This article first appeared on Forbes.com.
Procurement is often a company’s biggest cost item, in some industries accounting for as much as 80% of total costs. And it is often one of the first areas companies target for cost savings. However, when companies set out to gain those benefits, they often find themselves face to face with a daunting obstacle: Global procurement organizations often are not optimized to make the most of the opportunities.
What are the challenges? Business unit leaders may hold sway over how to organize procurement and may design it for their own needs, not for global performance. Separate organizations may work toward different objectives, giving the global procurement function less power than it needs—operating without a clear mandate and struggling to convince countries to participate. In fact, when Bain polled 75 North American executives about their procurement capabilities, nearly all readily admitted that organizational hurdles made it difficult to reach full savings potential.
Our work with hundreds of clients has helped us pinpoint the major areas where companies fall short: mandate and buy-in, roles and responsibilities, skills and capabilities, and a lack of effective key enablers such as poorly defined systems, standards, spend transparency and performance tracking.
Thankfully, companies are discovering a way out of this quagmire, building highly skilled global organizations that seamlessly connect across dozens of countries, efficiently managing categories at the global, regional and local levels. These companies have learned that transforming a global procurement organization 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 total spending and is positioned to make those savings stick year after year.
Beginning the journey. Winning companies start the process of building a world-class procurement organization by assembling a group of 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. Then after four to six months of fast-paced implementation, it can typically see and lock in tangible savings. By properly linking the project to savings initiatives, a company can amortize 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 in the earliest days had resisted the effort became its most ardent supporters.
Based on hundreds of such programs, 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 organization, a company needs to determine the right level of management for each different category—local, global or a mix of both. This requires gaining an external perspective by looking at the supplier market structure and an internal perspective by looking at the potential synergies for pooling and bundling.
Then, based on this fact-based approach, they map the different categories and establish the corresponding organizational setup at the right level—globally, regionally or locally. Most companies focus on organizational structure when designing their procurement function, but the underlying decision 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 and fitting those principles on a single page.
The second step is defining the procurement process, with a granular view on the key decisions behind it.
The third step is the most critical and requires the most effort. With each category’s level of management already determined and a clear set of guiding principles and process in place, decision responsibilities must be assigned at the global, regional and local levels across all functions involved. For each decision in the procurement process, the responsibilities of the various stakeholders must be described. We use a proven, pragmatic tool named RAPID to assign the key elements of decision-making accountability. An acronym for “Recommend, Agree, Perform, Input and Decide,” RAPID assigns owners to these five key roles 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 organization’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 conducting a systematic assessment of the existing procurement talent pool and devising a pragmatic skill-building plan.
The how: A collaborative global effort that truly involves countries and businesses. Mobilizing dozens of countries or business units starts by creating a savings-based case for change—a solid, rigorous foundation that shows what the full savings potential in procurement looks like.
Winning companies then perform joint blueprinting with countries and business units. For example, to determine if it had the right people to deliver on its targeted savings, the financial services company performed an organizational assessment across all three of its regions. To decide if it had the right structure, it looked at industry benchmarks, identifying a handful of options and assigning each a degree of difficulty. Ultimately, it recruited a global chief procurement officer and 62 additional procurement professionals, ensuring there were category managers to cover all spend categories. Through a series of training sessions, the company systematically brought the entire procurement organization up to the required skill level.
Finally, the best procurement organizations establish diligent change management and governance, owned by the front line and linked globally. Local teams identify and mitigate change risks on an ongoing basis, instead of relying on a global program management office team that may be detached and far away from the real frontline challenges. Bain has developed a battle-tested Results Delivery framework along 15 dimensions 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 the framework.
Executives and procurement professionals who take the time required to perform a serious transformation of their procurement organization following these guidelines 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% to 12% of total purchasing costs. And depending on the point of departure and industry, savings of 3% to 4% are reaped annually after the transformation journey ends.
Written by Klaus Neuhaus, a partner in the firm’s Global Procurement practice in Düsseldorf; Alexander Schmitz, a partner in the Performance Improvement and Private Equity practices in Düsseldorf; and Tobias Umbeck, a partner in the Organization and Results Delivery practices in Munich.