Parties Involved in the Total Procurement Process Accenture research and insights into procurement performance mastery October 2008.

Parties Involved in the Total Procurement Process Accenture research and insights into procurement performance mastery October 2008

Procurement masters have a clear advantage over the competition:
Executive Summary Accenture looked practically at the profiles of 225 respondents as they relate to four procurement processes (strategy, sourcing and category management, requisition to pay, and supplier relationship management) and three key enablers (workforce, organization and technology). We found: Procurement masters excel across the board Procurement mastery is a clear predictor of high performance through procurement Procurement masters achieve higher savings Procurement masters face fewer organizational challenges Procurement masters have a clear advantage over the competition: Fundamentally, they operate more efficiently and effectively than companies that do not excel in procurement. Copyright © 2007 Accenture All Rights Reserved.

Contents Background and objectives Research approach Key findings
High performance through procurement Copyright © 2007 Accenture All Rights Reserved.

Background and objectives
Ongoing series of cross-industry studies in supply chain management We created and quantified a new term—“procurement mastery”—and explained its relationship to high performance (the traits exhibited by the roughly 10 percent of companies that consistently outperform their peers) Procurement has dramatically evolved into a strategic, proactive process Lower cost and higher productivity are the hallmarks of procurement mastery Procurement in search of excellence: With the idea that procurement has the ability to influence corporate profitability favourably, the functional development has been a topic of growing interest. Departing from a re-active clerical position in the 70’s procurement developed in a strategic pro-active function contributing as much as other business functions to the creation of competitive advantage. Necessary skills to operate a high performance procurement function could be gained through intelligent make or buy decisions. A procurement department can think of the make or buy opportunities along the domains outlined below. Motivation: Link Procurement to Accenture’s High Performance Business Initiative The High Performance Business Program run by Accenture was recognized by HBR as one of the most important business research initiatives launched in the recent years (Harvard Business Review) The HPB Program identifies true (HPB phrase, strategic intent of Accenture etc.) and link that with the proc. Study Our underlying hypotheses is that procurement mastery drives procurement business productivity. Leading companies have different approaches than lagging companies to drive more value out of procurement spend. The distinctive success factors of leading companies are summarized in a set of “High Performance Procurement Rules”. Goal: Developing “High Performance Procurement Rules” Describe the characteristics of procurement mastery businesses Investigate the relation between procurement performance and procurement mastery Analyze the impact of “strategic make of buy decisions” in achieving a high performance procurement High Performance Businesses (HPB) Research: After three years of original research, industry analysis and rigorous testing, Accenture has developed a compelling set of practical insights for companies that aspire to achieve uncommon business success. Development of industry-specific high performance business models based on research results (e.g. High Performance Banking). Procurement Research :Accenture conducts global research activities on procurement …. The current “High Performance in Procurement Study 2006” is a subsequent research activity to our overall procurement research program we run since 2002. Copyright © 2007 Accenture All Rights Reserved.

Survey demographics Exceptionally high quality survey participants
82% of respondents CPOs or Directors 74% are responsible for procurement on a companywide level 83% have more than 5 years’ experience in procurement, 59% more than 10 years 50% of companies are businesses with equal or more than 5bn$ revenues (2005) … by job function … by responsibility … by experience … by 2005 revenues Copyright © 2007 Accenture All Rights Reserved.

Survey demographics Broad and diverse industries and geographies
…by industry … by geography Resources and Communications and High Tech represent the biggest industry segments US is the single biggest country in the survey Copyright © 2007 Accenture All Rights Reserved. *Services include i.e. health-, consulting-services, buying organizations

Research approach Research type: Quantitative
Format: Standardized questionnaire Methodology: Online interviews Target group: CPOs with corporate responsibility Sample size: 600 responses, 225 in-depth mastery analysis Qualifying criterion: international, big corporations Geographical scope: 19 countries from Europe, Americas, Asia-Pacific Industries: responses from 25 different industries such as Automotive, Banking, Chemicals, and so on Survey Approach and Design Create the high performance in procurement research model Formulate160 statements describing the seven dimensions of procurement mastery framework Develop the procurement performance framework Commence online survey in Summer 2006 Copyright © 2007 Accenture All Rights Reserved.

The survey is built on six dimensions of procurement mastery
Research approach The survey is built on six dimensions of procurement mastery Procurement strategy 1 Vision, mission, core values Operating model Performance management Category strategic planning Sourcing and category management 2 Strategic sourcing Category policy setting Category management framework Compliance monitoring Requisition to pay 3 Transaction processing Assisted buying Master data management Fulfillment Supplier relationship management 4 Supplier performance mgt Contract management Supplier development and integration Workforce and organization 5 Having the right network of competent people Working in an organization that facilitates working together Technology 6 Technology that delivers the right information Systems cover all functions: strategy to operations Note: Internal stakeholder management is embedded in the categories 1 to 4 and was measured separately Copyright © 2007 Accenture All Rights Reserved.

160 statements in total across every dimension
Research approach 160 statements in total across every dimension Procurement strategy Sourcing & category management Requisition to pay 1 2 3 Supplier relationship management Workforce and organization Technology 4 5 6 Copyright © 2007 Accenture All Rights Reserved.

Research approach Masters are identified by achieving an overall score one standard deviation better than the average The unweighted average of all procurement performance elements from all participants is calculated Master: The company‘s average mastery level is one standard deviation above the average Low performer: if the company‘s average mastery level is one standard deviation below the average Low performer 17% Midrange performer 67% Master 16% +1 -1 Standard deviation Copyright © 2007 Accenture All Rights Reserved.

Research approach Performance is measured through an average score based on five factors over a three-year time frame Total cost of ownership savings 1 Total cost of ownership savings Total controllable spend 2 Percentage of spend controlled by procurement Total cost of ownership savings / operating cost 3 The ratio between total cost of ownership reduction and procurement operating cost New product development 4 Percentage of new product designs/introductions where procurement has a material role Formally managed suppliers 5 Share of suppliers managed through a formal process* Controlled, normalized average over 3 years * A formal process is the operational equivalent of what is a company’s documented procurement process, which describes how the company is purchasing goods and services Copyright © 2007 Accenture All Rights Reserved.

Application of procurement mastery drives high performance results
Key findings Application of procurement mastery drives high performance results Masters and low performers have been identified by analyzing 160 statements describing procurement processes in six dimensions according to Accenture’s procurement model Only those companies who are one standard deviation better than the average have been classified as master There are some companies with a high performance but a low or average best practice level (upper left box). Due to the wide and diverse sample, many different industries are part of our analysis and so there are very different companies within this category. high Low performer Midrange performer Master Procurement performance Average low low Procurement mastery high Copyright © 2007 Accenture All Rights Reserved.

Masters consistently apply best practices across all dimensions
7 Key findings Masters consistently apply best practices across all dimensions Copyright © 2007 Accenture All Rights Reserved.

Key findings Masters are more efficient and have a 30% higher effectiveness year-on-year. This translates into 10x higher productivity level Masters cost to procure are half as high but provide 30% higher savings vs. low performers Masters save 10 times as much as it costs them to operate their procurement organizations 10x +30% 4x On $1 billion of controlled, normalized spend, procurement masters provide 30 percent higher savings with costs that are 50 percent lower -50% * On US$1 billion of controlled, normalized spend * On US$1 billion of controlled, normalized spend Copyright © 2007 Accenture All Rights Reserved.

* Out of 14 barrier the top 5 are listed
Key findings In an environment demanding excessive cost reductions masters are challenged with organizational barriers and lack of talent Master Low performer * Out of 14 barrier the top 5 are listed Copyright © 2007 Accenture All Rights Reserved.

High performance through procurement
Procurement strategy Sourcing and category management Requisition to pay Supplier relationship management Workforce and organization Technology Copyright © 2007 Accenture All Rights Reserved.

Procurement strategy Masters systematically apply a strategic approach to purchasing, aligning it to the business needs and proactively managing relationships Masters undertake strategic category planning (3–5 years exploration) proactively for critical business categories i.e. looking at future business needs/identifying trends to plan supplier selection strategy/relationship to guarantee supply at the right cost. Masters have a clear mandate from top management and full accountability to achieve big business impact (innovation, cost reduction, etc.) 80% of masters measure procurement performance using a balanced scorecard; a clear definition of value is shared throughout the company to drive purchasing decisions. Copyright © 2007 Accenture All Rights Reserved.

Procurement strategy A third of all masters source indirect goods through outsourcing or contracting out “Contract out” and “Outsourcing” of Indirect goods (Percentage of responses) The degree of make-or-buy of resources and responsibility shows four principle sourcing alternatives In-sourcing: Procurement as a profit- or cost-center Full operational responsibility remains in house, nearly no or few external resources. Buy-in: buy procurement services Full operational responsibility remains in house, but buying/using external resources (i.e. consulting, auction or transaction processing services, body shopping) Contracted out: joint procurement activities Operational responsibility goes to a third-party, human resources largely remain in house (or potentially on loan to a strategic alliance, procurement joint-ventures) Significantly outsourced procurement functions Operational responsibility goes to third-party, human resources provided by third party (i.e. sourcing, transaction processing, category management, call center, application mgmt.) 34% of masters already contract out or outsource the sourcing of indirect goods 66% source indirect goods through In-house or buy-In services. Procurement: make or buy options Copyright © 2007 Accenture All Rights Reserved.

Masters externalize three times more transaction management tasks
Procurement strategy Masters externalize three times more transaction management tasks Masters externalize three times more transaction management tasks “Contract out” and “Outsourcing” of transaction management (Percentage of responses) 3x more Question: To what degree have you outsourced the transaction management in each of the following areas? *Make: In-sourced = full operational responsibility remains in house, nearly no or few external resources *Buy: Buy in = full operational responsibility remains in house, but using external resources (body-shopping) Contracted in = operational responsibility goes to a third party, human resources remain in house (strategic alliance) Significantly outsourced = operational responsibility goes to third party, human resources provided by third party] Average for all transaction management functions By transaction management functions Copyright © 2007 Accenture All Rights Reserved.

Sourcing and category management
Masters leverage centralization and cross-functional perspectives to provide best practice sourcing & category management Masters leverage centralization and cross-functional perspectives to provide best practice sourcing & category management Best practice sourcing and category management (Percentage of responses on a best practice level) 100% of masters have implemented a centrally guided category management structure, which cuts across organizational entities. A quarter of low performers are also moving towards such a structure. 90% of masters have a best practices strategic sourcing process and structure in place that includes: Cross-functional sourcing teams defining for a given category-project the optimal sourcing strategy, running the supplier selection and implementing the contracts. This is an end-to-end process without handovers. The execution of the project is formally tracked against key milestones. Cross-functional collaboration is formalized top-down through the structure of category boards. These boards typically hold senior people from different technical and user-departments on top of procurement organization and project leadership. Copyright © 2007 Accenture All Rights Reserved.

Sourcing and category management
Masters have a systematic approach to global sourcing, use dedicated sourcing experts and have a clear mandate to drive change Another key differentiating practice, that sets masters apart from low performers is related to how they leverage low-cost country or global sourcing. For 87% of masters low-cost country sourcing is one of the key levers for value creation, not through ad-hoc opportunistic projects with agents, but a well-orchestrated set of direct sourcing projects, based on total landed cost decisions. 80% of masters have a dedicated sourcing analyst pool to enable excellence in analytical support during the sourcing and category management process. A mere 5% of low performers have started to think to set-up a specialized analytics support. We see a trend of companies off shoring these analytical support activities to countries like India. When reviewing the survey participants feedback on how much control and impact they have on non-compliance, we see a correlation with how well they were able to tie procurement practices into the financial budgeting practices. 81% of masters versus 3% of low performers indicate that they have properly realized integration with financial processes and at the same time have the mandate to propose and drive corrective actions to reduce non-compliance. Copyright © 2007 Accenture All Rights Reserved.

Requisition to pay Masters invest in efficient and transparent approval chains, using assisted buying concepts Best practice in requisition to pay (Percentage of responses on a best practice level) 83% of masters provide clear and documented buying channels to the end-user. Category specific processes are defined, transparent and consolidated through buying portals. Masters enjoy 67% catalogue buying and the approval chains are efficient and transparent at 89%. Masters focus and learn from assisted buying to improve their requisition to pay efficiency and effectiveness continuously and drive towards further reduction of “spot” buys. Three quarters of masters manage the process from requisition to payment fully integrated and strongly automated. Copyright © 2007 Accenture All Rights Reserved.

Supplier relationship management
Masters combine a strategic approach to segmentation with an automated supplier performance assessment Best practice in supplier relationship management (Percentage of responses on a best practice level) Masters excel over low performers in that they apply a supply-base segmentation strategy, implementing differentiated approaches by supplier segments and tiers. Masters focus on key suppliers and establish with them long-term partnering agreements. Masters centrally log contracts and pro-actively manage contract information and compliance data. Tracking and reporting suppliers’ performances and assessment is an area of improvement for masters. Copyright © 2007 Accenture All Rights Reserved.

Supplier relationship management
Masters formally manage three quarters of their supply-base, three times as much as low performers Share of formally managed suppliers (Three year average in percentage) When managing suppliers, masters have nearly 3 times more suppliers they manager through a formal process than less experienced companies. A formal process is the operational equivalent of what is a company’s documented procurement process, which describes how the company is purchasing goods and services Copyright © 2007 Accenture All Rights Reserved.

A rigor and systematic suppliers management
Supplier relationship management A rigor and systematic suppliers management A global industrial conglomerate in aerospace, food-manufacturing equipment and technical services has been working to master procurement processes such as strategic sourcing, contract management and compliance management. It now is focusing on developing and sustaining long-term relationships with key suppliers, and achieving mastery in the monitoring and management of supplier performance. Three stages comprise this effort. First is the establishment of a formal supplier-development process and a consistent set of key performance indicators for measuring supplier performance. Forty-four key performance indicators were established across four main categories: quality, logistics, technology and cost. Each key performance indicator includes specific descriptions and measurements. The second phase emphasizes the deployment of these two capabilities. The third phase involves an information technology solution that automates the entire process. Key to these phases are “improvement action plans” that transform key performance indicator results into clearly defined business cases for the implementation of specific improvements. Copyright © 2007 Accenture All Rights Reserved.

Workforce and organization
Masters manage by objective and successfully address dynamic category management Best practice in procurement workforce (Percentage of responses on a best practice level) 100% of masters indicate that they have a clear practice of management by objective. Targets are agreed upon at the highest level and cascaded down to the different teams and individuals. With low performers this is 15%. 100% of masters have implemented a structure of centrally-led category management. Our survey also tested how participating companies are applying practices to make this structure dynamic. There is a clear trade-off. If most of the workforce consists of generalists, they can easily be matched to a dynamic set of strategic projects. On the other hand, success in sourcing and category management is driven by clear specialization, both in terms of categories and in terms of process. Management by Objectives 60 to 70 % of buyers’ time is allocated to strategic activities Dynamic structure of category mgmt Buyers master the company’s sourcing and supplier management processes. Buyers typically spend 4-5 years on a limited set of categories We perform dynamic matching of people against project opportunities Competency Development across the extented network Procurement workforce development actions consider the extended network of procurement-, other departments as well as suppliers (talent network) Learning is part of balanced scorecard; Career progress is based on established performance metrics, annual training requirements We constantly adjust the procurement skill level to our procurement strategy Optimal Career Path A clear and flexible career path is provided for procurement employees Copyright © 2007 Accenture All Rights Reserved.

Masters successfully manage the “trade-off” between standardized and specialized sourcing skills 76% of masters dynamically match sourcing specialists to prioritized projects (such as applying a scheduling mechanism), while at the same time allowing clear specialization within a given process and category. Masters move away from a rigid category specialization, by allowing people to work for 4 to 5 years in a given category. In Accenture’s experience (and also confirmed by our procurement survey of the organization of the future, 2003) this is the ideal balance for rotation: less than four years mean people can not build the deep skills, more than four years leads to people lacking the will to change and question previous practices. Only 5% of low performers apply these practices. Copyright © 2007 Accenture All Rights Reserved.

Masters take skills seriously through regular self-assessment and realize skill infusion through collaboration with external partners The skills of the buyers are at the heart of high performance in procurement. At the same time all participants realize that finding the right skills (war for talent) is the number two challenge facing current procurement organization. With respect to competency development, our survey found 78% of masters : have a strategic way of objectively measuring their existing competencies make frequent adjustments of the skill-set to their procurement strategy measure learning execution, tied into people’s performance metrics, and extend their competency development strategies into the procurement network of users, technical people, suppliers, partners. Only 3% of the low performers apply these techniques Surprisingly, only 58% of masters and 3 % of low performers indicate that they have a clear career path for procurement employees. This confirms that there remains a need for procurement organizations to clearly define the different career paths to constantly motivate people. In our experience these career paths should also address entry and exit points to other departments. Copyright © 2007 Accenture All Rights Reserved.

Masters have significantly higher portion of procurement people focusing on strategic sourcing activities and use more variable pay Share of procurement skills (Percentage of total procurement workforce) Use of variable pay (Percentage of responses) Workforce skills Low performer Master Management 13% 11% Strategic sourcing 20% 46% Transaction management, operations 67% 43% Variable pay Low performer Master Use variable pay 50% 86% No variable pay 14% Variable proportion of the salary in… Strategic sourcing 16% 17% Operational procurement 7% 10% Masters have significantly higher portion of procurement people focusing on strategic sourcing activities A significantly higher percentage of masters (86%) than low performers (50%), use variable pay. The level of variable pay in the total reward package does not differ much across companies Copyright © 2007 Accenture All Rights Reserved.

Technology Masters use common and automated technology which also supports the sourcing process and can provide easy reporting Best practice in technology (Percentage of responses) The importance of a common and automated technology supporting requisition to payment is highly regarded by the masters. Almost 80% of them have the integrated platform in place and have achieved to a high degree procurement master data harmonization. The ratio of suppliers integration technology is fairly high. Masters are heavily supporting their sourcing process with technology to keep collaboration and knowledge sharing high. The value of user friendly ad hoc reporting capabilities is seen by over 70% of the masters who deployed technology allowing timely reports driven transparency into the organization. Copyright © 2007 Accenture All Rights Reserved.

Conclusions Virtually all masters take a supply-chain-wide view of the practice of procurement. They consistently outpace competitors by working effectively with product development, design, manufacturing, logistics and service/warranty management. Procurement masters are ever mindful of a product, category or stock keeping unit’s total cost of ownership. For every purchased item, masters know the acquisition costs, the logistics costs, the integration costs and the potential cost of obsolescence or failure. Procurement masters know that changing demographics can turn today’s low-cost source of materials and components into tomorrow’s mid-cost source. For this reason, they insist that their sourcing venues not be overly “locked in”, and that their procurement organizations and staff are flexible and open to change. Copyright © 2007 Accenture All Rights Reserved.

Contacts Jan Bouwer Senior Executive, Public Services
Accenture South Africa Hayley Walters Senior Executive, Supply Chain Management Accenture South Africa Sean Riley Senior Manager Accenture South Africa Copyright © 2007 Accenture All Rights Reserved.

Parties Involved in the Total Procurement Process Accenture research and insights into procurement performance mastery October 2008.

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Parties Involved in the Total Procurement Process Accenture research and insights into procurement performance mastery October 2008.

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