Building A Business Case For Procurement Transformation: A Well-Thought-Out Plan Is Worth Nothing Without Buy-In
Having a well thought out procurement transformation plan is a critical starting point for any cost-saving mission; but without board approval, that’s all it is – a plan. To put this plan into action, the Chief Procurement Officer (CPO) needs to pitch transformation as a business proposition, and this begins with a baseline savings plan. For example, “If you give me X, I will bring you Y in savings.”
But, where to start? After all, there are many ways you can tackle third-party spending. You could approach it supplier-by-supplier, or you could do it by business unit. In choosing the former, however, you have no competition in play; while with the latter, you miss out on any scale opportunity or the advantages of leveraging spend across the business. Instead, the most effective way is to do it by category – for example, all laptops, desktops, and devices could be one, while travel expenses could be another.
Mapping out these categories – including the annual spend, an addressability estimate, and a savings potential range, and dividing them into “sourcing waves” – will allow you to develop a clear and prioritised plan, through which you can then start addressing five to 15 categories at a time.
Tackling spend in this way provides you with a natural portfolio effect by spreading risk across categories, as you are attacking many different categories with different budget-holders and suppliers at once. A couple of your categories may not generate the outcome you’d hoped for, but another couple could provide a hefty 25% saving, which would counteract. While this may seem simple enough, there are key considerations that need to take place in order to make this a success:
The first is addressability. Not taking this into account and declaring that “we can deliver 10% savings across 100% of the spend” is a classic mistake. The problem is not the 10%, it’s the erroneous assumption that 100% of the spend will be addressable. Not only will you never include the various one-off purchases in your tail spend, but spend will also ‘disappear’ on you as you progress down the sourcing process. We jokingly call this Shrinking Spend Syndrome (SSS).
For example, you have a big outsourcing contract with IBM for 10 years that can’t really be touched, business unit X has pulled out of the effort, and it turns out that about 30% of the purchases in your category are bought on behalf of customers on a pass-through basis, therefore lowering savings. These situations will creep up on you, and you still end up saving the projected 5-10% – but on a hopelessly smaller base. To account for addressability, this risk should be anticipated at the start by discounting each category by at least 25%.
- Prioritising categories
Most businesses have 40-50 categories, so where to begin?
This is where the famous “category bubble chart” can come in handy. By plotting categories on a chart based on savings potential and implementation difficulty, CPOs can have a clear view of the categories easiest to pursue, while also providing the biggest rewards. These rewards – or rather ‘savings potential’ – should be based on several factors, including the addressable spend, the current state of procurement sophistication, the competitiveness of the supply market, and the existence of concrete supply and demand-side improvement opportunities. For the other axis of the chart, to determine the implementation complexity, the CPO must consider the following:
- Are there credible supplier alternatives?
- How complex and costly is it to switch suppliers?
- Are there any internal obstacles that must be overcome to push this through?
As well as picking high-value, quick-win categories in the first instance, it is also important to consider the categories that have strong budget-holder buy-in and iterate your chart depending on business priorities.
- Managing expectations
Last, but by no means least, timing is a crucial consideration when building a sourcing savings plan. Often, the time it takes to execute such a plan is vastly underestimated. On average, it takes six months to strategically source a category, two months for developing the baseline and agreeing on the strategy, and four months to issue the RFP, conduct negotiations and select suppliers. There is no denying it is a lengthy process, and it needs to be thorough – cutting corners or rushing simply isn’t an option. Yes, you will have push-back from the wider business during this time, and yes, you will have to fight your corner. But if a transformation doesn’t feel uncomfortable, then is it really a transformation?
Building a procurement investment business case
Now that you have your sourcing savings plan, you need to estimate the level of investment required in the procurement function to achieve those desired outcomes. When building such a business case, you must consider the various costs associated with hiring additional strategic procurement resources, upskilling, or training existing employees, new IT systems or tools, and finally – any external consultancy support that might be needed.
The procurement transformation business case then consists of pledging to deliver a specific savings target in return for these investments. If your spending is of reasonable magnitude, then the return on investment (ROI) should make for an attractive proposition.
Ensuring programme structure and governance
Delivering on a procurement transformation plan is a cross-functional effort – it requires engagement at all levels, and this is where a solid programme structure is essential. The transformation programme is typically divided into several workstreams. On one side, there are the sourcing teams responsible for executing the new strategic sourcing process. On the other side, there are the functional improvement workstreams – organisation and operating model redesign, recruitment, sourcing, supplier management and P2P process design, roll out and training, as well as IT system partner selection and implementation. The sourcing teams, in particular, should be well resourced and truly cross-functional in nature. The most successful transformation projects are co-driven by the business, rather than just procurement driven.
Ready, set, go!
And there you have it. You’re officially ready to embark on your procurement transformation mission. By now, you should have all the elements to pull into an 18-month programme timeline. Pivotal to the success of this programme, however, will be executive sponsorship – not just in terms of financial sponsorship, but also time and effort from the C-suite. This is what will ensure true engagement. By ensuring everyone is on the same page – the CEO, CFO, COO, CIO, and the various business unit heads – you can move forward with a united front towards your goal, ensuring the necessary sign-off along the way.
Once your plan is approved, you need to commence quickly, so – as well as visionary – your plan needs to be granular. Successful implementation will be underpinned by buy-in and visibility across the business, and this will depend on cross-functional alignment. Only then can procurement’s true profit potential be unleashed.
About the author:
Alex Klein is COO at Efficio Consulting and the author of PROFIT FROM PROCUREMENT: How to add 30% to Your Bottom Line by Breaking Down Silos with Efficio colleagues Simon Whatson and Jose Oliveira, published in 2021 by Wiley.