After recently speaking with a prospective client in the automotive industry about their sourcing and procurement function, I realized that the common theme during our discussions was the decentralized nature of their operations. This is not an uncommon situation in today’s spend management processes.
Decentralization is often a natural consequence of success. If a company has grown by acquisition, it follows that different units will operate different technology or procedures depending on the legacy organizations from which they were acquired. Organizations that have grown organically don’t always avoid these challenges, especially if they have grown rapidly and didn’t have the time to implement best practice sourcing and procurement models.
For the aforementioned organization, like many others, decentralization manifests itself in disparate technology systems, misaligned policies and procedures, and duplicated roles and processes. The consequence of this situation is that opportunities to share resources and aggregate spend are not capitalized upon with an outcome of leaving great value left on the table across all the business units.
Or, in language that your CFO will understand, money is left on the table.
Implementing a centralized model from nothing is no mean feat. Speaking to the automotive organization and my other customers in various industries, I recommended the following “Four Vs” as a good starting point to begin their path forward to centralization of selected spend categories:
The first step of any business transformation is to get visibility of the as-is situation. In the world of sourcing and procurement, this means spend analytics. This spend data needs to be collected from all corners of the organization—meaning every business unit, every category and sub-category of spend, every site and every geography including suppliers. Sources of this data, especially in a large organization, could be more than 10 to 20 and will include, but not be limited to, the general ledger, accounts payable, ERP, P-card, corporate card, travel booking system, ERS (employee resourcing system) and TMS (transportation management system). It can be difficult to convey how much value can be gained from aggregating all this data in one analytics system and then normalizing and categorizing the data, especially for an organization that cannot answer the following question: who is spending on what, where and how much?
Once spend has been aggregated, normalized and categorized, it is then time to perform some analysis on the output, with the key emphasis being on the variance between sites, business units and/or locations. Look for common suppliers across the business and find out if common prices are being paid. Also, you should see if combined volume is being leveraged and check if contracts in place. Also, look for the same or similar products/services being sourced from different providers. In example, do you really need daily collections from both FedEx and UPS? Do two facilities in the same city use different janitorial service providers? Do you really need four suppliers of office supplies? The answer to all of these questions is often “no,” which means opportunities exist to run sourcing initiatives and drive value for the business.
Once opportunities have been identified, there needs to be a certain degree of triage before deciding next steps and this is where change management comes into the picture. Given the legacy model, it is likely that individual sites or businesses had supply decision-making autonomy, so stakeholders across the business need to be brought on board. The way not to do that is to pursue large, complex and time-consuming projects that will put people off the journey toward centralization. Velocity to savings is the key. Choose projects with the least resistive stakeholders, projects that should be relatively straightforward, but which will deliver tangible and obvious value.
The final stage is to measure and report the value created back to the business. Savings immediately reflect on the P&L of the different business units to clearly demonstrate the value of sourcing and procurement processes to uplift spend under management within the organization. The value created from the initiative should be showcased to the office of the CFO to allow for additional opportunities to be identified and projects to be chartered. The outcome of the Four V approach should provide a clear vision and path forward to centralization of the organizations overall spend.
A key learning about business transformation in sourcing and procurement is knowing the Four V methodology, clearly bringing the organization and spend to a high degree of spend under management processes of 85 percent or above. When defining what that means in the organization, keep a keen eye on the following questions:
- Is spend in a competitive environment?
- Is spend under contract or written agreements?
- Are the contracts under a compliance management process?
- Is spend under a Purchase Order Management Approval Process?
- Is spend visible through e-procurement technology?
Asking the above questions will challenge the CFO, procurement professionals and stakeholders as to how well-managed spend is within their organization. It’s a very powerful method for changing the mindset in the organization about best practice spend management.
Jack Hess is Vice President of Solutions and Business Transformation at Xchanging Procurement Services