Leveraging the five levers of procurement transformation for discontinuous cost reduction

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1 PROCUREMENT Leveraging the five levers of procurement transformation for discontinuous cost reduction Rajarshi (Raj) Bhattacharya Vice President and Global Source to Pay Transformation Many global businesses have achieved impressive savings and efficiencies through procurement outsourcing, leveraging labor arbitrage, and the ability of service providers to do more with less. But this is no longer enough. Companies seeking to reach the next level in performance must challenge themselves and their service providers to fundamentally transform the procurement function. This paper identifies five essential procurement levers for achieving a step change in total cost of ownership (TCO). Transformation is discontinuous improvement We can distinguish procurement transformation programs from ongoing continuous improvement initiatives by their impact and returns. Our experience suggests that the best programs have the potential to deliver three to four times the return on investment, and typically reduce TCO by 5-6% of addressable spend a major improvement over continuous improvement and productivity initiatives alone, which yield reductions in the range of 0.5-1%. Yet any transformation program requires significant leadership support and substantial thought regarding change and risk management. These initiatives are typically multi-period, with non-linear value delivery slow in the initial months and accelerating as the program unfolds. No standalone solution can achieve such results companies must carefully assess the right balance of process and technology needed to address their specific goals. Change management and risk should be a key part of executing performance dashboards based on key performance indicators (KPIs) and creating strong process measurement systems. With any type of risk management program, fallbacks and redundancies are essential, especially when technology is a key lever during the pilot phase. For example, organizations need to think through the implementation of e-procurement platforms and contract lifecycle management (CLM) tools fully, especially when dealing with long-term service contracts that store terms and conditions in different legacy systems. A flawed migration can severely impact the purchase to pay cycle, leading to incorrect payments and poor vendor satisfaction. Five keys to transformation But there s hope. We ve identified five levers to use in procurement transformation that will help move your organization toward best-in-class status. 1. Begin with (and maintain) an end-to-end process view Strong relationships between sourcing, procurement, and

2 payables mean that a true end-to-end process view is critical to driving transformation impact. As shown in Figure 1 below, every area of sourcing and procurement has a link with downstream processes. A true transformation is incomplete without understanding (and more importantly, cultivating) those linkages. Inadequate spend visibility Incomplete market assessment Failure to link procurement to contracts Delayed or inaccurate receipt transactions Hindered actionable category strategy Wrong negotiation strategy Savings leakages Manual accruals Spend Management Category Strategy Negotiation & Procurement Payment Contracting Inadequate spend visibility Contract noncompliance Inadequate negotiation leverage Delayed payments Non-PO invoices Figure 1. Dependencies within source to pay (S2P) processes and value leakages Once the end-to-end process is defined, every single person who is a part of the transformation must keep it at the forefront restricting process improvement to small elements of a function will get you nowhere. For instance, imperfect spend visibility can lead to a flawed category strategy with consequent value leakage, as shown. Improving spend visibility by 10-20% can translate into sourcing savings of up to 5% based on our experience. Similarly, downstream accounts payable analytics and performance benchmarking based on invoice information enable better negotiation leverage and facilitate effective category management. A LARGE SERVICE COMPANY IMPROVES VENDOR LEVERAGE THROUGH AN END-TO-END VIEW OF PROCESSES A large service company had a serious problem with low vendor satisfaction, which led to poor results at the negotiation table and reduced leverage with key suppliers. The primary reason for this was delayed vendor payments, with fewer than 45% made on time. Conventional wisdom would have dictated a focus on payables and improving efficiency through extra manpower or technology. A deeper look, however, revealed that the issue was in fact caused by a feature in the customer enterprise resource planning (ERP) system that prevented invoices from being posted without a goods receipt. More than 50% of purchase orders (POs) lacked a proper receipt. Addressing the issue of a disciplined goods receipt process solved the root issue, improved payment accuracy, and restored supplier leverage, resulting in significant price advantages. 2. Data, data, data: Metrics speak volumes Most companies focus on metrics and KPIs. However, far greater value comes from stacking metrics in a way that reveals the interdependencies between them. For example, many companies track metrics for spend compliance and the cost of processing. As shown in Figure 2, the sub-level metrics of both interact with each other. And often, trying to optimize one makes the other go awry!

3 Investing in systems and processes to improve spend compliance (for instance, percentage of contract adherence), generally raises the transaction processing cost (for example, measured as cost per PO). By following a comprehensive framework that lays down metrics in logical combinations and drill-downs, companies can streamline balancing the tradeoff between cost and controllership. ASIS Exp Tgt Front end of the P2P chain % Preferred Vendor Spend 13% 30% Negotiation & Vendor Selection % Contract Compliance 13% 60% Spend Compliance % Blanket POs 0% 30% Vendor Setup % After-the-fact POs 27% 5% PR Creation & Approval Total Cost of Operations % PO Penetration PO Productivity 8% 60% 1 K 4 K PO Creation & Transmission Cost of PO Processing % Catalog Spend % PO Amendments 1% 20% 20% 5% Goods Receipt % Touchless POs 1% 15% Transmit Receipt Details to AP Figure 2. Cost and controllership metrics interact, making global optimization harder (illustrative example) The benefits and limitations of benchmarking KPIs Benchmarking KPIs can be an invaluable tool, but only when skillfully applied and leveraged on a directional basis, as opposed to a mandate to achieve best in class on every parameter of the game. Why not pick the battles that are most important for you to win? While benchmarks are an important indicator, they should not be used without understanding the context of an organization s larger journey. In general, Genpact s experience suggests that devoting resources and investments to solution design and deployment is preferable to investing already scarce resources and effort in intricate benchmarking exercises. 3. Phase and prioritize A deep understanding of the linkages between initiatives and the multidimensional profile of each project is necessary in order to phase and prioritize them correctly to achieve that end-to-end view discussed above. Proper phasing helps firms attain ongoing buy-in from organizational stakeholders and potentially achieve payback in months. Factors that determine prioritization include overall program benefits, alignment with larger organizational initiatives, and the need to show quick wins. For example, a marketing sourcing initiative in a consumer goods company is probably best conducted in conjunction with the annual planning cycle not in the middle of the year, when marketing programs are in midflight and stakeholder collaboration is difficult to obtain. Phasing and prioritization are also vital in risk management. In Figure 3, work streams W1, W2, and W3 are high-impact and require minimal change management. However, they also carry a significant risk of failure. The organization must consider that risk in order to make an educated decision regarding how to most effectively phase and prioritize.

4 Apparent Ease of Implementation W9 W3 W2 W1 W8 Impact W5 W4 W7 W11 W6 W10 W12 W13 Change Mgt Risk of Failure W3 W9 Impact W4 W11 W8 W2 W1 W7 W6 W5 Work Streams W1, W2, W3, W8, and W9 are high-impact projects which also come with a significant risk of failure W10 W12 W13 Likelihood People Policy Process Technology Figure 3. Execution impact and risk associated with work streams (illustrative example) 4. Bake-in organizational effectiveness analysis to sustain value and manage risk Effective organizational design is a lynchpin of transformation success. Because of leadership sponsorship, transformation engagements help drive the message of restructuring. When designing an effective procurement organization, benchmark the ratio between strategic and tactical staff. Our experience working with top-performing companies suggests that in these world-class organizations, 40-45% of the supply management team is typically focused on strategic activities encompassing $15-20 million of managed spend per procurement expert. Setting up regional centers of excellence in geographic hot spots (Figure 4) can also work well, especially where close interaction with stakeholders and a constant exchange of knowledge and best practices are crucial to garnering broader stakeholder buy-in. This also facilitates bringing the strategic-to-tactical staff ratio within acceptable levels by driving increased spend under management and consolidation. Engaging the human resources (HR) function early and having HR leadership represented in the program office ensures that response plans and backups are created for managed and unmanaged attrition.

5 Global Source to Pay Process Owner Global Sub-Process Owners Europe LATAM US APAC Degree of Centralization MDM Vendor, Product/ Services/Price Transactional Procurement Vendor Management & Risk Assessment Medium Spend Analysis & Contract Management Medium - Sourcing & Category Management Medium - Accounts Payables Figure 4. Balancing geographic hot spots with centralization (illustrative example) Procurement shared services center (SSC): Success with certainty Organizations are increasingly evaluating the SSC model to drive organizational effectiveness within the procurement function. While the potential advantages of a shared services center are significant, Genpact s experience suggests that businesses need to be aware of common risks four are outlined below and take appropriate mitigating actions. Are you seeing a lack of clarity in the scope and deliverables of the SSC? This can be offset by positioning the sourcing and procurement team as an extension of the retained organization, augmenting its capacity and capabilities. Clearly define governance and reverse escalation metrics, and have a senior executive at the client organization lead the change management effort. Worried about a weak transition? Comprehensive documentation regarding process scope, definition of business outcomes, performance drivers, and important metrics is key. This helps reduce or eliminate associated issues around sourcing policies, culture, understanding of critical spend categories, and non-availability of key stakeholders during the transition. Not seeing eye-to-eye across business units? Robust management of the transition and process knowledge transfer is necessary to ensure that the SSC fully understands the role of products and services being sourced, the supplier base, and procurement policy compliance. What if the stakeholders don t trust us? Quickly winning stakeholder trust in the SSC s ability to drive value is critical to ensuring long-term success and adoption. Start with relatively well-managed categories such as sourcing pilots to show quick wins, then evangelize across the organization to secure a ramp-up.

6 5. Choose the right technology While technology obviously can t transform businesses alone, it is a potential disrupter in transactional procurement. Automating standardized processes can reduce effort and manpower, which can introduce some intriguing options for creating more capacity in strategic positions. For instance, automating the procure to pay process (including sub-processes such as catalogs and blanket purchase agreements) can yield productivity improvement of 4-7% over and above process reengineering. Technology choices should be dictated by deep industry knowledge and technology platforms configured in line with business needs. Proven templates, workflows, and best practices are as important as the technology itself. For a company with sharp seasonal volume swings in a key process, an experienced service provider will ensure that infrastructure including technology is thoroughly stresstested in advance of real-world spikes. Finally, the right key performance indicators must also be put in place to continually measure return on technology investments. A GLOBAL BIOPHARMACEUTICAL GIANT RECOGNIZES THE ROLE OF TECHNOLOGY TO DRIVE DOWN COSTS IN PROCUREMENT A global biopharmaceutical company faced declining revenue due to patent expiry on key drugs. With cost reduction becoming a business imperative, the company teamed with Genpact to streamline its source to pay process. A joint group succeeded in identifying up to $40 million in potential savings, including $17 million directly stemming from the deployment of e-sourcing platforms and e-auctions, increasing spend under management, and tactical buying. Generally speaking, advanced auction formats and managed events can yield 20-25% savings beyond traditional approaches and up to 30% reduction in sourcing lead times compared to manual processes. Similarly, improving supplierbuyer collaboration through portals and supplier management tools can help reduce transaction error rates by 20-30%. Employ all five levers then focus on execution excellence A surprising number of companies leverage only a single or a handful of transformational levers, and are surprised when they don t see game-changing results. Achieving and retaining best-in-class status with performance requires that all five levers work in tandem. Success also calls for a strong program management office with subject matter experts, execution specialists, and change evangelists. A service provider with deep strategy-to-execution experience in all five areas can help organizations reach their goals with greater certainty while maximizinig the potential return from procurement on an overall basis. About Genpact Genpact Limited (NYSE: G) is a global leader in transforming and running business processes and operations, including those that are complex and industry-specific. Our mission is to help clients become more competitive by making their enterprises more intelligent, meaning more adaptive, innovative, globally effective and connected to their own clients. Genpact stands for Generating Impact visible in tighter cost management as well as better management of risk, regulations and growth for hundreds of long-term clients including more than 100 of the Fortune Global 500. Our approach is distinctive we offer an unbiased, agile combination of smarter processes, crystallized in our Smart Enterprise Processes (SEP SM ) proprietary framework, along with analytics and technology, which limits upfront investments and enhances future adaptability. We have global critical mass 60,000+ employees in 24 countries with key management and corporate offices in New York City while remaining flexible and collaborative, and a management team that drives client partnerships personally. Our history is unique behind our single-minded passion for process and operational excellence is the Lean and Six Sigma heritage of a former General Electric division that has served GE businesses for more than 15 years. For more information, visit Follow Genpact on Twitter, Facebook and LinkedIn Copyright Genpact. All Rights Reserved. About the author Rajarshi (Raj) Bhattacharya is a vice president in the Procurement and Supply Chain Practice at Genpact, a global leader in business process and technology management. He leads source to pay engagements and a global Common Minimum Practice (CMP) program that drives compliance, best practices, and operating excellence in procurement service delivery. For more information, contact: procurement.services@genpact.com