increase stakeholder engagement
Here is a summary of what we have written so far on this subject
Engaging your stakeholders starts with understanding your stakeholders. There are internal and external stakeholders, and Procurement needs to focus on both to deliver value.
So what we mean by understanding stakeholders
Who are they?
This is specific for internal stakeholders. When you are just building a procurement team, you need to not only understand who they are but also what they were doing with respect to Procurement before you joined the organization.
This is really important because if they are used to managing their own negotiations, you would have a tough time moving them away from that. So understanding their preferences would help you to be better prepared.
What are their business goals?
Every department owner would have two types of goals
One, the purpose of the department- for example, marketing sales, etc.
Second, their short-term goals and objectives.
Just because someone says they are in marketing, don’t assume that you know what they do. Certain core functions are common across companies. For example, Sales is responsible for selling. But the goal of this exercise is to get one level deeper and understand their stated goals and the challenges.
For example, you might be surprised how similar the role of IT and Procurement is. Both Procurement and IT also struggle with policy adoption challenges because there are always some rogue elements who want to do their own thing.
On the short-term goals, that helps you understand areas where you can deliver quick wins and get the engagement going. For example, let say the sales department wants to find a solution to increase the productivity of the sales team, they have found a couple of solutions, but they all seem to be out of their budget. Can you help them get the product/service within their budget?
You might not claim savings, but that is a great way to start building stakeholder engagement.
Different people have different personalities, and that is true for your stakeholders also. Understanding their personality types would help you structure a different approach for each stakeholder.
For example, some stakeholders like to take charge in vendor negotiations, and some might entirely rely on you to decide the approach and provide guidance during the vendor evaluation process.
If you don’t want to spend enough time on this, understand their need for control at the bare minimum. Some stakeholders need to feel fully in control of the evaluation process, which is important to them.
Based on the personalities, you can adapt your approach.
By understanding the goals of your stakeholders, you can better structure your team to serve the needs of the organization.
What do we mean by that?
Let’s take an example. As a part of understanding your stakeholders, you met with the CIO or VP of information technology in your Company. She explains that the department’s goal is to migrate all legacy applications to cloud-based applications in the next 24 months.
Also, they want to ensure that they can leverage existing platforms instead of purchasing point applications.
So how do you go about aligning goals?
There are two ways you can better structure your team to align with the goals of the CIO.
Since you now understand the stated goals, you can identify what skill sets would be required in your team to support the CIO’s goals. Would it help to hire a sourcing professional who has experience in negotiating cloud applications?
Or maybe you can find some in IT who wants to move to Procurement.
Second, you can help the IT team in identifying consolidation opportunities. For example, marketing wants to invest in a niche email marketing tool, but your current CRM solution already provides that capability. You can route all such requirements to IT and let them help drive consolidation.
Conclusion: There is no doubt that Procurement’s main driver is cost savings, but focusing on cost savings alone will not help drive stakeholder engagement.
The same is also true for the approach you take with your stakeholders. Remember we talked about understanding personality types. Once you understand your stakeholders, you can customize the approach for each stakeholder.
Here are some examples of how you can customize the approach
When it comes to enabling your stakeholders, keep in mind that you can’t approach this with a policy enforcement mindset.
For example, one stakeholder would love the RFP approach, and the other might just want to call the vendor and select one. Yes, we are exaggerating a little bit, but you get the point.
So are we suggesting that you let your stakeholders do what they want without regard for procurement policy?
No, we are not.
We suggest that you keep your strategic sourcing process flexible and adapt that to the needs of your stakeholders. You need to continuously evaluate whether your current strategies are working and what adjustment is required.
Not all stakeholders like detailed presentations and recommendations supported by facts. Some might want just a quick update or high-level summary without going into details.
Understanding what works best for each stakeholder helps you save time and better enable your stakeholders.
For example, if you know that a particular stakeholder doesn’t like presentation, there is no point in laboring on one. Just present a synopsis and that all!
Stakeholder engagement is not one and done. You need to seek regular feedback from your stakeholders and report on the value added to the specific department or the entire organization.
Here are a few reasons why you should regularly seek feedback from your stakeholders
Changes in Priorities
Stakeholder priorities change every few months, which is driven generally by the corporate strategy. That’s why you should have a regular cadence, preferably quarterly, to connect with your stakeholders and get their feedback.
That will ensure that you are continuously evolving the capabilities of your team to match the needs of your stakeholders.
Change in stakeholders
Your stakeholders might change due to attrition or people moving on to other departments. So having a continuous feedback loop ensures that you are in touch with the needs of your stakeholders.
Once you establish the engagement cadence with your stakeholders, it is essential to seek feedback from your stakeholders continuously. For example, by seeking feedback, you can understand how happy your stakeholders are with the assigned team member and what corrective actions are required.
Bonus: Want to know how to put this all together, don’t worry, we got you covered. Download our procurement team build checklist for free.
No discussion of procurement teams is complete without addressing the question of measuring and tracking the procurement team’s performance.
You could broadly divide the performance metrics into two categories.
At the beginning of this guide, we talked about understanding the expectations of your key stakeholders and what they expect from the procurement department.
We can use the outcome of that exercise to design key performance metrics that need to be tracked to ensure that Procurement is aligned with the corporate goals.
For most procurement teams, this will fall into three major areas
You can think about procurement metrics as transactional metrics and operational metrics. What do we mean by that?
Transactional metrics are about the efficiency of your purchasing process. These metrics help you to understand if you need to simplify your purchasing process further.
Things like the number of PO’s processed, the time it takes for approval etc.
Operational metrics are focused on the output of the strategic sourcing function. Things like the number of categories per category manager, savings delivered as a percentage of Spend managed.
Both categories are equally important. The first category is focused on stakeholder engagement and ensuring that Procurement is delivering what the stakeholders expect.
The second category allows you to measure your team’s productivity and understand the areas for further improvement.
As per the 2018 Deloitte survey, CPO’s have the following priorities, and these drive the metrics for measuring procurement performance.
As you can see, the top 3 measurements are related to cost savings, and then followed by supplier performance and operating efficiency
With that said, the following is a list of key performance metrics you should be tracking. This is not a comprehensive list but should get you started towards building a dashboard for measuring procurement performance.
You must be wondering why cost savings is not our number one Key Performance Indicator (KPI). We strongly believe that better engagement drives better cost savings.
If you are actively tracking stakeholder engagement, that would impact all other metrics and drive positive change for other KPI’s
What and how to measure it?
The main goal is to measure the overall satisfaction of your stakeholders. However, this needs to be tracked in comparison to other areas too. For example, If your stakeholder’s engagement is increasing, but your Spend under management is decreasing, then there is something wrong with this picture.
Higher engagement should lead to higher Spend under management.
Stakeholder engagement can be tracked through surveys or in-person meetings. We recommend a quarterly frequency for tracking this metric.
At a bare minimum, you should be asking this:.
You can add your own questions, but the first two questions can give you a clear objective measure of stakeholder engagement.
The third question is designed to be open-ended so that you can get whatever feedback they might have.
Cost savings if the main function of Procurement. If you are new to procurement cost savings, we recommend reading Procurement cost savings, a complete guide
What and how to measure it?
Procurement should report cost savings in the following categories
Every Company has an Opex budget to run the operations and a Capex budget to invest in the assets to drive future revenue growth.
A simple way to track cost savings is to create a procurement savings tracker, which is a simple tracker to maintain your savings, and in that, you can mark savings as Opex or Capex.
One important note here is that you are reporting against the allocated budget for that project. For example, you have $100,000 allocated for the purchase of the new software. For the sake of simplicity, let’s assume that the average bid from all suppliers was $115,000.
Your final negotiated cost is $95,000.
So cost savings is ($100,000- $95,000) $5000 and not $20,000 ($115,000-$95,000)
You continuously measure against the budget. The reason you do it this way is so that the finance team can adjust the budgets accordingly.
Capex cost savings is savings delivered against the various projects in the capital plan.
As you might already know, Opex savings impact EBITDA and cash flow, but Capex savings only impact the cash flow. So Opex savings delivered by your team is helping to drive better EBITDA margins.
In our view, cost avoidance is equally important as cost savings. Cost avoidance is considered soft savings because it is the avoidance of cost and not a price reduction.
For example, Marketing wants to implement a new initiative for driving more leads, and it is going to cost $100,000 based on the initial quotes from the vendors.
There is no budget allocated to the project, but with your involvement, you brought the cost down to $50,000. Would you consider $50,000 as cost savings or cost avoidance?
If you look purely from a financial perspective, it is cost avoidance because there is no pre-allocated budget for this project. However, if Procurement was not involved, probably the cost would have been $100,000 or a little bit less.
So even though you are not considering this as cost savings from a finance perspective, it is still an important contribution from the procurement team
Spend under management is the Spend managed by the procurement team or spend where the procurement team has any influence.
As per Ardent partners, for every new dollar placed under the procurement department’s management, the average enterprise realizes a benefit of between 6% and 12 % during the first contract period.
Also, as per Ardent partners, best-in-class companies have 90% + spend under management.
How do you measure Spend under management?
First, exclude all the non-vendor payments from the Spend, For example, interest payments, payroll, taxes, regulatory payments, etc.
Based on your industry, you should quickly scope out what is in scope or out of scope for Procurement.
Second, out of the In-scope Spend, measure how much Spend in any given year is influenced by Procurement. In other words, how much of the Spend has gone through your procurement process.
So there you have it, track it on a quarterly basis, and if the numbers are trending up, then that is better for the procurement department,
Contract compliance is a measure of the effectiveness of your purchasing process.
Procurement might spend endless hours negotiating the best deal on the planet, but if your stakeholders are not purchasing from that contract, then you are not going to realize procurement savings.
Any spending that is not with contracted vendors is called maverick Spend. Understanding contract compliance helps you implement strategies for controlling maverick Spend.
There are two sub-categories for contract compliance
A transaction is compliant at the contract level if the purchase of a product or service is routed to the right supplier and the right contract. For example, all office supplies products should be purchased from Staples or office depot is an example of contract compliance.
Compliance at the line item level is to measure whether you are getting the right pricing based on negotiated tiers. For example, a widget costs $10 but as soon you cross 1,000 units cumulatively, the price drops to $9. So line item compliance would track if you got the $9 price for any widget purchased after the 1,000 units.
Line item compliance is hard to administer. Investing in a purchasing system can significantly reduce this headache because you can now implement a catalog-based approach to drive tier-based pricing.
The cost of a purchase order is another important key metric you should be tracking. Do you know what your purchase order cost is?
The purchase order cost consists of all steps required to process a purchase order. That includes requisition, approval of requisitions, creating purchase orders, and sending purchase orders to suppliers.
There are various PO cost benchmarks available across industries. It could be as low as $50 and up to $500. Of course, that is because of the complexity and maturity of the procurement process.
Why does it matter, and how to measure it?
First of all, it is a tangible cost, and if you can reduce the cost, you can either run the department with less headcount or you can move the current resources to more value-add activities.
For example, your team can focus on running more sourcing events instead of spending time manually processing the orders.
Measuring the cost can be done either based on estimates or taking a random sample and calculating the average PO cycle and cost associated with it.
You might not think of executives’ cost as part of PO cost but come to think about it, the time spent on approving orders is costing their time, and executives could have used that time somewhere else.
We have covered a step by step approach to calculating your own purchase order cost.
Purchase order cycle time is the time it takes from the time the user creates the requisition to when the purchase order is sent to the supplier.
You should be able to report these metrics out of your purchase order system.
This metrics is important to track for two reasons
How efficient is your purchasing process
If the order is taking too long to be approved, then why is that the case?
You might realize that the requisitions are sitting in draft for a long period of time, and that is caused by users not having the right information at the right time.
You could easily solve this problem by building more catalogs so that information is readily available.
If the reason for the delay is that the user doesn’t know how to use the system, then you can solve that by providing more training or cheat sheets.
Are the orders getting approved at the right authorization level
The other common reason for delays is the approval levels. Any good purchasing system can help you automate the approvals based on the purchasing policy but are they getting approved at the right level?
The data should tell the story of whether your approvals are efficient are not. For example, if all the approvals are going to a person higher in the hierarchy, why is that the case? Maybe the purchasing limits at the lower level are too low.
Analyzing your cycle time can help you identify problems with your purchasing process and how to go about simplifying the purchasing process.
Procurement cost savings is an important KPI for procurement teams. However, tracking the savings pipeline is equally important.
A close analogy would be sales; if marketing and inside sales are not continuously working on generating leads, then field sales will not be able to meet the revenue targets, no matter how good they are.
The same is true for Procurement; you need to have a healthy pipeline of projects for your strategic sourcing team. The two main benefits of having a savings pipeline are as follows.
There is no point in delaying the cost savings because of the lack of resources.
We have covered a lot in this guide to make it comprehensive, but you can get value from this guide even if you just read one chapter.
If you can take away one thing from this article, I would say that is the balance you need between driving cost-saving and managing stakeholders’ expectations.
Curious if Procurement technology can help your Procurement team? Schedule a demo with one of our product specialists and find out how you can transform the procurement department at your Company.