How to build a world-class procurement organisation
published : 2 Mar 2015 at 06:00
newspaper section: Business
Procurement is often a company's biggest cost item, in some industries accounting for up to 80% of costs. And it is often one of the first areas companies target for cost savings. However, many global procurement organisations are not optimised to make the most of such opportunities.
What are the challenges? Business unit leaders may organise and design procurement for their own needs, not for global performance. Separate organisations may work towards different objectives, so the global procurement function lacks a clear mandate and struggles to convince all countries to participate. In fact, when Bain polled 75 North American executives about their procurement capabilities, nearly all admitted organisational hurdles made it difficult to reach full savings potential.
Our work with hundreds of clients has helped us to pinpoint areas where companies fall short — mandate and buy-in, roles and responsibilities, skills and capabilities and a lack of effective key enablers such as properly defined systems, standards, spending transparency and performance tracking.
Thankfully, companies are discovering a way out of this quagmire, building highly skilled global organisations that connect seamlessly across countries, efficiently managing categories at the global, regional and local levels. They have learned transforming a global procurement organisation takes time and careful planning, but it pays off.
Consider the case of a financial services company operating in more than 40 countries. A year after starting its transformation, the company is on target to save 8% of its spending and make those savings stick year after year.
Beginning the journey: Winning companies start the process of building a world-class procurement organisation by assembling the most senior leaders for a steering committee. With the right approach, a company can devise a robust, globally accepted blueprint within two or three months. After four to six months of rapid implementation, it can typically see and lock in tangible savings.
By properly linking the project to savings initiatives, a company can amortise project costs after only a few months. For example, at the financial services company, savings began accruing four months into implementation. At the eight-month point, when the long-term results were visible, stakeholders who earlier had resisted the effort became ardent supporters.
Based on hundreds of such programmes, we have identified the key elements of a successful global procurement transformation. These elements determine the outcome — the "what" — as well as the way to get there — the "how".
The what: A fact-based solution that is not guided by emotions, beliefs or politics. Before designing a global procurement organisation, a company must determine the right level of management for each category — local, global or a mix of both. It must look externally at the supplier market structure and internally at the potential synergies for pooling and bundling.
Then the company maps the categories and establishes the corresponding organisational set-up at the right level — globally, regionally or locally. Most companies focus on organisational structure at the design stage, but the underlying decision-making roles and processes are actually much more important.
Winning companies achieve a laser-sharp definition of responsibilities by creating a set of guiding principles for working together.
The second step is defining the procurement process, with a granular view of the key decisions behind it.
The third step is the most critical. With each category's level of management, guiding principles and processes in place, decision-making responsibilities must be assigned and clearly described at the global, regional and local levels across all functions involved.
We use a proven, pragmatic tool named RAPID® to assign decision-making accountability. It assigns owners to the five key roles — Recommend, Agree, Perform, Input and Decide — in every decision. When designing procurement RAPIDs, the best companies assemble a cross-functional team including procurement, operations, R&D and management to agree on how certain decisions should be made.
Companies need to strengthen the procurement organisation's skills over time, becoming a pool for top talent, providing rotational roles, continuous learning and competitive, results-based compensation.
Building the right skill base starts by systematically assessing the existing talent pool and devising a pragmatic skill-building plan.
The how: A collaborative global effort that truly involves countries and businesses. Mobilising dozens of countries or business units starts by creating a savings-based case for change. Winning companies then jointly develop the right blueprint with countries and business units.
For example, to determine if it had the right people to deliver its targeted savings, the financial services company assessed the organisation across all three of its regions. To decide if it had the right structure, it looked at industry benchmarks, identifying options and assigning each a degree of difficulty. Ultimately, it recruited a global chief procurement officer and 62 additional professionals, ensuring there were category managers to cover all spending categories. Through training, it systematically brought the entire procurement organisation up to the required skill level.
Finally, the best procurement organisations establish diligent change management and governance, owned by local units and linked globally. Bain has developed a battle-tested Results Delivery® framework that makes change risks measurable, manageable and predictable. With as little as two hours of training and some follow-up coaching, a local team can learn it.
Executives and procurement professionals who follow the above guidelines for transformation tell us they are impressed by two things— the approach feels different from other efforts, and it is far more successful than a series of one-off procurement initiatives.
Based on our work with clients, initial project savings typically range from 8-12% of total purchasing costs, with savings of 3-4% reaped annually after the transformation journey ends.
Klaus Neuhaus is a Bain & Co partner based in Duesseldorf, Germany, and leader of the firm's global procurement practice. Alexander Schmitz is a partner based in Duesseldorf and a leader in the performance improvement and private equity practices in Germany. Tobias Umbeck is a partner based in Munich and a leader with the organisational and results delivery practices in Germany. Francesco Cigala is a partner based in Malaysia and Southeast Asian head of the performance improvement practice.