Editor’s Note: This week on CPO Rising, we’re publishing some “best of” 2016 articles as we reflect on the year and prepare for the new year ahead. We also have a research report and a webinar that are only available for a few more days. Enjoy!
Every year, the pace of business continues to accelerate, forcing enterprise sourcing teams to adapt to changes and shifts within global markets in order to stay competitive. Although workloads and responsibilities continue to increase, sourcing teams remain understaffed with little relief in sight. As a result, collaboration, early engagement, process linkage, and automation have become valuable force multipliers to help extend a sourcing team’s impact throughout the enterprise, even as it remains stretched to its limits. This article series, based on the annual State of Strategic Sourcing report, will examine the pressures and challenges facing sourcing leaders today, as well as the capabilities and technologies that they bring to bear. It will conclude with a discussion of Best-in-Class performance, followed by recommended strategies that sourcing teams can employ to accelerate their souring game into 2016.
Best-in-Class Performance Metrics
Cutting costs and increasing savings are a couple of important measures for how a procurement organization performs in its mission of delivering the best value to the organization. One way to cut costs/increase savings is to not spend money; another way is to spend it wisely and efficiently. There are many ways to do this. Best-in-Class sourcing and procurement teams consistently show us that process standardization, linkage, and automation correlate with greater performance across a variety of metrics. Here is what superior performance looks like:
- Spend Under Management: At 71%, Best-in-Class sourcing teams report nearly one and a half times greater spend under management (all spend that procurement influences), compared to all other sourcing teams. We can attribute their superior performance to their ability to gain visibility into their spend, their ability to leverage eSourcing and contract management tools in harmony, their ability to collaborate with internal and external stakeholders, like suppliers, and their ability to manage supplier performance to their advantage.
- Savings Last Year (Actual): As a result, the Best-in-Class reported 11% realized savings last year, nearly four times as much as all other teams. The invisible hand of spend analysis is likely at work here, as well, for if it can be identified, then it can be sourced at more competitive prices. Extending this visibility across the sourcing process into contract management and supplier management can help corral maverick (off-contract spending) and drive supplier compliance and performance.
- Savings This Year (Planned): Based on their enhanced ability to realize identified savings, Best-in-Class sourcing teams report two and a half times greater planned savings than all other teams at 10%. Why would not shoot for the stars if they thought it was attainable?
- Percentage of Spend Sourced: At 63%, the Best-in-Class source more addressable spend than all other teams, meaning that they place more spend through the formal sourcing process with suppliers. By leveraging eSourcing tools, they can conduct more sourcing events, which incrementally saves the enterprise more money and increases efficiencies between buyers and suppliers.
- Percentage of On-Contract Spend: Best-in-Class sourcing teams report 64% on-contract spend, meaning that nearly two-thirds of their spend is conducted through established contracts with preferred suppliers, rather than off-contract/maverick spend or by conducting three bids and a buy. Best-in-Class on-contract spend is one-and-a-half-times greater than that of all other teams.
- Percentage of Transactions Compliant with Contracts: Not surprisingly, the Best-in-Class report 69% of contract-compliant transactions, which is also one-and-a-half-times greater than all other teams. Simply put, more spend conducted through established contracts should mean more compliant transactions, which can have numerous windfalls – from low savings leakage, to enhanced risk management, and ultimately to greater enterprise value.
The Best-in-Class do not become best-in-class overnight and reap the benefits the next day. It takes years of practice, process efficiency, standardization, automation, and linkage to get these kinds of results. It may seem insurmountable for less mature and under-performing procurement organizations. But as the saying goes, “the journey of a thousand miles begins with a single step.” CPOs and procurement teams that wish to take that first step need to imagine the possibilities before them and then rationalize their next few moves based on where they are and where they’d like to go next.