The Analyst Corner: Sourcing

Continued pressures to reduce costs and improve spending visibility and control are fueling a strategic sourcing revolution among midsize enterprises


Most midsize enterprises missed out on (and bore the brunt of) the first wave of supply management automation and improvements, being forced to compete as suppliers in price-based reverse auctions and drive year-over-year cost reductions in the face of rising energy and commodity prices. With continued pressure to reduce costs and compete in global markets, many midsize companies view strategic sourcing improvements not just as a priority but as a necessity for survival.

Research Findings

Most midsize enterprises continue to rely on inadequate, fragmented and largely manual procedures to analyze spending and negotiate, collaborate and manage suppliers. Aberdeen's benchmark identified the following hindrances to sourcing effectiveness at most midsize firms:

  • Lack of formal sourcing procedures: More than a third of midsize enterprises lack formal and written strategic sourcing processes that are used consistently across the company. Another third only use disciplined and formal sourcing methods for their most critical or strategic spend categories (Figure 1).
  • Lack of sourcing and commodity skills: Midsize enterprises rated the lack of strategic sourcing process expertise among the top challenges to sourcing transformation at their companies. Respondents also reported that their companies lack basic strategic sourcing principles as well as domain expertise for key spend categories and supply markets.
  • Insufficient systems infrastructures: More than 80 percent of mid-market enterprises use a hodgepodge of homegrown sourcing automation "solutions" and offline communications to facilitate negotiations and manage sourcing projects. These homegrown solutions primarily consist of word-processing or spreadsheet-based RFx templates and analytics. Such inadequate "systems" limit the feasible number of suppliers evaluated, diminish productivity, elongate sourcing cycles and stifle knowledge transfer.

Figure 1: Mid-size companies have mostly fragmented or limited sourcing efforts

Adding to these challenges, midsize enterprises often lack the spending clout to aggressively negotiate the best pricing and terms with suppliers, making it even more imperative that midsize firms capitalize on every dollar and advantage.

As a result of such issues, the typical midsize enterprise applies disciplined sourcing methods to only a third of total spending. These factors lead Aberdeen to estimate that inadequate sourcing competencies are costing midsize U.S. firms more than $134 billion in missed supply savings opportunities annually.

Overcoming Impediments to Strategic Sourcing Improvements

Challenges to improvements also include internal resistance to standardizing and centralizing sourcing procedures, poor visibility into spending data, and a general lack of strategic sourcing and category management competence within the enterprise. Many midsize firms also report difficulties in securing sufficient budget and resources to acquire and deploy sourcing automation.

Midsize firms have prioritized the following strategies to overcome these challenges (Figure 2):

  • Secure executive support for strategic sourcing and automation investments.
  • Recruit a proven procurement executive to lead the development of a strategic sourcing organization and program.
  • "Upskill" the procurement team by hiring sourcing, process and category experts.
  • Adopt sourcing automation to improve negotiation leverage, sourcing process standardization, buyer skills and productivity, and spend visibility and control.
  • Use consultants to develop and accelerate sourcing competence and programs.

Figure 2: Top Strategies Used to Overcome Sourcing Challenges

Mid-market Takes New Approach to Sourcing Automation

Looking to leapfrog and avoid the mistakes of early adopters, midsize enterprises have prioritized investments in sourcing and supply management automation solutions that are broader, better integrated and more strategic than those employed by early adopters. Midsize firms have the added benefit of new, flexible shared instance ("on demand") delivery and usage-based pricing models that can accelerate deployment, reduce total cost of ownership (TCO), and circumvent internal budgeting and resource requirements.

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