The Analyst Corner: Sourcing

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


As a group, midsize firms have prioritized supplier performance measurement, contract management and broad e-sourcing platforms for investment within the next 12 to 24 months. Upper-midsize enterprises (annual revenues between $500 million and $900 million) have prioritized e-sourcing and spending analysis solutions for investment. Companies in this segment have had greater experience and maturing results from initial investments and are now looking to adopt more advanced sourcing capabilities to identify new savings opportunities; enable collaborative, total-cost based negotiations; and support sourcing process standardization, project management and knowledge transfer.

Planned approaches to sourcing automation and service adoption vary greatly from those of early adopters:

  • Greater interest in broader sourcing project management and collaborative and optimization-based negotiation capabilities, rather than the priced-based reverse auctions that fueled the first wave of online sourcing. Part of this motivation can be attributed to the fact that many midsize firms lack the buying clout to mandate and capitalize on reverse auctions, particularly in tightening supply markets.
  • Broader adoption of a new shared application delivery model that provides sourcing functionality to multiple clients from a single and centrally hosted application instance. Midsize firms will mostly use this model for online negotiation capabilities.
  • Prioritization for sourcing application to effectively integrate with execution and compliance solutions. Having learned from the compliance challenges of early adopters, midsize firms list the ability to integrate with or deliver contract management and procurement execution — as well as enterprise resource planning (ERP) systems — as critical criteria they will use to select their sourcing solution providers.
  • Increased reliance on third-party consultants to help define strategic sourcing processes and train internal employees on commodity costing models, sourcing automation tactics, and category and supply market assessments.

A more straightforward reason for the uptick in solution adoption is that sourcing automation delivers rapid, measurable benefits in the form of material cost savings, process efficiencies and performance enhancements when incorporated into a well-designed sourcing program. Many users have achieved full ROI from their solution investments after a single sourcing event.

Successful Strategies Used by Best-in-class Companies

Aberdeen uncovered the following common characteristics among the midsize enterprises that demonstrated the greatest return from their strategic sourcing initiatives:

Development and enforcement of standard sourcing procedures Not surprisingly, midsize enterprises recording the greatest strategic sourcing effectiveness and returns have been at it the longest. Nearly 90 percent of top-performers have had formal and written sourcing policies and procedures for more than a year. Similarly, most high performers have standardized sourcing processes company-wide, including use of disciplined sourcing procedures for all categories of spending. The remaining best-in-class firms have standard procedures at least for their companies' most critical and strategic spending categories.

Standard procedures ensure consistent results, minimize regulatory and supply risks, foster knowledge transfer, and elevate the skill set of the entire procurement organization.

Hiring sourcing and commodity expertise, including consultants Best-in-class companies have aggressively hired sourcing and commodity experts, including procurement executives, to build the right procurement operating model, define best-practice processes and recruit talent. Having ample staffing is critical, but sourcing excellence cannot be achieved by just adding new talent. On the contrary, best-in-class companies are managing more spending and sourcing projects and returning greater results with fewer resources than average and below-average performers. These firms are focused on results, both in terms of cost savings and supply quality and continuity.

Best-in-class companies are also using consultants to improve sourcing processes and organizational structures, increase the portion of spending that is strategically sourced, and attack categories of spending where internal expertise is deficient.

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