1) Procurement ambition and role

In Chapter 2, we looked in detail at the topic of “ambition.” At the top of the pyramid that comprises your plan, needs to be some kind of vision and ambition for Procurement. In a way, the role or strategy for Procurement is predefined (to buy things that the business needs!)—the question is, how far do you want to stretch it? What do you want your Procurement function to be famous for? Can you articulate what is the next level for Procurement in your organization?

Your Procurement vision also needs to relate back to your corporate strategy. If your strategy is to grow aggressively by acquisition, an appropriate approach for Procurement is to (i) set itself up to be scalable, to keep adding new scope, and (ii) to set up an expert unit that takes the lead on integrating new acquisitions' spends. Or, if your corporate strategy is to digitize the business, Procurement can play a key part in this by digitizing the supply chain.

Next up is the role / remit / mandate. You're probably looking to strengthen these, so let's articulate what that looks like—maybe “working collaboratively with the business to jointly optimize its third party spend on a total cost basis.” Another angle to take is to ask, how do you see Procurement's ways of working changing? How do you see your Procurement people interfacing with the rest of the business? Finally, think about the supplier side of the equation—what do you want your suppliers to say about you?

So, the first step is to really articulate where you want to get to. Chapter 2: Ambition, provides some useful examples of companies setting out different levels of Procurement ambition, based on their starting point and based on their level of aspiration.

2) Functional improvement plan

Next up is the detailed plan of how you're going to lick your Procurement function into shape. Here again, it's good to spend time listening to your internal customers to understand how Procurement is perceived today. Then you need to look at the various facets of the function—the organization, the people, the processes—and draw a line in the sand that says, “here's where we stand today.” That's your starting point, and it needs to be realistic and ideally agreed to by Procurement and by the wider organization.

From that baseline, you can then develop a roadmap for your Procurement function. How good do you want to get, and in what timeframe? We find it useful to set a couple of objectives along the way—one after 12 to 18 months, and then another at three years in. That way, you break your ambition into a couple of chunks, and check your progress along the way.

The consultancies all have their “House of Procurement” or equivalent framework, and it's a useful one. It looks at the Procurement function in terms of its strategy, organization, people, processes, and systems, and it gives you a benchmark of what “bad,” “average,” and “good” look like. The following chart shows a version of such a tool (see Figure 13.2).

Behind what you see in the summary depicted in Figure 13.2 are some 50 or so sub-factors and the relevant descriptors of a “1,” “3,” and “5” positioning. You need to eat the elephant in chunks, and set concrete objectives at the sub-factor level. For example, within “Procurement IT and Data,” which systems are you going to implement and in what timeframe? Within “Policies, Controls, and Compliance,” which policies are you going to draft and roll out by when?

These “House of Procurement” tools have their limitations, but I've seen them used extremely well by clients. At one large utility company, the entire Procurement team took part in a quarterly scoring across the 50 dimensions and, while doing so, discussed improvement opportunities and set new goals for the coming period. It was very powerful, and the framework became known as “the Worms Chart” (because the three lines look like wriggly worms!). If nothing else, it's a useful way of articulating a vision for the function, along with a concrete plan of what needs to be done to get there.

Ultimately, you need to take a long honest look at where you are today and determine where you want to be by when. The next chart illustrates the Procurement journey over time: plot your current state and ambition so you don't forget where you're headed (see Figure 13.3). And you don't need to reach for “World Class,” certainly not in the medium-term. And, frankly, a professional services company doesn't need to have the same level of Procurement sophistication and centrality in the business as an auto manufacturer! Aim for “Advanced” instead; a good level of competence is all that's required.

In looking at the function and the team, we would also encourage the CPO to think about activities. Which activities matter…what are people doing, and how can we rebalance the mix? Often in Procurement, entire teams are doing entirely the wrong things, in which case you need a fundamental redesign rather than some tweaking at the edges. And, if your team will be doing more meaningful activities in the future, you will likely need to upgrade the capability of the team.

In particular, you may need to invest in strategic Procurement resources, i.e., people who can do sourcing and category management. You may also need to re-organize the entire team to maximize their effectiveness on a global basis, balancing global coordination with local effectiveness (see Chapter 5: Operating Model).

Remember that the functional improvement plan needs to be granular and actionable. It's all very well saying, “We want to be at level X in Procurement maturity in 18 months”…but how are you going to get there? So, make sure you eat the elephant in chunks: What are you going to do, specifically, in the next six months, and then in the following six months? How are you going to know when you've been successful, not just at the end, but along key points in the journey?

Assembling the functional improvement plan is no easy task: you need to accept where you stand today, set a goal for the future, and develop a detailed plan for getting from the former to the latter. A central component of moving the function to the next level is to actually have your team execute a true Strategic Sourcing process across your spend…which brings us to the third element of the plan.

3) Sourcing savings execution plan

When the new CPO goes to the Board for approval of his or her Procurement plan, they are essentially pitching a business proposition, “Give me $10 million, and I'll bring you $50m in savings.” So, you need to come up with a savings plan. What should this be based on?

There are many ways you could attack your third party spend to generate savings: you could do it supplier-by-supplier (although then you have no competition in play, it's just mano-a-mano); or you could do it by business unit (but then you miss out on any scale opportunity or spend leverage).

Clearly, the way to do it is by category: “Let's put all our laptop and desktop spend together and take it out to market.” Makes sense. Most organizations have some 40–50 spend categories, so you now have 40 or 50 categories to play with. A category takes an average of six months to source—sounds long, but this includes harmonizing the spec up front, etc. So, classic sourcing theory says divide your spend into three waves of sourcing, making an 18-month program to work your way through the entire spend. Eighteen months also makes sense in reality, as unleashing more than a certain number of category-sourcing efforts becomes unmanageable for the wider organization.

Ultimately, and I oversimplify, the way you build such a plan is to set up a spreadsheet with the first two columns being “Category Name and Annual Spend,” and the following columns being “% Addressed” and “Savings Low High %.”

Now, estimate the addressability (it's normally no higher than 75%, because you can't get your arms around the tail spend of small suppliers and small countries, plus some spend is locked in); then estimate the savings potential. Aim for 8–10% and calibrate up or down…3% for a commodity chemical, 12% for office supplies.

Next, sort in order of size and attractiveness and divide into three waves. Ta-dah! One sourcing savings plan…done! The beauty of it is the natural portfolio effect. Because you're attacking so many different categories with different budget-holders and different suppliers, you have a lot of balls in the air, and this spreads your risk. A couple of your categories might fall over; but another couple will hit the ball out the park and generate a 25% saving. The ability to spread your risk across categories is an important benefit of Strategic Sourcing.

What are the biggest pitfalls and reasons why people don't hit their proclaimed targets? Answer: addressability. Not only will you never include the various one-off purchases in your tail spend in your project but spend will “disappear” on you as you progress down the sourcing process.

That big outsourcing contract with IBM is for 10 years and can't really be touched; business unit X has pulled out of the effort; it turns out about 20% of the purchases in your category are bought for customers on a pass-through basis, thus lowering your savings. And so on, and so forth. SSS, we call it: Shrinking Spend Syndrome. It'll creep up on you, until your $100m scope has become $63m. You're still saving the projected 5–10%…but on a hopelessly smaller base. Plan for this phenomenon upfront by discounting each category by at least 25% for addressability—best advice you were ever given; trust us.

The by now (in)famous consulting bubble chart can actually be a useful tool (see Figure 13.4). The example shown in this next chart was used with the newly minted CPO of a mobile telecoms operator. He wanted to drive a sourcing savings program across his four country units, each of which had its own powerful CPO. The country CPOs didn't want to play ball. The bubble chart was used to at least agree “a handful of things where we could work together.” Sitting in a conference room in Düsseldorf looking at a chart showing some 40 categories, it was only a matter of time before the group came up with something …and that something turned into the first group-driven sourcing wave, which laid the groundwork for transforming the client's Procurement function. All down to the power of the humble sourcing bubble chart!

Without going into too much detail, the “bubble chart” plots categories based on savings potential and difficulty of implementation: How big is the prize? And how difficult is it to get? This makes a lot of sense in terms of prioritizing categories for sourcing. But it does require a lot of thought.

The savings potential of a category should be based on a number of factors: the addressable spend, your current state of Procurement sophistication in the category, the competitiveness of the supply market, and the existence of concrete, evidenced supply and demand-side improvement opportunities.

The other axis, implementation complexity, is also driven by a number of factors: Are there credible supplier alternatives? How difficult / costly is it to switch suppliers? And, just as importantly, what is the internal complexity: how on-board are the stakeholders, how difficult will it be to streamline specifications, can we actually push this through? In 80% of cases, the supply-side difficulties can be overcome relatively easily as long as you're not faced with a monopolistic supplier, which is relatively rare. So therefore, in practice, it's your assessment of the internal “do-ability” that matters more.

In terms of selecting the bubbles for that first wave—as the chart suggests, try to go for a mix of high savings and easy / quick-win opportunities. Try to have Wave 1 represent close to 50% of your total addressed spend, to maximize impact. If your Procurement team has yet to earn its stripes, start with the indirects, and maybe throw in one or two directs as a test case. Don't go just for the easy stuff…that's not a way to start a transformation! And try to cover the whole business in terms of stakeholders—Manufacturing, Engineering / product development, IT / technology, Real Estate, Marketing, HR…again, to maximize the portfolio effect, and to make sure that Procurement starts to penetrate all areas.

What's key is that you select categories in which you have strong budget-holder buy-in. So, you will need to iterate your bubble chart based on business priorities and stakeholder appetite. Stakeholder buy-in and appetite are more predictive of success in sourcing a category than anything else.

One final thing to consider when building your sourcing execution plan, and that is timing. Non-Procurement people typically vastly underestimate the time and effort required to properly source a category. Gathering baseline demand data, working with the budget-holders to harmonize the specification or to de-proliferate the items bought, soliciting supplier bids, holding several rounds of negotiations…the process is extremely thorough, which is why it throws off breakthrough savings.

On average, it takes six months to strategically source a category: two months for developing the baseline and agreeing to the strategy, and four further months from issue of RFP to supplier selection. Some categories can be done more quickly (Office Supplies, Temp Labor, Laptops can take four months), and some take nine months or longer, particularly if supplier certification is required at the end of the process.

I've spent half my career defending why six months is needed on average! A big driver of the time taken is the stakeholder intensiveness of the process. Yes, it will take six months rather than three, but at the end of the six months, everyone will be fully on board. Rush it in three months, and it will likely wobble and fall over at the end. You must make sure you have six months to complete a wave of sourcing; the business will need to be patient, it'll be worth the wait—and it's six months, we're not talking two years!

You will get push-back with regards to your savings plan, so you'll have to fight your corner. You'll be told that the spend in question is “in contract,” so cannot be touched…this is usually a fallacy. In-contract sourcing is absolutely possible, and the incumbent supplier will usually comply with the process—unless they're a particularly powerful IT company. You will get defensiveness from the business, and you have to push them beyond their comfort zone; as a CPO, that's part of your job. If a transformation doesn't feel uncomfortable, then it's just BAU, and that's not a transformation.

Now…enough about the savings you're promising to the business! Let's look at the other side of the financial equation; i.e., what kind of investment are you going to ask for?

4) Procurement investment business case

You've got your sourcing savings plan. You now need to estimate the level of investment required in the Procurement function in order to make those savings happen. The good news is, and assuming that your organization is of a reasonable size, the ROI from Procurement is usually very attractive.

In your business case, there are four types of cost you will want to think about:

• The cost of hiring additional strategic Procurement resources.
• The costs associated with exiting any departing Procurement team members.
• The costs of new Procurement IT systems and tools.
• The cost of external consultancy support.

The people costs should be obvious—you're bringing in more, and more expensive, resources. The costs of IT will obviously depend on what systems you need to put in place. When it comes to IT, make sure you're comfortable with the business case: be aware that large cost over-runs are common, and that the financial benefits often ascribed to P2P are dependent on other workstreams—you will never realize the compliance savings associated with a P2P system if you haven't put any preferred suppliers in place.

What about consultancy support? One does see a lot of Procurement transformations heavily supported by consultants. That's because, as discussed earlier, consultants can fill in for your as-yet-incomplete Procurement team, enabling you to get going on savings delivery straightaway. In addition, the consultants will bring the required best practice processes and show your team how it's done.

You kick start the transformation with consultants doing a lot of the lifting, and over a period of 12–18 months, you gradually replace them with your new team members. Different organizations have different opinions on external consultants, and they do have to be used effectively (see Chapter 11: Consultants). However, there can be no doubt that the consultancies can stand up an instant team for you, which enables you to start generating benefits much sooner than you otherwise would.

The Procurement transformation business case then, involves (i) you pledging to deliver a specific savings target, for which (ii) the business sanctions your investment proposal. As long as your spend is of a reasonable magnitude, then the ROI on the exercise should be very attractive.

Ballpark, organizations tend to have very roughly one strategic Procurement person for each $20 million in spend (although this varies by industry). So, if you have $400m in spend, you might need a Procurement team of about 20 category management grade people. That might cost you around $1m per annum, versus a spend of $400m, out of which you could strategically source at least $200m, maybe $300m, and generate savings of $20m plus. These numbers are highly illustrative, but you get the point: $20m of savings from a $1m team is a fantastic ROI, even after you spend a few more million on Procurement technology and consultancy.

5) Program structure and governance

In Chapter 3: Sourcing Execution, we discussed how to set up a sourcing program for success. We talked about the need for full and active cross-functional engagement at all levels: within the sourcing teams, but also in the Steering Committee.

A Procurement transformation program is broader than a sourcing project. The program is typically divided into a number of workstreams: on the one side are the sourcing teams, executing the new Strategic Sourcing process; on the other side are the functional improvement workstreams: organization and operating model redesign; recruitment; sourcing, supplier management, and P2P process redesign; process roll-out and training; and IT systems partner selection and implementation. Assuming that the program progresses well, these two halves of the transformation give you the ammunition to tell an awesome story: “In the last six months, our sourcing teams delivered $5m in savings, while we filled a number of vacancies in the team and kicked off the implementation of System X.” Nice.

Be very sure though, that the delivery workstreams and the transformation workstreams are intertwined. The sourcing teams should use the new Strategic Sourcing process to source their categories…and get the buyers and the stakeholders used to the process. It's “learning while doing” at its best—the only way your people will adopt a new process is by learning it on the job.

One last word on program structure: I'm stating the obvious, but make sure that your sourcing teams are fully resourced. These teams should be truly cross-functional in nature. That does not mean that it's a Procurement-driven project, and the business doesn't have to provide any resources.

Our experience tells us that cross-functional teams just deliver more. In fact, the most successful sourcing programs I've seen have been co-driven by the business, to the extent that some of the sourcing teams were actually led by a person from the business, rather than by a Procurement person. And, to again state the obvious, the more of these people's time you can get, the better.

In an ideal world, the business would second its best resources to your program full time for six months. In reality, you may not get this—but don't settle for anything less than formally seconded team members, who have a significant proportion of their time, i.e., at least 15–20%, dedicated to the program.