Editor’s Note: This week on CPO Rising, we’re publishing a series of “best of” articles from 2015 as we reflect on the year and prepare for the new year ahead. Enjoy!
Ardent Partners recently published my annual CPO-themed report – CPO Rising 2015: The Agility Agenda (click to download, registration required) – that is drawn from the responses of more than 300 Chief Procurement Officers and other procurement executives (as well as 26 CPO interviews) and presents a comprehensive, industry-wide view into what is happening in the world of procurement. As we do each year, we like to discuss the research report in a series of articles that examines some of the key findings and major takeaways from the study.
Best-in-Class Procurement Performance
In 2015, procurement departments, on average, manage just slightly over 60% of total enterprise spend, a number that has stayed flat for the past few years. Additionally, these organizations, on average, delivered annual savings that totaled 6.0% last year (2014) and are expected to deliver 6.6% this year (2015). The savings numbers continue a multi-year downward trend and parallel the gradual, relative de-emphasis on procurement savings that is occurring within global enterprises and their procurement departments. Average sourcing volumes have followed in lock-step with savings, trending downward this year and falling below 50% for the first time in several years.
Ardent’s analysis in this report determined Best-in-Class procurement performance by identifying the top 20% of performers in the spend under management metric. These leaders have placed, on average, 90% of spend under the management of the procurement organization which is a full 70% more spend than their peers. Ardent uses spend under management as a starting point in the development of its Best-in-Class Framework and to drive additional discussion and deeper analysis of strategies, capabilities, and results.
The Best-in-Class Advantage
In 2015, the Best-in-Class procurement departments manage most of their enterprise spend (90%) and based on other performance metrics, manage it well, or at least significantly better than the competition. The ability to influence 90% of total spend is an accomplishment borne from years of hard work, tenacity, and consistent execution. It is also worthy of high praise. These Best-in-Class teams have proven that their CPOs’ plans to gain credibility and influence spend are both achievable and worthwhile. These groups, more than others, stand on the cusp of the next wave of procurement, well-positioned to continue to push the procurement performance envelope and execute the CPO’s new Agility Agenda.
While the Best-in-Class manage significantly more spend than their peers, they also source significantly more addressable spend (61.8% vs. 43.9%). This higher level of sourcing activity, combined with other efforts, enabled the Best-in-Class to report savings that were 15% higher in 2014 on a much bigger spend portfolio. This means that the bottom line impact of having a procurement department operating at Best-in-Class levels can pay for the entire department many times over – this shows once again that the leverage from a successful procurement operation can be extraordinary.
Best-in-Class Drivers for Superior Procurement Performance
At a higher level, Best-in-Class procurement performance can be attributed to several key process and technology drivers that they leverage more frequently than all other procurement and sourcing teams. Across the board, the Best-in-Class are more likely to standardize processes, like spend analysis, sourcing, contract management, and supplier management, than all other teams. And in the case of spend analysis, they are also more likely to link it to their other sourcing activities. This should not be a surprise, since linking sub-processes is much easier when the areas are clearly defined and understood. Linked processes and systems can result in a more familiar and user-friendly experience, which can drive more users to leverage them, foster greater spend under management and ultimately, greater realization of identified cost savings.
Best-in-Class procurement teams also automate and leverage technology solutions more frequently than other teams as shown by higher application adoption rates. Chief Procurement Officers from Best-in-Class procurement teams understand that technology solutions, when implemented well and leveraged effectively, can be force multipliers for their staff, and can allow them to move mountains across the sourcing landscape. For example, automated spend analysis solutions can allow a staff to aggregate, analyze, and distill spend data into actionable spend intelligence in a scalable and repeatable way. This in turn can help them develop better sourcing strategies and make more informed sourcing decisions.
The use of business networks among the Best-in-Class is also a noteworthy feature. Since business networks provide enterprises with an array of suppliers that are already connected electronically for transactions, Best-in-Class teams that leverage business networks can take advantage of a supplier base that can enable greater agility vis-a-vis changing market conditions and is already “enabled” on a system.
Best-in-Class procurement departments, on average, manage 90% of enterprise spend and they do it more efficiently and more effectively than their competitors. They think about their processes more holistically and utilize technology to drive visibility, collaboration, and superior performance. To learn more about their characteristics and competitive differentiators, click to download CPO Rising 2015: The Agility Agenda (registration required).