The State of Strategic Sourcing

The State of Strategic Sourcing Building a Context for the Next Decade April 2011 Christopher J. Dwyer, Constantine G. Limberakis

Page 2 Executive Summary Strategic sourcing, for as long as this function has been in place, has been established as a valued set of processes for companies looking to drive savings out of their purchasing activities. As organizations see the current state of strategic sourcing as a high-value component of overall spend management activities, companies will increasingly look to link sourcing activity with the objectives of the greater organization. This report demonstrates the intentions, performance and strategies of over 315 companies globally (responses collected between February and March 2011), as they continue in their pursuits to drive true procurement performance out of their strategic sourcing activities. Research Benchmark Aberdeen s Research Benchmarks provide an in-depth and comprehensive look into process, procedure, methodologies, and technologies with best practice identification and actionable recommendations Best-in-Class Performance Aberdeen used the following three key performance criteria to distinguish Best-in-Class performance: spend under the management of the procurement group, procurement contract compliance, and realized / implemented cost savings. Best-in-Class enterprises in this study are notable for their superior performance and attribute their reliance on key capabilities and technologies for the advantages that they hold over their peers: 72% higher procurement contract compliance than all other companies 52% higher rate of realized / implemented cost savings 37% higher rate of spend under management Competitive Maturity Assessment Survey results also show that the firms enjoying Best-in-Class performance shared several common characteristics, including: 47% higher likelihood of instituting internal collaboration between key internal units 36% higher likelihood of leveraging an active spend analysis program Required Actions In addition to the specific recommendations in Chapter Three of this report, to achieve Best-in-Class performance companies must: Leverage e-sourcing solutions to drive higher savings and automate manual strategic sourcing processes Utilize spend analytics to drive visibility into corporate spending and forecast savings for future planning and budgeting Align overall sourcing activities / processes with the goals and objectives of the greater organization This document is the result of primary research performed by Aberdeen Group. Aberdeen Group's methodologies provide for objective fact-based research and represent the best analysis available at the time of publication. Unless otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc. and may not be reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by Aberdeen Group, Inc.

Page 3 Table of Contents Executive Summary...2 Best-in-Class Performance...2 Competitive Maturity Assessment...2 Required Actions...2 Chapter One: Benchmarking the Best-in-Class...4 Business Context...4 Pressures: Cost and Sourcing Performance...5 The Modern Strategic Sourcing Program: Typical Attributes and Weak Links...7 The Maturity Class Framework...9 The Best-in-Class PACE Model...9 Best-in-Class Strategies: Alignment and Analytics...10 Chapter Two: Benchmarking Requirements for Success...12 Competitive Assessment...12 Capabilities and Enablers...14 Better Sourcing Through Technology Enablers...15 Chapter Three: Required Actions...19 Laggard Steps to Success...19 Industry Average Steps to Success...19 Best-in-Class Steps to Success...20 Appendix A: Research Methodology...22 Appendix B: Related Aberdeen Research...24 Figures Figure 1: The Value of Strategic Sourcing...4 Figure 2: Top Strategic Sourcing Pressures...5 Figure 3: The Leakage Problem...6 Figure 4: Typical Attributes of the Modern Strategic Sourcing Program...7 Figure 5: Strategic Sourcing "Weak Links"...8 Figure 6: Best-in-Class Sourcing Strategies...10 Figure 7: Sourcing Collaboration...11 Figure 8: Best-in-Class Technology Utilization...15 Figure 9: Best-in-Class Spend Analysis Attributes...17 Tables Table 1: Top Performers Earn Best-in-Class Status...9 Table 2: The Best-in-Class PACE Framework...10 Table 3: The Competitive Framework...13 Table 4: The PACE Framework Key...23 Table 5: The Competitive Framework Key...23 Table 6: Relationship Between PACE and the Competitive Framework...23

Page 4 Chapter One: Benchmarking the Best-in-Class The past decade saw an increased reliance on strategic sourcing, with companies identifying extreme cost savings based on the innovations e- sourcing technologies have provided. During this time, strategic sourcing had been leveraged as a positive means for identifying new business opportunities, developing meaningful supplier relationships and driving the necessary cost savings. As a result strategic sourcing has provided a bolster to the bottom-line, while contributing to greater corporate growth and development. It is within this backdrop that we unveil The State of Strategic Sourcing, not only for illustrating the true perception of this valuable internal function, but also for looking ahead at the innovative sourcing strategies into the next decade. Business Context Sourcing activity can involve a variety of processes from buying raw / direct materials related to products and goods to indirect items such as Maintenance, Repair and Operating supplier (MRO) and complex spend areas (i.e. contingent labor, travel, strategic meetings, etc.), that support the greater organization. In this regard strategic sourcing was designed to streamline activity around these two purchasing areas in an efficient manner that is conducive to cutting costs through favorable contracts and maintaining long-lasting supplier relationships designed for future growth. To this point, Figure 1 indicates, the majority (57%) of the organizations participating in this benchmark survey perceive strategic sourcing as a "high value" function. Fast Facts 57% of organizations perceive strategic sourcing as a high value internal function Nearly 2.7% of the average company's identified cost savings are lost due to savings leakage (Best-in-Class have only experienced a 0.26% rate of savings leakage) Figure 1: The Value of Strategic Sourcing 5% 57% 38% Low value Moderate value High value Our sourcing group is perceived as disciplined and effective. They deliver benefits through collaboration and sharing of market shifts and trends as well as delivering strong contracts with bottomline impact. ~ Director of Purchasing, Large Chemicals Enterprise

Page 5 Since strategic sourcing is tied to a series of corporate performance arenas that all have a direct link to organizational growth and financial health, the more corporate spending is managed by a sourcing team (the group tasked with strategically purchasing goods, materials and services), the greater potential value supplier contracts can provide that is later realized against purchase orders within procurement. This invaluable link provides a basis for strategic sourcing activity to be perceived as a high value series of processes that even C-level executives see as necessary to corporate health development. Pressures: Cost and Sourcing Performance Although a new decade of strategic sourcing may unearth fresh approaches towards this internal function, there remains one classic factor driving organizations to rely on their sourcing teams: the drive for increasing cost savings. For instance, Figure 2 illustrates that 60% of survey respondents cited top-down directives to increase cost savings as the top pressure. Figure 2: Top Strategic Sourcing Pressures Top-down directives to increase cost savings 60% Need to improve sourcing performance Need to mitigate overall sourcing risks Need to improve supplier relationship management 19% 32% 40% Strategic sourcing is seen as a key contributor to the success of the organization. Executives believe that if strategic sourcing is successful, then the bottomline will improve. ~ Director of Procurement, Large North American Consumer Electronics Manufacturer With the modern Chief Procurement Officer (CPO) facing the overarching issue, the trickle-down effect of linking sourcing to savings has continued to be the top pressure faced universally by strategic sourcing teams. And it's all in the design; C-level executives (especially the CFO) understand the purpose of modern sourcing efforts and the main benchmark on which these teams rely: identified cost savings. Moreover the need to improve overall sourcing performance (40%) and sourcing risk mitigation (32%) plays a major role in modern strategic sourcing. Metrics such as spend under management (which has cost savings

Page 6 as an underlining factor) and procurement contract compliance are also crucial in evaluating sourcing performance. This is combined with the concerns over managing for the risks related to supplier engagement during the sourcing process. New Decade, Old Problem The path to true bottom-line growth is paved with enterprise cost savings negotiated by the strategic sourcing team. However, as we move into a new decade, sourcing as a part of the larger procurement organization, is increasingly looked upon to augment financial efforts and help resolve a significant issue that the average organization continues to face: savings leakage (Figure 3). Figure 3: The Leakage Problem 6.4% Identified savings 2.7% leakage 3.7% Realized / implemented savings Savings, Defined Identified: Beyond simple identification of a savings opportunity, this tier of savings is characterized by sourcing activity and negotiated pricing, where savings potential is attainable. Implemented (or realized): After the contract has been executed, enterprises begin to realize the potential of previously identified savings opportunities. This tier is characterized by purchasing, receiving, invoicing, and settlement activity and ensured by contract compliance and strong enduser adoption. Booked: Once savings have been realized, they can be recognized or booked in operating budgets and other enterprise-level financial statements. This tier is characterized by close involvement with finance, procurement, and the budget holder. The average organization stands to lose nearly 2.7% of their identified cost savings to the savings leakage issue. Translated for the modern enterprise, this dilemma could result in losses of millions of dollars every year despite the robust work initially put in by sourcing professionals to negotiate cost reductions with key suppliers. Causes for savings leakage include: Unexpected increases in supplier prices due to economic conditions. For example, despite efforts from strategic sourcing teams, adverse economic conditions may prevent the ability to identify savings, particularly when unpredictable events such as civil unrest or environmental disasters cause inflationary pressures. When sourcing professionals are faced with the pressure to

Page 7 maintain supplier relationships while trying to preserve savings margins, savings leakage may be a result. Off-contract spending and poor contract management execution. "Maverick" spending is often the detractor of savings; when internal business units purchase goods or services from suppliers outside of contracted agreements, prices may be inflated and can burst the savings bubble. Failure to accurately forecast and understand business performance. CFOs are relying on the sourcing organization's ability provide insights for budgeting and cost benefit analysis. Therefore the CPO shouldn't be the only executive with a solid understanding of how company budgets are spent three or six months into the future. The CFO should be on the same page as the CPO in his or her ability to forecast corporate spending and how this spending is reflected in agreements with current suppliers. The Modern Strategic Sourcing Program: Typical Attributes and Weak Links This report is meant to be perceived as a guidebook for companies that want to reevaluate existing strategic sourcing program attributes and learn new methods for improving the performance of their efforts. Figure 4 details the typical attributes included in the modern strategic sourcing program. Figure 4: Typical Attributes of the Modern Strategic Sourcing Program Strategic sourcing is one of seven critical initiatives for 2011 and 2012. Due to budget reductions, our organization is looking for cost savings and efficiencies in managing spend. ~ Procurement Director, Large North American University Supplier negotiations 80% Current spend assessment 78% Savings assessment 69% Cost analysis for materials / services 59% Tracking / monitoring of sourcing results 59%

Page 8 Assessing current spending (78%) and supplier negotiations (80%) are "givens" in the world of sourcing today; sourcing program heads are frequently tasked with understanding budgeting, managing spend and utilizing that information when negotiating with key vendors. In this regard, nearly 60% of organizations are also actively tracking and monitoring the results of sourcing efforts, which can help determine existing gaps in the program and can be addressed through the utilization of technology enablers or internal collaborative coordination. While many of the aspects addressed in Figure 4 are typical of modern strategic sourcing, there are a several "weak links" that must be shored up for organizations to reduce savings leakage and drive more spend under the management (Figure 5). Figure 5: Strategic Sourcing "Weak Links" Proactive data analytics for future sourcing projects 28% Optimization of ideal suppliers 29% Geographical assessment of supply needs / requirements 33% Supply risk assessment 35% Based on this study, only 35% of survey respondents are currently instituting supply risk assessments as part of their current strategic sourcing programs. With a seemingly uncertain economic outlook and a recent increase in geo-political challenges today, major suppliers could face bankruptcy or supply chain disruption issues, causing not only an increase in costs, but also adverse effects for organizations relying on raw / direct materials for product development. Worse yet, only 28% of the survey respondents are currently relying on proactive data analytics for future sourcing projects, thus reducing the ability for organizations to plan or predict supply chain disruption issues. The usage of proactive data can be leveraged within existing contract management or spend analysis systems / solutions to accurately forecast future spending with key suppliers within specific categories or commodities. This can ultimately assist in boosting visibility into corporate purchasing activity and help push savings towards the realized realm.

Page 9 The Maturity Class Framework Aberdeen used the following three key performance metrics to distinguish the Best-in-Class from Industry Average and Laggard organizations: spend under the management of the procurement / sourcing organization, savings that are realized and implemented, and compliance to negotiated procurement contracts and agreements. Table 1: Top Performers Earn Best-in-Class Status Definition of Maturity Class Best-in-Class: Top 20% of aggregate performance scorers Industry Average: Middle 50% of aggregate performance scorers Laggard: Bottom 30% of aggregate performance scorers Mean Class Performance 80% spend under management 78% procurement contract compliance 12% realized / implemented cost savings 62% spend under management 30% procurement contract compliance 8% realized / implemented cost savings 22% spend under management 11% procurement contract compliance 2% realized / implemented cost savings Our strategic sourcing organization is a vital contributor to the bottom-line performance of our organization. ~ Procurement Manager, Large Pharmaceutical Manufacturer Best-in-Class companies in the data pool have demonstrated their ability to drive not only spend under management, but also record top-tier levels of realized / implemented cost savings and procurement contract compliance. Spend under management, a classic measure of procurement's impact on the greater organization, is the percentage of non-payroll spend that is actively managed by the procurement group. For every dollar of spend under management, Aberdeen has historically quantified 5% to 20% cost savings. Top-performing enterprises place nearly 37% more spend under management than all other organizations. Top-performing organizations have also effectively plugged the savings leakage issue currently plaguing all other organizations. In fact, Aberdeen research has found that the Best-in-Class have only experienced a 0.26% rate of savings leakage. The Best-in-Class PACE Model In order to utilize the modern strategic sourcing program to realize superior cost savings (i.e. minimize savings leakage), increase the amount of spend managed by the procurement group, and achieve corporate goals, requires a combination of strategic actions, organizational capabilities, and enabling technologies that can be summarized in the PACE Framework in Table 2

Page 10 Table 2: The Best-in-Class PACE Framework Pressures Actions Capabilities Enablers Improve sourcing performance (spend under management, savings and contract compliance) Establish formal strategic sourcing organization with standardized and formal processes Align sourcing activities and objectives with that of the greater organization Standardized sourcing process Formal sourcing organization Active spend analysis program Cross-functional coordination with finance, product, and sourcing groups Visibility into enterprise-wide spend across all categories (commodities and services) Best-in-Class Strategies: Alignment and Analytics Best-in-Class companies are known for their superior level of performance across a broad scope of procurement and sourcing performance metrics. When looking behind the curtain and peering into the Best-in-Class strategic sourcing program, it is clear that these top-performers have leveraged a series of strategies to enhance sourcing operations and drive significant value to the greater organization (Figure 6). Figure 6: Best-in-Class Sourcing Strategies esourcing Spend analysis Contract Lifecycle Management Automated data analytics and reporting tool (business intelligence) Supplier Performance Management (SPM) E-procurement system / solution Category-specific solutions (MSP, expense management, etc.) Strategic sourcing consulting services 64% 56% 52% Best-in-Class All Others 32% 27% 16% Align sourcing activities with goals of the greater organization Enhance spend analytics capabilities Automate strategic sourcing processes Based on the survey findings, it is evident Best-in-Class organizations have aligned their sourcing activities with the goals and objectives of the greater organization (64%). This strategy entails having the CFO, CPO and other C- level executives on the same page in regard to all corporate purchasing activity, thus allowing the sourcing team to negotiate with the suppliers that will have the most effect on the bottom-line.

Page 11 The majority (52%) of Best-in-Class organizations have also enhanced their spend analytics capabilities. Spend analysis has become a top tool in the CPO's arsenal by funneling valuable corporate spend data into sourcing efforts. By holding intelligence on the aspects of company spending, such as top suppliers, top spend categories and opportunities for consolidation, strategic sourcing program heads can form a plan of attack when negotiating with potential and existing vendors. Spend analytics also plays into the above-referenced strategic action (overall business alignment) in the sense that CPOs and CFOs can work together to formulate a proactive financial plan that allows for peering into the future. Aberdeen Insights Strategy: Sourcing Collaboration As noted in The CPO's Agenda for a New Decade study (September 2010), one of the main items on the desk of the modern CPO is collaboration and cross-functional coordination with other key internal units and groups. At the core of the modern strategic sourcing program is intelligence and, intelligence regarding organizational-wide spending can be acquired through free-sharing of information between procurement and other key groups. Figure 7 shows the top groups currently collaborating with the strategic sourcing / procurement teams. Figure 7: Sourcing Collaboration Finance 80% Operations 77% Executive office 67% IT 66% Collaboration between procurement, sourcing and finance (80%) has become a "hot" spend management topic in recent years, as more CPOs and CFOs have realized that they are often on the same page with regard to specific financial goals and targets but are traditionally not aligning their efforts. Moreover, it is interesting to note that the vast majority of organizations are also currently instituting collaboration with operations (77%) and the executive office (67%). Coordination with these two units is an indicator that the sourcing team is a catalyst for linking the activities within their team and with that of the greater organization.

Page 12 Chapter Two: Benchmarking Requirements for Success The current reliance on strategic sourcing increases the need for organizations globally to look for innovative strategies that drive spend under management and solve the savings leakage conundrum. With organizations on the rise of linking sourcing efforts with the objectives of the greater organization, it has therefore become crucial to shore up the weak links of modern strategic sourcing programs and enhance existing processes. Case Study The Benefits of Spend Analytics A large European consumer goods manufacturer faced issues recently within its strategic sourcing program. The top challenge was to better understand corporate spend data and develop granular visibility into the multi-lingual data that was spread across their 40-plus ERP and financial systems. With economic conditions causing supplier price increase, the company required a strategy that could help them reduce costs and gain that coveted visibility into corporate spend data, especially since the company conducts business globally and necessitates 17 different languages as part of their data reporting and analysis. Implementation of a full strategic sourcing suite that offered both e- sourcing and spend analysis resulted in elimination of disparate and decentralized spend analysis capabilities. The automated spend analytics solution helped to provide transparency into all corporate spend data in less than six months, and resulted in a $100MM reduction in spending due to consolidation of suppliers and superior intelligence within the global marketplace. "The spend analysis solution was an enabler for us in identifying savings opportunities," said the senior project manager. The organization was also enabled with consistency in detailed spend reports (due to better classification of data) and allowed for true understanding of the multi-lingual sources of key spend data aspects in all enterprise systems. Fast Facts 87% of Best-in-Class organizations are currently leveraging spend analysis Best-in-Class companies are 47% more likely than all others to institute collaboration between procurement, sourcing and other internal groups Competitive Assessment Aberdeen Group analyzed the aggregated metrics of surveyed companies to determine whether their performance ranked as Best-in-Class, Industry Average, or Laggard. In addition to having common performance levels, each class also shared characteristics in five key categories: (1) process (the approaches they take to execute daily sourcing operations); (2) organization (corporate focus and collaboration among stakeholders); (3) knowledge management (contextualizing spend data and exposing it to key stakeholders); (4) technology (the selection of the appropriate sourcing tools and the effective deployment of those tools); and (5) performance management (the ability of the organization to measure its

Page 13 sourcing results to improve its business). These characteristics (identified in Table 2) serve as a guideline for best practices, and correlate directly with Best-in-Class performance across the key metrics. Table 3: The Competitive Framework Process Organization Knowledge Technology Performance Best-in-Class Average Laggards Standardized sourcing process 77% 61% 50% Active spend analysis program 77% 62% 37% Collaboration with internal units (finance, product development, treasury, etc.) 80% 44% 41% Ability to collect spend data from multiple internal sources 70% 48% 34% Visibility into all enterprise spending across all categories 69% 50% 31% Strategic sourcing technology solutions / tools in place: 87% spend analysis system 66% automated contract repository 63% contract lifecycle management 57% e-sourcing 53% supplier performance management 34% Optimizationbased sourcing analytics 68% spend analysis system 54% automated contract repository 47% contract lifecycle management 44% e-sourcing 32% supplier performance management 18% Optimizationbased sourcing analytics 53% spend analysis system 32% automated contract repository 27% contract lifecycle management 32% e-sourcing 27% supplier performance management 12% Optimizationbased sourcing analytics Strategic sourcing performance-tracking capabilities: 73% ability to develop and analyze reports on spend data 54% track and update strategic sourcing pipeline regularly 52% ability to develop and analyze reports on spend data 38% track and update strategic sourcing pipeline regularly 40% ability to develop and analyze reports on spend data 31% track and update strategic sourcing pipeline regularly

Page 14 Capabilities and Enablers Best-in-Class organizations have demonstrated a strong reliance on specific process, organizational, knowledge management, performance management and technology capabilities/enablers to effectively drive spend under management, increase bottom-line savings, and reduce savings leakage. Process: Standardization and Spend Analysis Purchasing activity is tied directly to corporate performance; companies must follow consistent guidelines and methods to spend wisely and avoid the pitfalls of procuring goods and services off-contract. In this regard, standardized sourcing processes are in place in nearly 30% more Best-in- Class organizations than all others. This capability also assists in centralizing purchasing activities through a singular set of guidelines to ensure buyers are procuring under contracted terms for maximum savings. Best-in-Class companies are also 36% more likely than their peers to have an active spend analysis program in place. While the benefits of spend analytics will be detailed later in this chapter (and the Best-in-Class utilization of specific attributes within this program), having an internal spend analysis program helps CPOs and other executives understand current spending (suppliers, categories, materials, frequency, etc.) and provides them with the ability to forecast future spending for budgetary planning. The organization is slowly learning the benefits of strategic sourcing. The strategies / methodology is getting more attention from executives. ~ VP of Procurement, Media Relations Firm Organization: Collaboration Sourcing's internal collaborative efforts were detailed at the end of Chapter One. However, it is worth revisiting this aspect given Best-in-Class companies are 47% more likely to have collaboration in place than all other organizations and because cross-functional coordination is a major means of reinforcing the top strategic action in companies today while aligning sourcing activities with the goals of the greater organization. Cost savings and contract compliance are also significant metrics for the sourcing team, and communicating regularly with other divisions (especially those departments that spend major corporate dollars) can help identify savings, push those into the realized / implemented realm, and help purchases stay on contract. In fact, companies currently instituting collaboration between procurement / sourcing and other key internal units have experienced nearly 31% higher realized / implemented cost savings than those companies that have not instituted this type of collaboration. Knowledge Management: Spend Visibility Best-in-Class companies are 42% more likely than all others to have visibility into enterprise spending across all spend categories (direct and indirect). This visibility translates into intelligence in what categories an organization is spending in terms of products, goods and services. Visibility also enables the CPO and CFO to work together to identify specific spend patterns and

Page 15 trends, and funneling this information to the sourcing team as fodder for improving negotiations with suppliers. The ability to collect data from multiple internal sources (in place in 41% more Best-in-Class companies than all organizations) has also assisted topperforming enterprises. This capability provides additional visibility into organizational-wide spending by extracting valuable spend data from various avenues, such as accounts payable, ERP, spend analytics, and business intelligence systems, as well as the general ledger. This capability also provides the CPO and CFO with a clear (and often in real-time) view of company spend performance against savings targets and pre-determined budgets. Performance Management: The Sourcing Pipeline Best-in-Class companies are 34% more likely than all other organizations to actively track and monitor the sourcing pipeline. This capability helps align the needs of the organization (from a supply / service standpoint) with the ideal suppliers at an ideal price. Active tracking and monitoring of this pipeline can also help the CPO forecast identified savings and identify exactly how those savings can fit into the company's existing financial plans. Better Sourcing Through Technology Enablers Although internal capabilities are critical components of a modern Best-in- Class strategic sourcing program, it is through sourcing solutions and enablers that these top-performers have enhanced their downstream procurement activities and driven more value out of their sourcing efforts. Figure 8 details the Best-in-Class reliance on technology solutions. Figure 8: Best-in-Class Technology Utilization Spend analysis 64% 87% Contract lifecycle management E-sourcing 41% 41% 57% 63% Spend analysis work is done continually at our company. It is used for strategic sourcing events as well as reporting category and geographic spending trending to the greater business. Supplier performance management 30% 53% ~ Director of Supply Chain Management, Large Utilities Enterprise Optimization-based sourcing analytics 16% 34% Best-in-Class All Others

Page 16 The enablers listed in Figure 8 have helped Best-in-Class organizations excel within their strategic sourcing programs. The following solutions have been major cogs in the Best-in-Class sourcing machine: Supplier Performance Management (SPM) is an enabler which utilizes a unique set of supplier-specific metrics to track, monitor and analyze the performance of key suppliers. Companies utilizing SPM can accurately forecast savings, compliance and delivery aspects for their suppliers and analyze this information as a means of renegotiating when renewals are approaching. SPM will be covered in-depth in Aberdeen's upcoming Supplier Management research study (April 2011). E-sourcing, which Best-in-Class companies are nearly 30% more likely to utilize than all other organizations, automates all facets of the strategic sourcing set of processes, such as event creation, electronic bidding, scenario development, and supplier optimization. Automation of these steps ensures that organizations make use of analyzed spend data and are able to effectively negotiate with major suppliers. Contract Lifecycle Management (CLM), in use in 63% of Bestin-Class organizations, is a major contributor in the drive for cost savings, the reduction of savings leakage, and ensuring all purchasing activity is compliant with supplier agreements. Aberdeen research has found that companies currently utilizing CLM solutions have a 32% higher rate of procurement contract compliance than those companies without this enabler in place. Yet above all else, Best-in-Class companies are leveraging a major tool that, over the past decade and moving into a new one, has resulted in significant visibility increases into corporate spending and allowed CPOs and sourcing executives with the necessary intelligence for supplier negotiations: spend analysis. Spend Analysis: The True Link to Best-in-Class Sourcing The top technology tool utilized by Best-in-Class companies (87%), spend analysis is the true link between sourcing programs of yesteryear and the modern set of processes. The information inherent in companies that utilize spend analysis systems presents a potential wealth of accurate spend intelligence, a factor which allows top organizations to truly understand spend behavior by breaking down areas such as frequency of spend with top suppliers the categories of spend with those suppliers. Moreover, Aberdeen research has discovered that companies currently utilizing spend analysis solutions have achieved a 30% higher rate of realized / implemented savings and a 20% higher rate of spend under management than companies not currently leveraging spend analytics.

Page 17 The attributes listed in Figure 9 are the subsets of a modern Best-in-Class spend analysis program and contribute to their superior level of spend visibility and overall sourcing performance. Figure 9: Best-in-Class Spend Analysis Attributes Category-level spend data utilization 57% 78% Data support in negotiations Slice-and-dice analytics Proactive forecasting / budgeting 28% 45% 49% 54% 64% 73% Spend analytics is the basis of understanding our overall spend base and spend within commodities and subcommodities. This drives savings opportunities and allows improved management of suppliers as well as our sourcing staff. ~ Director of Procurement, Large North American Enterprise Data enrichment 34% 45% Best-in-Class All Others Category-level spend data utilization refers to the usage of spend data, drilled down to the actual spend category (temporary labor, travel, strategic meetings, services), that is leveraged by the CPO (and sometimes the CFO) to not only gain visibility into corporate spending, but also understand which categories are receiving monetary attention. Sourcing professionals can then approach specific indirect or complex spend categories with a more detailed eye, gain intelligence on the top suppliers in these spaces, and funnel information into their sourcing pipeline. Slice-and-dice analytics is the most alluring component of the spend analysis system. Sourcing professionals can uniquely cut data (by supplier, category, time period, division / region, etc.) and funnel this information into intelligence on corporate spending. When in negotiations with key suppliers, sourcing teams can also utilize this intelligence to build better contract terms that will result in higher (and more consistent) cost savings.

Page 18 Aberdeen Insights Technology: The E-Sourcing Advantage Manual strategic sourcing processes often encompass a variety of menial tasks, such as spreadsheet-based scenarios, manual handling of supplier responses during bidding / sourcing events, and the creation of events. E-sourcing solutions automate these processes and allow a greater range of suppliers into the sourcing mix, expanding the opportunities for cost savings and highlighting new vendors that can meet unique corporate requirements. E-sourcing solutions also typically offer a Software-as-a-Service (SaaS) platform that can easily create new sourcing events, invite related suppliers, execute bidding and allow sourcing professionals to not only monitor and track responses in real-time, but also enable the necessary analytics for reporting on sourcing events and efforts after activities have come to a close. Best-in-Class companies 30% more likely than all others to leverage e- sourcing. In fact, users of e-sourcing technology report the following advantages over those not currently relying on this sourcing enabler: 57% lower rate of savings leakage 21% higher rate of procurement contract compliance Nearly 20% higher rate of spend under management

Page 19 Chapter Three: Required Actions Based on the findings presented in Chapter Two, it is evident Best-in-Class organizations have demonstrated their ability to perform at a high level across the full scope of strategic sourcing metrics, such as realized / implemented cost savings, spend under management, and procurement contract compliance. In order for companies on the lower levels of the Maturity Framework to achieve Best-in-Class strategic sourcing performance or continue in their ability to maintain high levels of it, it is recommended organizations follow the recommended actions below: Laggard Steps to Success Take measures to implement an active spend analysis program. Industry Average companies are over 40% more likely than Laggards to utilize this type of program, which can help organizations dig deep into organizational spend data as a means of driving spend visibility, understanding the categories of products / goods / services being procured, and forecasting for future budgetary planning. Institute collaboration between procurement, sourcing and other internal groups, such as finance and operations. The current state of strategic sourcing dictates that organizations work together to drive value out of their purchasing activities. Industry Average companies are 38% more likely than Laggards to have the sourcing team work with other groups, particular finance and operations, which can help further align financial targets (such as cost savings) and reinforce the importance of on-contract spending across the company. Standardize all strategic sourcing processes across the entire organization. Industry Average organizations are over 20% more likely than Laggard companies to formally-standardize strategic sourcing processes. This aspect will ensure that all strategic purchasing activity (across all business units and locations) is in line with negotiated contracts and agreements with key suppliers. This can curb savings leakage and drive more savings to the bottom-line. Fast Facts Best-in-Class companies are over 52% more likely than Laggards to utilize spend analytics Best-in-Class companies are 23% more likely than Industry Average organizations to leverage e- sourcing Industry Average Steps to Success Actively monitor and track the strategic sourcing pipeline. A sourcing team is only as good as its pipeline; Industry Average companies must align ideal suppliers to spend categories and keep tabs on potential savings opportunities. Best-in-Class companies are

Page 20 30% more likely than Industry Average organizations to monitor and track their sourcing pipelines. Leverage CLM automation and technology. Savings leakage is a concern for every organization, and the main cause for this issue is poor management of procurement contracts. To keep purchasing activity closer to compliant measures, Industry Average companies must leverage CLM solutions to improve their savings retention and provide sourcing executives with visibility into current milestones and delivery dates for the supplier base. Best-in-Class companies are 25% more likely than Industry Average organizations to have a CLM solution in place. Look to e-sourcing to eliminate manual sourcing activity and drive cost savings. Manual sourcing processes, such as spreadsheet-based scenario creation, savings forecasting and tracking of supplier responses to bids, can waste time and resources. E-sourcing can streamline these processes and drive cost savings. Best-in-Class companies are 23% more likely than Industry Average organizations to leverage e-sourcing. Best-in-Class Steps to Success Utilize optimization-based sourcing analytics. Only 34% of Best-in-Class companies are currently leveraging sourcing analytics as an enabler, which can help create future savings forecasts and optimize the organization's material needs against the existing suppliers out in the marketplace. This can also help spur savings and build long-lasting supplier relationships. Shore up supplier performance management by utilizing KPIs to address supplier effectiveness. Less than 20% of topperforming organizations are currently measuring true supplier effectiveness. KPIs such as on-time delivery and frequency of savings increases "year-over-year" can help Best-in-Class companies to monitor their top suppliers and ensure that the sourcing team reconnects with those suppliers that are lagging against corporate expectations. The strategic sourcing group reports directly to our CEO and is involved the company's planning processes. ~ Director of Supply Chain Management, Large Utilities Enterprise

Page 21 Aberdeen Insights State of the (Sourcing) Union Address The current state of strategic sourcing differs from the programmatic ventures that were part of this team a decade ago. As we usher in a new decade of supply management, it has become clear that based on improvements in technology, strategic sourcing functions have the potential to play a greater corporate role than in years past. Furthermore with this increased alignment between sourcing and the overall organization, it has become critical for organizations to ensure robust sourcing strategies, approaches and capabilities are in place to drive procurement performance. In order to effectively solve the savings leakage quandary as discussed in this paper, companies must improve contract management efforts and conduct superior forecasting, primarily through spend analytics. Spend analysis systems can also assist in helping sourcing executives understand corporate spending and identify key spending patterns and trends. Intelligence gleaned from these systems will support on-going supplier negotiations and assist in the drive for cost savings. Looking forward, companies will need to utilize these systems, in conjunction with an organizational outlook that strongly includes other internal groups and stakeholders and looks to further propel sourcing into the strategic stratosphere of corporate development and growth.

Page 22 Appendix A: Research Methodology Between February and March 2011, Aberdeen examined the use, the experiences, and the intentions of more than 315 enterprises using strategic sourcing in a diverse set of enterprises. Aberdeen supplemented this online survey effort with interviews with select survey respondents, gathering additional information on sourcing strategies, experiences, and results. Responding enterprises included the following: Job title: The research sample included respondents with the following job titles: manager (36%); director (25%); VP / EVP / SVP (15%); C-level / executive office (6%); and others. Department / function: The research sample included respondents from the following departments or functions: procurement, sourcing or supply chain (72%); finance (7%); business development (5%); operations (5%); IT (4%); and others. Industry: The research sample included respondents from the following industries: manufacturing (11%); public sector (10%); utilities (10%); IT (9%); financial services (8%); food and beverage (5%); and 25 others. Geography: The majority of respondents (62%) were from North America. Remaining respondents were from the following regions; Europe (24%); Asia / Pacific (8%); Middle East and Africa (4%); and South / Central America (2%). Company size: Sixty percent (60%) of respondents were from large enterprises (annual revenues above US $1 billion); 24% were from midsize enterprises (annual revenues between $50 million and $1 billion); and 16% of respondents were from small businesses (annual revenues of $50 million or less). Headcount: Seventy-two percent (72%) of respondents were from large enterprises (headcount greater than 1,000 employees); 17% were from midsize enterprises (headcount between 100 and 999 employees); and 11% of respondents were from small businesses (headcount between 1 and 99 employees). Study Focus Responding executives completed an online survey that included questions designed to determine the following: The degree to which strategic sourcing is deployed in their retail operations and the financial implications of the technology The structure and effectiveness of existing strategic sourcing implementations Current and planned use of strategic sourcing to aid operational and promotional activities The benefits, if any, that have been derived from strategic sourcing initiatives The study aimed to identify emerging best practices for strategic sourcing, and to provide a framework by which readers could assess their own management capabilities.

Page 23 Table 4: The PACE Framework Key Overview Aberdeen applies a methodology to benchmark research that evaluates the business pressures, actions, capabilities, and enablers (PACE) that indicate corporate behavior in specific business processes. These terms are defined as follows: Pressures external forces that impact an organization s market position, competitiveness, or business operations (e.g., economic, political and regulatory, technology, changing customer preferences, competitive) Actions the strategic approaches that an organization takes in response to industry pressures (e.g., align the corporate business model to leverage industry opportunities, such as product / service strategy, target markets, financial strategy, go-to-market, and sales strategy) Capabilities the business process competencies required to execute corporate strategy (e.g., skilled people, brand, market positioning, viable products / services, ecosystem partners, financing) Enablers the key functionality of technology solutions required to support the organization s enabling business practices (e.g., development platform, applications, network connectivity, user interface, training and support, partner interfaces, data cleansing, and management) Table 5: The Competitive Framework Key Overview The Aberdeen Competitive Framework defines enterprises as falling into one of the following three levels of practices and performance: Best-in-Class (20%) Practices that are the best currently being employed and are significantly superior to the Industry Average, and result in the top industry performance. Industry Average (50%) Practices that represent the average or norm, and result in average industry performance. Laggards (30%) Practices that are significantly behind the average of the industry, and result in below average performance. In the following categories: Process What is the scope of process standardization? What is the efficiency and effectiveness of this process? Organization How is your company currently organized to manage and optimize this particular process? Knowledge What visibility do you have into key data and intelligence required to manage this process? Technology What level of automation have you used to support this process? How is this automation integrated and aligned? Performance What do you measure? How frequently? What s your actual performance? Table 6: Relationship Between PACE and the Competitive Framework PACE and the Competitive Framework How They Interact Aberdeen research indicates that companies that identify the most influential pressures and take the most transformational and effective actions are most likely to achieve superior performance. The level of competitive performance that a company achieves is strongly determined by the PACE choices that they make and how well they execute those decisions.

Page 24 Appendix B: Related Aberdeen Research Related Aberdeen research that forms a companion or reference to this report includes: Bridging the eprocurement Gap through Contract Management; March 2011 Effective eprocurement: Assessing Options for the New "Economic Normal"; November 2010 From Preservation to Prosperity: The CPO's Agenda for a New Decade; September 2010 Spend Analysis: Visibility for Intelligent Decision-making; July 2010 The CFO's View of Procurement: Work in Progress; November 2009 Spend Analysis: Transforming Data Into Value; September 2009 Procurement Contracts: Real Value, Real Returns; March 2009 Spend Analysis: Pulling Back the Cover on Savings; October 2008 Strategic Sourcing in EMEA; May 2008 The CFO's View of Procurement: Same Page, Different Language; November 2007 The Advanced Sourcing and Negotiation Benchmark Report: The Art and Science of the Deal; January 2007 Information on these and any other Aberdeen publications can be found at www.aberdeen.com. Authors: Christopher J. Dwyer, Research Analyst, Global Supply Management (chris.dwyer@aberdeen.com) Constantine Limberakis, Senior Research Analyst, Global Supply Management (constantine.limberakis@aberdeen.com) For more than two decades, Aberdeen's research has been helping corporations worldwide become Best-in-Class. Having benchmarked the performance of more than 644,000 companies, Aberdeen is uniquely positioned to provide organizations with the facts that matter the facts that enable companies to get ahead and drive results. That's why our research is relied on by more than 2.5 million readers in over 40 countries, 90% of the Fortune 1,000, and 93% of the Technology 500. As a Harte-Hanks Company, Aberdeen s research provides insight and analysis to the Harte-Hanks community of local, regional, national and international marketing executives. Combined, we help our customers leverage the power of insight to deliver innovative multichannel marketing programs that drive business-changing results. For additional information, visit Aberdeen http://www.aberdeen.com or call (617) 854-5200, or to learn more about Harte-Hanks, call (800) 456-9748 or go to http://www.harte-hanks.com. This document is the result of primary research performed by Aberdeen Group. Aberdeen Group's methodologies provide for objective fact-based research and represent the best analysis available at the time of publication. Unless otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc. and may not be reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by Aberdeen Group, Inc. (2011a)