Are you looking to elevate the role of Procurement in your organization?
Procurement transformation can provide you with a framework on how to transition your procurement department from a tactical cost center to a strategic value-added profit center.
Procurement like any other back-office functions has been focussed on supporting the need for the function and optimizing the functional areas. These could be efficient purchasing process or working with suppliers to ensure seamless delivery of product and services.
Procurement is continuously trying to elevate the value-add in the organization. I am sure you would agree with me that procurement transformation is not an overnight success.
Transforming procurement from tactical to strategic value-add organization needs a well thought about procurement transformation model and a flawless execution to achieve stated goals.
As head of procurement, if you are looking to transform procurement, then the steps mentioned in the post would help you to get started on your procurement transformation journey. Let’s get started
Senior management of any company now demands from procurement. Is not just about cost savings anymore but depending on the industry, procurement could be tasked with enabling new product development, managing supplier risk and sustainable procurement.
The first step is defining the strategy for procurement transformation. In this, we are answering the “Why” of procurement transformation. Why it is needed and what are the factors which are influencing it.
For example, Deloitte suggests that Procurement must transform itself by 2020 due to the following reasons
The need for transformation is driven by the changing expectation from management.
Procurement is expected to be equipped to be an advisor to the finance and operations along with other supply chain functions. Such an organization needs a different approach, skill set, and people.
So where you get started with the procurement strategy?
Start with interviewing key stakeholders on understanding the long-term vision for the company as well as the expectations of the procurement department. Some of the stakeholders you should talk to
a) CEO/ COO – You can talk to the COO or if your company doesn’t have a COO role, talk to the CEO of the company. The goal is to understand key operational goals for short and long-term (5 years) and the potential barriers to achieving these goals.
From there, map out the role procurement can play and capabilities your team needs to develop to support operations requirement.
b) CFO – Conventional wisdom is that when it comes to procurement, CFO’s only care about cost savings. That is not true anymore. CFO’s are looking to procurement teams for better spend visibility, understanding cash flow trends and managing cash flow goals.
Talk to your CFO and understand where you can add value, that assessment should drive strategy for your procurement department transformation.
Once you have your strategy defined, it is time to clearly define the benefits of procurement transformation. It is important for two reasons
The following transformation model from Deloitte is a good start.
The model divides the outcomes of procurement transformation into four areas and the additional skill sets your team can gain as a result of a transformation.
For example, Financial metrics could cost savings and cost avoidance.
Risk management could lead to fewer disruptions, it is always better to have SMART goals. If you have a baseline of previous supply chain disruptions then you can clearly state the benefits and how the enhanced risk management can help reduce such disruptions
More and more procurement organizations now have a better appreciation of the value of enhancing customer experience. This is one of the major drivers for many procurement transformations, especially when you are trying to drive a behavior change or spend consolidation in Indirect Spend categories.
A better end user/customer experience leads to better stakeholder engagement and procurement teams should spend time in articulating the benefits of better customer experience.
The supply chain can tremendously help in gaining a competitive advantage, especially in discrete manufacturing. So you should look at what benefits an organization can achieve due to your transformation efforts.
The third step in the process is to assess the current state and what gaps do exist in different areas.
Let’s review each of those areas
Of course the most critical and valuable assets. The goal of this assessment is to understand current skill sets and what skill sets are required to achieve the end state of procurement transformation.
For example, the goal of procurement transformation is to align procurement with finance. The obvious requirement for that is that your team understand key financial terms and how to talk finance language.
Now if they already do, then great. You are already ahead of the curve. If not, then you might want to identify this as a gap and acquire necessary training etc. to bridge the skill set gap.
The other example could be to build low-cost sourcing capabilities and if none of your team has ever done that, then that is a gap which needs to be filled.
The next step is to assess your current processes and understand if they are aligned with your procurement transformation goals.
For example, if the goal of the procurement transformation is to improve customer experience then a process which needs five approval to procure a laptop is not going to cut it.
In this case, your focus should be to make the approval process simple. That could be done by giving more approval authority to individuals and building better controls to prevent any rogue spending.
Focus on the process changes required to meet your procurement transformation goals.
The right technology solution can help expedite the procurement transformation journey.
Start with documenting the role technology will play in transformation.
For example, if your goal is to modernize the experience for your end users, then an old ERP system will not work.
You should look for a Procure to Pay technology provider who can provide a consumer-like shopping experience.
Similarly, if your goal is to bring more spend transparency around spend then you should invest in a good BI tool, assuming you have accurate and granular spend data.
You finished your benefits and objectives, you assessed the gaps. Now it is time to clearly define the scope of transformation.
It is important for two reasons
One, it helps you to clearly define what is covered and how much time it will take to achieve the defined scope.
Second, it will help you to assess the cost of procurement transformation and build the business case so that you can get senior management approval.
The scope should answer these questions
These questions are dependent upon the objectives and benefits defined in the previous sections, For example
We will train our resources to improve their financial and data analytics skills. This will require training and continuous collaboration with finance.
Another example – We will modernize the procurement process by implementing next-generation procurement tools. This will require substantial investment and executive buy-in for enterprise-wide change management.
It is obvious that technology should be a key part of procurement transformation but technology needs investment and time.
So it is important to prioritize the technology investments. Generally, procurement technology can be divided into upstream and downstream technologies.
Upstream is focussed on driving efficiency for productivity for procurement teams.
Downstream applications are focussed on driving better experience and enabling your employee through better purchasing experience.
Depending on your procurement transformation objectives, you can prioritize the technology deployment.
For example, a Spend Analysis tool can help you get better visibility into spend but doesn’t improve the purchasing experience for your employees.
If your objective is to make your organization a world-class data-driven procurement organization, then spend analysis could be a good start.
List down your objectives and the technology backbone required to enable and automate wherever possible. The automated the systems, the better for the chance for repeatable success.
With all you need to achieve for transforming your procurement department, you should create a roadmap for how long it will take to achieve your desired goals.
Your procurement roadmap should cover the following
Clear objectives of transformation
Clear benefits you would achieve. Find a way to quantify the benefits of transformation so that it is easy to sell and track. Just saying that we want to improve customer experience is not a benefit.
Improving the customer experience so that we can bring more spend under management is a benefit.
You can easily quantify the benefits of more spend under management through additional savings you can generate via additional negotiation leverage.
Your roadmap should also cover the resources required to achieve your objectives.
That includes internal resources, external resources, and technology investment.
It is best to do run an RFI to assess the cost of procurement transformation. If it is all internal resources, then the cost might be just additional headcount.
Your procurement transformation roadmap should also have the timelines in which you want to achieve those milestones.
In some cases, it might be very difficult to assess timelines with greater confidence, that is fine for now.
You can always refine the timelines later once you get approval to move forward.
You obviously need a sponsor for the procurement transformation. Most likely it is going to be CFO or COO depending upon where the organization report into.
And depending upon the scope, procurement transformation could be expensive. So spend some time calculating the return in the form of IRR’s (Internal rate of return) and NPV’s (Net Present value) of your proposed investment.
Procurement success is based on stakeholder engagement. The better the engagement, the better the chance for success.
Your procurement transformation scope though limited to your function does impact the entire organization. So it is critical to get the buy-in not just your immediate manager or CFO (In case you report into CFO) but also the key management executives or your stakeholders.
You should form a procurement advisory council if you don’t have one already. The advisory council should consist of your key stakeholders.
You should make sure that the advisory council should have both critics and supporters so that you are getting real feedback on how procurement is doing currently and how the proposed transformation is going to impact the organization.
For example, suppose you are looking to transform the way you purchase and pay your vendors through a procure to pay system implementation.
Your stakeholders would have concerns about disruption it may cause with supply chain or concerns around how the vendors would react to it.
Whatever the concerns might be, list them down, discuss the concerns and make sure you and your stakeholders agree on the game plan.
I can’t overemphasize the need to stakeholder buy-in, so please spend time on this.
Download Procurement transformation template
Procurement transformation is generally a 3-5 year roadmap to elevate the value of Procurement in the organization.
Done right, this could deliver significant benefits to your organization. Some of them are cost reduction, improved employee experience, reduced supply chain risk and more agile supply chain to address ever-changing customer needs?
I will not turn this over to you, where are you’re in your procurement transformation journey? Leave your feedback in the comments section.