Introduction
Many companies miss out on an opportunity to improve their expense ratio by 1 – 3%, due to a lack of maturity within their procurement functions. For these companies, procurement’s role is typically limited to rubber stamping contracts and sending PO’s to suppliers. In turn, this creates a culture where procurement is seen as a back-office function, whose role is purely transactional. Some of the key pain points faced by insurance carriers include:
- No standard procurement process for engaging with suppliers for contract renewals and negotiations
- Not leveraging their enterprise wide spend during negotiations with suppliers
- Lack of contracting & negotiating best practices which result in sub-optimal supplier contracts
- No standard process for supplier relationship management, often without any monitoring mechanism
- Non-procurement professionals performing procurement activities (i.e. hobbyists)
- Lack of end-to-end procurement skills including negotiating and contracting.
- Lack of ongoing vendor management skills post contract signature
- Poor quality of information on how much is spent with each supplier
- Lack of a centralized contracts database or “proactive” contract management tools
- Lack of best-in-class RFP documents and contract templates
Procurement Objectives: Striking The Right Balance
Procurement can deliver strategic value for any company if it’s people, process and tools are optimized along 4 key objectives: cost, compliance, quality and speed. However, in our experience, procurement functions at most companies tend to not address all of these four objectives equally. Some of the key issues this creates include:
Satisfaction of legal and procedural requirements
End-to-End time from need identification through in-place goods or services
Degree to which procured goods or devices satisfy the need
Total cost of ownership for lifetime use of goods or services
Focusing too much on any one objective can significantly reduce procurement effectiveness
Compliance
Multiple review steps which can make the process slow.
One size fits all compliance approach for all vendors catagories can introduce inefficiencies.
Speed
Minimal review steps to accelerate processes can lead to increased risk due to limited due diligence efforts.
Business stake holders take more authority in the overall procurement process, making it ineffective.
Quality
Goods & services requirements are specified to meet extreme use cases Total cost of ownership.
can rise significantly as cost is deprioritized as a procurement criteria.
Cost
Extreme focus on cost reduction projects across categories compromise speed, quality & compliance.
Increased emphasis on cost can negatively impact the partnership and deter collaborative innovation.
Procurement Transformation : How To Move Towards a Best-In-Class Procurement Function
We have extensive experience in transforming procurement functions for companies, from a transactional department to a key enabler of corporate strategy. We bring the expertise, tools, templates, best practices and benchmarking information to help transform your people, processes and tools to best-in-class. We support the transformation journey through effective change management which is key to the success of the program. Additionally, we also set up effective governance & reporting mechanisms to ensure sustainability.
Our proven procurement transformation approach is supported by effective change management
- Analyse current state procurement capabilities across people, processes and tools.
- Identify owners and map all existing processes to people and tools.
- Identify gaps with respect to best in class procurement function.
- Conduct interviews with company leadership to get comprehensive understanding of company’s vision mission and corporate strategy Interview key
- Procurement stakeholders to gauge strategy alignment.
- Design customised road map to attain best- in-class procurement.
- Redefine procurement policy and procedures to eliminate inefficiencies.
- Make recommendations for new tools, training, outsourcing etc.
- Set up governance & reporting mechanisms
- Provide end to end support in implementing transformation roadmap
- Implement procedural changes, conduct personnel training and increase awareness
- Monitor progress continually with effective change management
Procurement 2.0 : How Does It Look?
The result of a successful procurement transformation program is a best in class procurement strategy and operation which is flexible, yet balanced to meet all objectives including cost, compliance, speed & quality. Some of the key highlights of such a procurement function are:
- Dedicated procurement professionals negotiating all vendor contracts to ensure maximum value is being derived from every dollar spent with third parties.
- Clear delineation of responsibilities between Procurement and business stakeholders.
- Culture of continuous improvement and skill enhancement through comprehensive training programs.
- Streamlined procurement policy, clearly outlining number of bids required, spend thresholds and delegation of authority to execute contracts beyond certain spend value.
- Clearly defined end-to-end processes across the entire procurement value chain.
- Established mechanisms for supplier relationship management with continuous monitoring.
- Third-party risk management framework for vendor on boarding and performing ongoing risk monitoring of vendors.
- Adoption of industry leading tools to enrich spend data.
- A central contracts repository to enhance visibility across contract life cycle and drive strategic benefits.
- A database of pricing benchmarks and market intelligence.
- E-catalogues and order process-flow for commoditized categories like office supplies, etc.
- Standard templates for supplier segmentation, supplier performance management, category strategy, etc.
- Developing balanced scorecard of strategic procurement metrics and KPI’s.
- Active compliance tracking for saving targets, contract SLAs, KPIs and pricing.
- Designing robust governance model to review performance and address risks.
- Close coordination with business planning, budgeting and other financial reporting processes.
Conclusion
As CFOs continue to look for innovative ideas to improve their company’s operating performance, it is important they understand the full potential of procurement. Procurement can have a far-reaching role in the organization and the CFO must realize this early on and invest in setting up a sophisticated procurement function, that is empowered to deliver strategic value. Along with an awareness of procurement’s value, it is also equally important to get the function involved early in the planning and budgeting process to maximize results and have a positive impact on the bottom line. Afterall, procurement and finance are effectively working towards the same goal of reducing excess costs and identifying more savings opportunities.
Typically, we work with companies to help reduce their supplier spend by 10% -15%, to deliver an ROI of 4X-8X with a payback period of less than 6 months. The program not only enables companies to drive savings year over year, but also paves the way for establishing a strategic procurement function in the organization which can unlock a multitude of benefits.
