World-class procurement organizations now have 18 percent lower operating costs than typical companies, and operate with 28 percent fewer staff, while generating more than twice the return on investment, according to new benchmark research from The Hackett Group, Inc.
Digital business transformation is one key enabler to how world-class procurement organizations achieve greater efficiency, effectiveness and higher ROI, the research found.
World-class procurement organizations understand the opportunity that digital technologies present to transform service delivery, reduce errors, and free procurement staff for higher-value work.
"For many years, world-class procurement organizations achieved dramatically better results than their peers by focusing on process optimization,” says The Hackett Group Principal and Global Procurement Advisory Practice Leader Chris Sawchuk.
“Technology has long played a role in helping these top performers standardize, simplify, and streamline their operations. But today, world-class procurement organizations are focusing much more broadly on digital business opportunities to maintain their performance advantage.
“They understand that cloud, mobile, and other digital business tools can allow them to truly transform the way procurement functions, including forecast and plan more accurately, collaborate with suppliers more effectively, and improve the experience for their customers."
5 strategies of world-class procurement organizations
The Hackett Group's research revealed a total of five strategies used by current world-class procurement organizations to achieve superior results: embrace digital transformation; reallocate resources from transactional focus to value adding; leverage analytics-based decision making; adopt stakeholder/customer-centric service design and delivery; and re-skill the procurement function.
World-class procurement organizations are those that achieve top-quartile performance in both efficiency and effectiveness across an array of weighted metrics in The Hackett Group's comprehensive procurement benchmark.
As a percentage of total procurement spend, world-class procurement organizations spend 18 percent less on labor (by far the largest cost in procurement) and 13 percent more on outsourcing than typical companies. They also see more than twice the return on investment (the ratio of total savings generated by procurement to its total operating cost) – generating a 9.5 times payback on investment versus 4.6 times for typical companies.
However this number is forecasted to rise only slightly for all companies over the next five years, as cost reductions and savings continue to level off.
In addition to operating with dramatically fewer staff, world-class procurement organizations also allocate their staff very differently.
They dedicate a significantly larger percentage of the overall staff to sourcing, supply base strategy and planning/strategic roles, and have a much smaller percentage of people focused on operations and compliance management.
Many world-class organizations are investing in the new wave of cloud-based applications and services ranging from core end-to-end procure-to-pay (P2P) systems to process-specific applications such as risk forecasting and planning, e-sourcing and spend analysis, the research finds.
Cloud-based infrastructure and applications, virtual business and technology networks, and business analytics are coming together with rapidly transitioning employee and consumer bases that are increasingly adept with new mobile technologies and business models.
This convergence is creating tremendous new opportunities for procurement organizations to apply digital technologies to transform service delivery.
Increasingly, this becomes the platform for delivering a whole new class of services, such as information and predictive analytics to guide decisions. Digitally-enabled processes also reduce errors and make information easier to access, freeing procurement staff for higher-value work.
The research found that world-class procurement organizations spend 23 percent more on technology per staff person, and the investment yields real productivity gains at world-class procurement organizations, including 71 percent lower cost per order than typical companies.
A high use of automation also allows procurement staff to devote more time to talent development and business performance-related activities.
World class procurement organizations also continue to selectively outsource in areas such as procurement system support, supplier help desks and market intelligence to tap into greater expertise, augment knowledge, and leverage the capacity and capability of third-party providers.
This helps to increase agility by providing resources that can scale to demand and frees up procurement to focus on anticipating and responding to critical business needs.
In addition to a higher procurement ROI, world-class organizations are more effective in how they operate and deliver services. For example, the research found that their percent of transactions requiring post-issuance activity to resolve discrepancies in areas like order quantity, quality and pricing is often two to three times less compared to peers.
Fewer errors mean that world-class procurement organizations have higher quality process execution across the board. These differences have real bottom-line impact: The high number of transactions for some transactional processes and the cost to correct errors means the total cost gap between world class and peer organizations can be in the millions of dollars.
Last but not least, world-class procurement organizations are nearly twice as likely to have talent retention planning in place, and see turnover rates that are more than 50 percent lower than typical companies, illustrating the ability of world-class procurement to generate outcomes that impact business performance.