2010_06_highervisibilitygreaterexpectations.pdf

7/27/2019 2010_06_HigherVisibilityGreaterExpectations.pdf

1/16

Higher Visibility,Greater ExpectationsA.T. Kearney Indirect Procurement Study, 2010


2/16


3/16

HIGHER VISIBILITY, GREATER EXPECTATIONS | A.T. Kearney 1

The procurement o indirect goods and servicesdo you mean pa-

per clips, printer paper and temps? We just dont have time. The

spend isnt big enough to justiy the eort. Its maybe 20 percent o

our third party spend. We already have indirect goods under control.

Weve been sourcing oce supplies or years. Supply chain proession-

als have heard these types o questions and comments or years when

discussing the benets o managing the procurement o indirect goods

and services more rigorously and systematically. But indirect procure-

ment is not what it used to be.

Today ar more people recognize the importance

o indirect procurement as it now includes pur-

chasing complex goods and services such as IT,

marketing and advertising, acilities management,

proessional services, and maintenance, repair and

operations (MRO). Indirect procurement typi-

cally accounts or 60 percent o third-party spend

in non-manuacturing companies, more than 90

percent in the nancial services industry, and

sometimes 50 percent o spend in manuacturing

organizations. But recognition is only the rst

step. While many companies do a good job o

sourcing paper clips, ar ewer manage complex

indirect spend categories with the level o atten-

tion necessary to reap the potential benets.

To identiy how leading procurement organi-

zations are managing the procurement o indirect

goods and services, A.T. Kearney perormed the

2010 Indirect Procurement Study in which we

queried procurement executives rom 94 multi-

national companies who manage a combined

global indirect spend o nearly $134 billion (see

sidebar: Study Approach and Defnitions on page 2).

The results present a mixed picture. Procure-

ment organizations are becoming more infuential

within their companies, building stronger inter-

nal relationships and boosting perormance. An

increasing number o C-level executives under-

stand how indirect procurement contributes to

nancial results (cost reduction and revenue

growth), risk avoidance and value creation. And

they acknowledge that the contributions can be

substantial. As one leader said, In our business

unit, the chie procurement ocer (CPO) or indi-

rect goods and services has the same delivery targets

as the CPO responsible or direct materials.

Yet, in looking back at the results rom our

earlier studyperormed in 2007some opti-

mistic or aspirational predictions have not been

ullled, or they took place more slowly or with

less impact than expected. For example, the move

toward outsourcing indirect procurement has

been ar slower than anticipated. Participants in

the 2007 study expected 40 percent o opera-

tional indirect procurement to be outsourced by

2010. The actual gure is 14 percent. Furthermore,


4/16

HIGHER VISIBILITY, GREATER EXPECTATIONS | A.T. Kearney2

the outsourcing service providers o choice, which

were predicted to be business process outsourcing

giants such as IBM and Accenture, are actually

category-specic managed service providers with a

narrower mandate.

In another surprising nding, indirect pro-

curement organizations are leaving money on the

table by neglecting their most sophisticated tools.

For example, rather than using advanced data

analytics techniques such as predictive modeling

Study Approach and Denitions

Following A.T. Kearneys initial studyin 2007, the 2010 Indirect Procure-

ment Study ocused on how compa-

nies are becoming more ecient in

the sourcing o indirect goods and ser-

vices. The global study team, com-

prising 14 consultants and analysts,

have worked on hundreds o relevant

client engagements. Participants com-

pleted a detailed questionnaire with

more than 1,400 evaluation pointsspanning six dierent savings levers

or the successul management o

indirect spend: infuence, automation,

organization structure, tools and tech-

niques, benets measurement and key

perormance indicators. Participants

included procurement and supply

chain executives rom 94 companies,

representing 21 countries rom North

and South America, Western and

Eastern Europe, and Asia Pacic.

Study participant ratios are asollows (see fgure):

Onaverage,2.2full-timeemploy-

ees work on indirect procurement

activities per $100 million in third-

party spend.

Onaverage,80percentofthird-

party indirect procurement spend

is spread among 14.6 percent o

the supply base.

Onaverage,theequivalentof0.4percent o third-party spend goes

to non-personnel related inra-

structure costs to support the indi-

rect procurement organization

The ollowing are denitions or

the strategic, tactical and operational

activities described in this paper:

Strategicactivities.These typically

include business strategy develop-

ment, supplier relationship man-

agement, stakeholder management,

participation in multiunctionaldevelopment teams, process devel-

opment, simplication and

standardization.

Tacticalactivities.These typically

include routine supplier communi-

cation, interactions with internal

users, monitoring supplier service,

problem resolution, supply market

screening, demand analysis, cate-

gory strategy development, supplierselection, negotiation o contracts,

process controlling, spend manage-

ment, compliance management and

supplier perormance management.

Operationalactivities.These typi-

cally include requisition-to-pay,

order pacing and administration,

order retrieving, order inspection,

order registration, warehousing,

change order management and

nancial reporting.

Figure: The study highlighted several key ratios

*FTE is full-time employee Source: A.T. Kearney Indirect Procurement Study, 2010

Spend per procurement FTE*(for indirect goods and services)

Supplier spend concentration(% of suppliers receiving 80% of spend)

Non-personnel infrastructure costs

Average Average oftop quartile

Highestratio

Average Average oftop quart ile

Highestratio

Average Average oftop quart ile

Highestratio

$44.80

(US$ million)

$96.70

14.6%

3.6%

1.4%0.357%

0.877%

3.125%$170.80


5/16


to deliver useul uture insights, many indirect

procurement groups are merely analyzing data to

track historical trends.

Further, benets tracking remains a problem

or procurement organizations as they still do not

control where the savings go. Commenting on

a chie nancial ocers response to the benets

reports, one study participant explained, Even in

our strongly nancially ocused company, budget-

holders still decide what to do with the unds

created through sourcing their indirect products

and services. Without strict reporting and gover-

nance structures in place, the savings are oten

used in unintended ways.

It continues to be true that what companies

track and report illustrates what they value. More

than two-thirds o study participants say their

companies measure such nancial and internal

key perormance indicators (KPIs) as addressable

spend, identied savings and addressable catego-

ries. But less than hal include compliance man-

agement metrics such as spend integrity or

accuracy, supplier commitments, scorecards or

reviews. This data, o course, not only helps with

the realization and sustainability o identied ben-

ets but also inorms uture supplier selection and

negotiations.

In short, although once overlooked, indirect

procurement organizations have come a long way

and are increasingly recognized as having signi-

cantly more value to contribute.

Indirect Procurement: Infuence on the Rise

Where is procurement most infuential today, and

where does it expect to be involved in the uture?

IT, telecom and logistics are the categories in

which procurement is most active today(see fgure

1). Procurement has the least amount o infuence

Figure 1

Procurements level of influence by category

Source: A.T. Kearney Indirect Procurement Study, 2010

Average rating(100% = full involvement in all category related spend)

IT andtelecom

90%

80%

70%

84%

66%

80%

Current Future

62%

82%

62%

72%

56%

72%

58%

76%

68%

60%

50%

40%

30%

20%

10%

0%

Marketing andadvertising

Professionalservices

Overheadand support

Facilities Logistics


6/16


on marketing and advertising, and proessional

services. Looking ahead, the greatest growth is

expected in overhead and support, with acilities

and logistics ollowing closely behind.

Procurements involvement has increased over

time, as corporate boards consider business cases

or procurement that are based on past successes.

Growth within categories can refect a move rom

simpler to more complex goods and services. In

proessional services, or example, procurement

may have begun with temporary labor and

expanded to address boardroom-driven expenses

such as audit, legal and consulting.

Viewed regionally, procurement executives in

developing regions and emerging markets expect

to experience the most growth in infuence. For

example, Latin American study participants expect

tobeinvolvedin84percentofrelatedspenddeci-

sions in the uture; today they are involved in

about 62 percent o such decisions. Study partici-

pants rom Korea, China and Japan; India and

Southeast Asia; and Arica and the Middle East are

close behind with orecasts o 20-point growth in

involvement. Interestingly, pro-curement execu-

tives in North America have the highest level o

involvementincurrentspenddecisionsat68per-

cent, and the lowest projected level o increase in

the uture, as participants expect to increase their

involvement in spend decisions by just eight points

to 76 percent.

There are many ways a procurement team can

increase its infuence in spend decisionsthrough

internal marketing o proven successes, eective

communication, and leadership support.

Indirect Takes Unexpected Turn

In the 2007 study, the largest number

o participants (45 percent) reported a

mixed centralized-decentralized indirect

procurement organization with respon-

sibilities split along unction or category

lines. Furthermore, 44 percent o study

participants expected that model to pre-

vail in 2010.

Now, ast-orward to 2010 and the

most successul model is ar dierent.

Measured by realized benets, the lead-

ing model is a central-led indirect pro-

curement organization that collaborates across

business units. Users o this model have achieved

savings greater than 10 percent over the past two

years in 47 percent o categories.

The model comprises a virtual team that

works or the greater good o the organization. The

head oce collaborates with business units globally

to come up with the optimal company solution

(see case study: Global Financial Institution).

Success requires procurement proessionals to

develop solid working relationships. Local leader-

ship, support and expertise are particularly impor-

tant when dealing with complex categories such as

IT, marketing and advertising, and proessional

services. Voluntary collaboration is also essential

i centralized contracts or such categories and

arms-length mandates rom the head oce are to

deliver on their promises.

Indirect procurement organi-

zations have come a long way

and are increasingly recog-

nized as having signifcantly

more value to contribute.


7/16


The move to outsourcing also took a dierent

direction than predicted. Executives participating

in the 2007 study expected signicant growth

in outsourcing strategic, tactical and operational

activities by 2010 (see fgure 2). But the numbers

show slow or no growth. Outsourcing o strategic

activities was projected to grow rom 1 percent in

2007 to 12 percent in 2010: the actual gure today

is 5 percent. For tactical activities, 6 percent in

2001 was expected to reach 23 percent in 2010:

The actual gure is unchanged at 6 percent. Finally,

operational activity outsourcing was orecast to

move rom 10 percent in 2007 to 40 percent in

2010: The actual number in 2010 is 14 percent.

Figure 2

The move to outsource strategic and operational activities is slower than expected

Source: A.T. Kearney Indirect Procurement Study, 2007 and 2010

Outsourcing of activities, actual versus expected(% of respondents)

2007 2010

Strategic

32

14

19

2007 actual

Expected in 2010

2010 actual

Expected in 2 to 4 years

6

10

5

40

10

23

6

12

1

Tactical Operational Strategic

4% instead of 11%

Unchanged instead of 17%

4% instead of 30%

Tactical Operational

4 ins tead of 11

4 instead of 30

Unchan ed instead of 17%

CASE STUDY: Global Financial Insitution

A global nancial institution started

its journey to build a world-class

procurement organization. Following

one o the worlds largest mergers,

the company was hampered by poor

perormance in almost all areas.

Charting a three-year strategic road-

map, with more than 160 action

points, the organization reached

world-class status, as judged by two

independent rms. Today, the orga-

nization sources (or resources) more

than $1.6 billion a year, with average

year-on year savings o more than

6 percent. Dedicated category teams

work on a global scale, eectively

collaborating as a business unit with-

out borders, and most operational

and tactical activities are either ully

automated or supported by IT.


8/16


What explains these numbers? The potential

ailure o external service providers, as illustrated

by the downall o Satyam, exposed the risks inher-

ent in handing over strategic activities to outsiders.

Indeed, as gure 3 shows, risk has become the

primary concern in deciding whether or not to

outsource. In 2007, 20 percent o companies con-

sideringoutsourcing,and38percentofcompa-

nies considering the use o a managed service

provider, were concerned about the risk o losing

control. In 2010, the concern o losing control or

both o these models jumped up to 100 percent.

Furthermore 100 percent o 2010 participants say

they will not select a managed service provider or

captive oshoring model due to misalignment

with their existing organizational structure.

In addition, indirect procurement decision-

makers are closely scrutinizing providers capabili-

ties and how they align with their organizations

oten complex requirements. Advocates o out-

sourcing must present a compelling business case,

which is becoming more dicult to develop as

infuencing actors such as labor arbitrage are

producing increasingly lower returns. Furthermore,

high unemployment levels in developed coun-

tries are making headcount reductions politically

unpalatable.

When queried about the selection criteria

or choosing outsourcing partners, 2010 partici-

pants report that a strong relationship and trust

Procurement outsourcing Captive offshoring Managed service provider

Figure 3

Risk is primary concern in outsourcing decision


% of companies selecting yes

100%20%

38%

37%

50%

52%

48%

35%

37%

38%

38%

38%

38%

100%

63%

82%

100%

100%

82%

90%

94%

90%

94%

82%

1

1

4

4

2007 2010

Risk a lossof control

Does not fitin organiza-

tional model

Does not fitin companyculture

Businesscase for thisscenario isinadequate


9/16


are the most important elementsmore impor-

tant than process competency. Category manage-

ment expertise ties or second place, and the

ability to deliver a total solution ranks third.

Although indirect procurement outsourcing

has not developed as ast as expected, we should

not assume that it will not do so eventually. In

the meantime, however, someone has to perorm

indirect procurement duties. Once more the sur-

vey ndings conound expectations. The 2007

participants relied heavily on centralized internal

service providers or strategic, tactical and opera-

tional activities, but predicted that those levels

would drop substantially in the near uture. They

thought that captive oshoring would increase.

However, ndings in the 2010 study reveal the

opposite: participants report an increase in cen-

tralized service provision across the board and less

captive oshoring.

Repeating history, 2010 study participants

predict a decline in centralized internal service

provision within the next two to our years. The

rationale or centralized internal service provid-

ersimproved volume leverage, higher rates o

compliance and increased transparencymay

simply be too compelling to abandon, particularly

given the risks o the alternatives.

More Automation on the Wish List

While purchase-to-pay (P2P) systems have been

around or more than 10 years, they are not

applied as widely as might be expected (see fgure

4). One explanation may be that the tools are still

evolving; another is the price tag. Even so, study

participants are aiming to use automated tools in

line with best practices, as demonstrated by their

ambitious tool deployment plans. They expect to

increase the automation o spend management

Figure 4

Purchase to pay systems are still not widely applied


Level of automation by category(average usage rating: 1 = low, 5 = high)

Level of spend coverage by category(average % of spend)

ITand

telec

om

4.1

Marke

tinga

nd

adve

rtisin

g

Profes

sional

service

s

Overhe

ad

ands

uppo

rt

Facilitie

s

Logis

tics

ITand

telec

om

Marke

tinga

nd

adve

rtisin

g

Profes

sional

service

s

Overhe

ad

ands

uppo

rt

Facilitie

s

Logis

tics

3.2

3.7

2.5

3.7

2.6

3.9

2.8

4.0

2.9

3.9

3.0

85.6

77.2 76.5

79.180.9

84.6

70.4

58.4 58.0

62.663.8

69.7

Next 2 to 4 years

Today

Next 2 to 4 years

Today


10/16


by 60 percent, bidding and negotiations by 22

percent,contractmanagementby58percentand

supplierperformancemanagementby78percent.

Behind this commitment to invest in automation

lies a proven return on investment: the higher the

automation levels across indirect categories, the

larger the average savings (see fgure 5).

The case study on the page illustrates the

success story o a North American insurance rm,

which is partly due to automating many o its

tactical and operational activities.

Traditional Sourcing Trumps

Advanced Analytics

Despite having an array o

advanced tools and techniques

at their disposal, there is a de-

nite preerence or tools that

oster supplier competition

negotiations, issuing requests

or inormation (RFIs) and

requests or proposals (RFPs),

and benchmarking prices. When applying ana-

lytics, the ocus is usually on spend tracking and

management, and less on modeling applications

that have beneted the direct procurement side

(see fgure 6).

Advanced analytic capabilities, such as pre-

dictive modeling and optimization, can assist in

identiying opportunities in the more complex

indirect categories that oten require orward

looking decisions and scenario analyses to identiy

maximum value. The application o advanced ana-

lytics requires not only a detailed understanding

o and access to a robust data set, but also the

knowledge and inormation to make calculated

assumptions. As one o our clients said, having

the right analytic capabilities and tools on the

team helped us to quantiy the trade-os in the

category and to make act-based prioritization

and supplier selection decisions.

Nailing Down the Benets:

Tracking What Matters

Few people would be surprised to learn that

92 percent o our study participants track cost

reduction benets linked to sourcing. Seventy-

seven percent track cost avoidance, dened as

reduction in the appreciation o costs previously

CASE STUDY: North American Insurance Firm

To improve visibility and infuence

over purchasing decisions, a leading

North American insurance provider

began a two-year strategic journey

to deploy the latest systems available

covering requisition-to-pay (R2P),

contract management, supplier rela-

tionship management and eRx.

Today, the company has achieved

what many other companies strive

orincluding visibility into 100

percent o its indirect spend across

the organization, an electronic

centralrepositorycontaining80

percent o its current incumbent

third-party contracts, and an eRx

tool that is also being used to source

proessional services such as legal.

A strong relationship and trust are

the most important criteria when

choosing outsourcing partners.


11/16


Figure 5

The higher the automation levels across indirect categories, the larger the average savings


Savings

lev

el

(averagepercom

pany)

Companies in North America

Companies in Western Europe

Low

High

Low High

Companies with moreautomation in indirectcategories have higheraverage savings acrossall categories

Automation level(average per company)

C

Figure 6

Analytics is currently focused on spend management but will evolve to more advanced analytics

Source: A.T. Kearney Indirect Procurement Study, 2010

Average rating(1 = low level of usage, 5 = high level of usage)

Tracking andspend reporting

5.0

4.5

4.0

3.5

2.8

Current focus Future focus

1.7

3.6

2.6

3.4

2.3

4.2

2.9

4.7

3.9

3.0

2.5

2.0

1.5

1.0

0.5

0.0

Spend query Cost and should-cost modeling

Spendforecasting

Predictivemodeling


12/16


paid or budgeted, and 72 percent track rebates.

Far ewer track other more subtle sources o

benets and value deliverythe kind that could

allow procurement teams to expand their infu-

ence within the organization, such as income

generation, innovation, tax and value-added-tax

savings, commissions and litigation reduction.

Although it is possible to track cost reduction

savings, corporate leaders are oten reluctant to

accept indirect procurement teams interpretation

o the results. Figure 7 presents the reasons why.

Leading the list is the re-investment o benets

achieved. Without rigorous reporting and gover-

nance, savings may disappear back into the busi-

ness beore they are properly accounted or. In

addition, procurement may not be credited with

the savings due to a lack o (or limited) involve-

ment.

The latest thoughts in this area correlate the

benets measured with the investment require-

ments needed to deliver desired results. A new

approach, Return on Supply Management Assets,

or ROSMA, helps translate the business case

into a language more recognizable to nance exec-

utives (see fgure 8).

Measuring Perormance: What Is Key In KPI

Our study ndings grouped perormance indica-

tors into three buckets: nancial, internal and

compliance. Participants ollow nancial KPIs

more extensively than any other group. Eighty-

three percent look at total addressable spend; 79

Figure 7

Control of savings and lack of procurement involvement are most common reasonsfor not tracking benefits


Benefit is re-invested

Benefit is out of scope of procurement savings

Lack of procurement involvement

Benefit cannot be tracked

Cannot place a value on benefits

Cannot forecast impact

Savings calculation not accepted

Benefit does not impact cash savings

Fear of budget reduction

Reason for not tracking % of respondents tracking benefits

73%

63%

58%

48%

34%

32%

32%

20%

14%


13/16


percent review addressable categories; and 75 per-

cent look at annual expense reduction. The least

popular nancial KPI, annual capital cost reduc-

tion, still attracts 63 percent o participants. The

top internal KPIs are savings, spend and categories

undermanagement,citedby84percent,64per-

cent and 63 percent o participants respectively.

Fewer companies pay attention to KPIs

refecting compliance management. While indi-

rect procurement leaders consider compliance

metrics regarding top suppliers relevant, other

supplier-related metrics lie urther down the

scale. These priorities refect missed opportuni-

ties. Indeed, eective supplier relationship man-

agement depends on data that more than hal o

study participants do not collect.

Figure 8

Return on Supply Management Assets (ROSMA)

The materials in this document, including without limitation ROSMA, SMEVAand Procurement Management Inventory constitute the proprietary, copyrightedmaterials of A.T. Kearney, Inc.

ROSMA

Financial results delivered Invested supply management assets

Spendgovernance

Programaddressed

relationshipsConventional Enforcement

Programdriven

strategies

Benefitperiod

e(PV) from

SM enabledinnovation

Realizedstructural

cost improve-ments and TCObenefits (e.g.,simplification,

process)

People costs

Externalsupport costs

Other

Technology Training

Knowledgemanagement

VisibilityConventionalnegotiationscompleted

Complex Visibility Changein inventory

Changein DPO

Roles Process Recruiting

Totalspend

Complexnegotiationscompleted

Negotiationdriven

strategies

Categoryyields

VelocitySpendcoverage

PolicyRealized

value fromprior periodnegotiations

Less lossesdue supplierperformance

issues

FTEs Infrastructure Capabilities

( (x x ComplianceNet

extendedbenefits

Periodcosts

Structuralinvestment+

x


14/16

More Value to Contribute

Indirect procurement organizations have signif-

cantly more value to contribute. This message

encapsulates the insights rom every section o the

study. But what does this mean to an individual

indirect procurement leader? How much more

value can a particular organization deliver? I you

participated in the study, you can evaluate the

opportunities that exist or your organization.

The 2010 Indirect Procurement Study remains

open through December 2010. To learn more

about participating, please email Jan-Fokke Van

Den Bosch, Simon Rycrat, Alec Bounds or Julia

Trampel.

Authors

Jan-Fokke van den Boschis a partner and vice president in the procurement and analytics division.

Based in theAmsterdam ofce, he can be reached at [email protected].

Alec Boundsis a consultant in the operations practice. Based in the Atlanta ofce, he can be reached

at [email protected].

Simon Rycraftis a consultant in the procurement and analytics division. Based in the San Francisco ofce,

he can be reached at [email protected].

Julia Trampelis a consultant in the procurement and analytics division. Based in the Dsseldor ofce,

she can be reached at [email protected].


16/16

2010_06_highervisibilitygreaterexpectations.pdf

Documents