Hackett Plots Evolution of Procurement's Value Proposition to Drive Competitive Advantage, Ensure Long-term Relevance

Research highlights from Procurement Practice Leader Chris Sawchuk And Senior Business Advisor Pierre Mitchell

Atlanta and London — October 25, 2007 — How can procurement organizations evolve from a traditional tactical sourcing focus to a comprehensive position of value management? By moving through five discrete stages that help them develop new skill sets and operating models enabling them to eventually reach a point where procurement's sole agenda is to advance and support business strategy, according to new research from The Hackett Group, a global strategic advisory firm and an Answerthink company.

Hackett's research, "Evolving the Value Proposition of Procurement — A Five-Stage Model," looks at today's procurement environment, where organizations are faced with the challenge of delivering ever-increasing savings in the face of tightened supply markets, powerful suppliers, global supply market volatility and equally volatile demands from customers who want "free, perfect and now." In addition, many procurement leaders are frustrated in their attempts to deliver value beyond the "low-hanging fruit" by obstacles such as internal budget cuts, re-organizations, poor IT support, outsourcing and decades of legacy operating models.

From this starting point, Hackett's research endeavors to answer the question being asked by many procurement executives today, "What is the future of procurement, and how can I evolve my value proposition to sustain and improve long-term relevance?" The research describes the path that leading procurement organizations follow as they evolve towards world-class performance levels.

In working with hundreds of procurement leaders and their staff, Hackett said it has found that successful procurement organizations not only inevitably hit a "tipping point" where the business seeks procurement's involvement, but also move through five discrete evolutionary phases:

  • Level 1 — Assurance of Supply: Right goods and services at the right time. Procurement role = buyer / planner.
  • Level 2 — Price: Right stuff and at the right price. Procurement role = negotiator.
  • Level 3 — TCO: From Price to Total Cost of Ownership. Procurement role = supply expert and project leader.
  • Level 4 — Demand Management: See and shape demand. Procurement role = money manager and relationship manager.
  • Level 5 — Value Management: Increase business value from spend, not just reduce spend magnitude. Procurement role = Trusted business advisor and change agent.

At each evolutionary stage, Hackett's research details key performance metrics, skill sets, empirically proven best practices and emerging leading-edge practices.

Hackett's research describes an evolutionary model that starts with a traditional purchasing organization that is reactive and transactional. The next two stages involve separating transactional purchasing from strategic supply management activities and aligning its organizational structures, processes and staff around supply markets in order to gain leverage in spend effectiveness and process efficiency. The final two stages shift 180 degrees to customer management and switch the focus from supplier relationship management (SRM) to a set of customer relationship management (CRM) processes that help Procurement get the Voice of the Customer and "assurance of relationship" with spend owners, allowing them get more value from their spend.

According to Hackett's research, the evolutionary end-state involves much more than a cursory "stakeholder management" process in a traditional sourcing methodology led by a cross-functional supply team. It involves a focus on making sure that the spend owners are getting what they need from both suppliers and also from Procurement as a professional services organization. At the last stage, Procurement's agenda is the CEO's Agenda (e.g., innovation, growth, sustainability, etc.) and there's no parallel measurement system beyond the metrics that define value for the organization.

"What we've detailed here are the steps in a journey that takes procurement organizations 5 to 10 years, at a minimum," said Hackett Procurement Practice Leader Chris Sawchuk. "But the benefits of moving up this evolutionary scale are clear. They begin with broader and deeper spend impact. Then they enable procurement to move beyond cost savings and generate real competitive advantage for their company by harnessing the innovation and intelligence of supply markets."

According to Hackett Senior Business Advisor Pierre Mitchell, "The levels we're detailing with this research build on each other, and companies will evolve at different rates based in their operating models and business needs. Some companies will even find that the highest levels are beyond their grasp. But if companies evolve their model annually, and methodically self-fund new processes, projects, and capabilities, they will make progress and see powerful benefits."