eWorld Purchasing & Supply Conference Day 1 - September 28th, 2010 09:30 to 10:05 AM Agile Procurement: A New Value Proposition for a Volatile World Overview: The procurement function has certainly proved its worth over the past few years, as many organisations cut costs rapidly to survive the economic downturn. But opinion is still firmly divided on the economic outlook for the next few years, with the only consensus being unpredictability. So would the same purchasing efficiencies be available second time around, if a ‘double-dip’ recession takes shape? Or will procurement’s contribution quickly be forgotten if a global recovery emerges instead? Chris Sawchuk from the Hackett Group puts forward the case for a new value proposition that can cope with unprecedented levels of uncertainty – challenging existing models in favour of increased flexibility and agility throughout the procurement and supply chain functions. Speaker: Chris Sawchuk, Global Procurement Practice Leader, The Hackett Group

1. The Journey to World-Class
Agile Procurement
A New Value Proposition for a Volatile World
Chris Sawchuk
Principal, Global Procurement Advisory
The Hackett Group
September 28th and 29th, 2010

2. Agenda
 Where Have We Been?
– Quick review of the last 2.5 years
 So What Do We Do Now?
– Excelling in Uncertainty
 What are World Class Organizations Doing?
– Practices of Leaders
 Closing Thoughts
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3. Where We Have Been
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4. To begin, let‟s quickly review where we have been…
US Producers Price Index (all commodities) last 2.5 years
1
2 4
“Procurement‟s
perfect storm” “Survival mode”
3 “The New Normal”
“Proactive and
deliberate focus:
cost, cash and risk”
Plentiful Supply, Scarce Demand
Scarce Supply, • Renegotiating Contracts
• Delaying & • Extending payment terms
Plentiful Demand scaling back
• Securing supply • Reducing supplier viability risk Uncertainty Prevails, Agility Is Key
capital • Increased climate of risk & volatility
• Staving of price investments
increases • Globalization & emerging market exploitation
• Reducing • Acceleration of creative destruction cycles:
• Finding talent discretionary
• Sustainability Innovate..or die
spending
• Evolving • Freezing hiring
procurement ‘s value
proposition
Source: www.bls.gov
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5. Organizations hoped for growth, but also hedged their bets with still
lower operating budgets and staff levels
What is the Estimated Percentage Change that You Expect
During 2009 and 2010 in Procurement for:
Staffing Budgets Revenue
3.7%
The jobless recovery
(i.e., even fewer
planned jobs going
into 2010)
-1.5% -1.7%
-2.2% -2.3%
-2.6%
Change in Change in Operating Operating Revenue Revenue
number of staff number of staff Budget Budget 2008-2009 2009-2010
(FTEs) 2009 (FTEs) 2010 2008-2009 2009-2010
Source: The Hackett Group 2010 Key Issues Study
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6. What have you done in the last year?
1. Have you added high-value procurement services and related capabilities to
your service portfolio?
2. Do you manage procurement processes as services?
3. Have you added higher-value metrics to your scorecard and gaining associated
resources?
4. Have you helped the enterprise become more agile through better commercial
risk management and improved variability of asset/cost structures?
5. Have you made procurement more agile to deliver more capacity and savings?
6. Have you extricated procurement staff from low-value processes? Are you
obtaining maximum value (and minimizing distractions and risk) in p2p activities?
7. Are your key suppliers innovating with you?
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7. Many Procurement organizations capitalized on the downturn to
evolve Procurement‟s value proposition…
Percentage of Procurement Organizations that Used the Recession to Make
Themselves Stronger
Influenced new spending areas and put in place new policies that
73%
were not possible before
Brought additional attention, focus, and resources to supply risk
57%
as an enterprise risk issue
Added higher-value procurement 'services' to your service
53%
portfolio and increased your brand to the business
Added higher-value metrics to your scorecard beyond cost
47%
savings
Extricated procurement staff from low-value processes, but also
40%
increased resources in high-value procurement activities
Helped critical suppliers through the downturn and garnered their
23%
goodwill and commitments in preparation for the market upturn
Freed up working capital without undue stress on your suppliers
13%
(e.g., use of supply chain financing)
Source: The Hackett Group 2010 Key Issues Study
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8. So what will happen next?
US Producers Price Index (all commodities) last 2.5 years
1
2 4
“Procurement‟s
perfect storm” “Survival mode”
3 “The New Normal”
“Proactive and
What if nothing changes, can we sustain
deliberate
Will procurement‟s contribution quickly be
?
focus: cost, this new normal?
forgotten if a global recovery emergesbe
Would the same purchasing efficiencies
cash and risk”
instead?
available second time around, if we see a
“double-dip”?
Uncertainty Prevails,
Agility Is Key
Source: www.bls.gov
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9. So What Do We Do Now?
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10. How do we deal with uncertainty?
Be Agile – ready to react to the environment
Build your value proposition – more value in the right areas
Drive performance – increase efficiency and effectiveness
Get back to the basics – build capabilities
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11. In this time of uncertainty, Procurement must evolve its value, build its
execution capabilities and align performance
Business Procurement Suppliers
Procurement Value Spend / Supplier Value
Business Environment
“The New Normal” Procurement
Value:
Increased climate Evolve the Service Value
of risk and “What do we aspire to be?” which
Requirements Requirements & Spend
becomes “What to execute?”
volatility (and investments)
Exploit emerging
market Procurement
Procurement
opportunities Capability:
Performance:
Recalibrate the Service Execution Redevelop the Service Capability
“What is the level of performance “What capabilities do we have
Innovate or die (or for both efficiency and today or need to acquire to
be acquired) effectiveness?” change?”
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12. Every Procurement organization must define the value they want to
deliver to their stakeholders
Business Procurement Suppliers
Procurement Value Spend / Supplier Value
Procurement
Value:
Evolve the Service Value
“What do we aspire to be?” which
Requirements becomes “What to execute?” Requirements & Spend
(and investments)
Procurement Procurement
Performance: Capability:
Recalibrate the Service Execution Redevelop the Service Capability
“What is the level of performance “What capabilities do we have
for both efficiency and today or need to acquire to
effectiveness?” change?”
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13. It starts with “doing the right things” as procurement INFO RMA
TIO N
O RG ANIZATIO N
Procur
ement
Service
Deliver
SERVICE
PLACEME
NT PRO CESS
SO URCIN
ENABLIN
G
PRO CESS
DESIG N
continues to evolve its value proposition…
SKILLS & G
TALENT
y TECHNO L
OGY
Value Proposition Role of Procurement
…ultimately stimulating good demand and Leading
increasing business value derived from spend Safely harnessing the power of supply
markets for competitive advantage “Influence the
(and supply markets) rather than just reducing
Business Strategy”
spend magnitude.
VALUE MGT
Increase value (and required capabilities)
Reducing unneeded demand activity, Customer relationship Exceeding
complexity, immediacy and DEMAND management; money management; “Support the
variability… MANAGEMENT demand/specification influence Business Strategy”
…by reducing total supply Cost modeling; supplier/market
analysis; supplier management;
costs (not just supplier TCO REDUCTION
profits). SRM; supply planning; project
management; risk mgmt
Achieving
“Reduce Costs”
PURCHASE COST Negotiations, n-step
And at the right price…
REDUCTION sourcing process
Right goods and Site-level tactical
services at the right
SUPPLY ASSURANCE sourcing, ordering Lagging
time at the right and expediting “Firefight”
place…
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14. To ensure you are investing enough time in strategic activities INFO RMA
TIO N
Procur
ement
Service
SERVICE
PLACEME
NT PRO CESS
SO URCIN
G
you must measure the right things
PRO CESS
O RG ANIZATIO N
DESIG N
Deliver
SKILLS &
ENABLIN
G
TALENT
y TECHNO L
OGY
Capabilities
Performance Measurement Value Level via Investment in „Services‟
Percent of firms measuring value element Percent of time spent on procurement activities
on primary Procurement scorecard by non-transactional FTEs
40% Supporting 18%
VALUE Strategic Initiatives 25%
MGMT
27% DEMAND 21%
Managing Demand
MANAGEMENT 20%
15%
50% Reducing
TCO REDUCTION 23%
Total Cost of Ownership
26%
77% PURCHASE COST Reducing
Purchased Costs 17%
REDUCTION
19%
43% Assuring Supply 15%
SUPPLY ASSURANCE
Current Allocation Desired Allocation
Source: The Hackett Group Procurement Value Proposition and Capability Study, 2010
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15. Achieving high performance requires an increase in the level of
efficiency and effectiveness
Business Procurement Suppliers
Procurement Value Spend / Supplier Value
Procurement
Value:
Evolve the Service Value
“What do we aspire to be?” which
Requirements becomes “What to execute?” Requirements & Spend
(and investments)
Procurement Procurement
Performance: Capability:
Recalibrate the Service Execution Redevelop the Service Capability
“What is the level of performance “What capabilities do we have
for both efficiency and today or need to acquire to
effectiveness?” change?”
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16. Hackett Value Grid™ − the foundation for how Hackett defines INFO RMA
TIO N
O RG ANIZATIO N
Procur
ement
Service
Deliver
SERVICE
PLACEME
NT PRO CESS
SO URCIN
G
PRO CESS
DESIG N
world-class performance
ENABLIN
SKILLS & G
TALENT
y TECHNO L
OGY
EFFECTIVENESS Hackett Value Grid™ (Procurement) EFFICIENCY
 Economic return  Process costs
 Supply base leverage & performance  Productivity
 Role of procurement  Cycle times
 Costs per transaction
 Process quality  Staffing Levels
Examples: Examples:
 16% lower Cost of Procurement as a % of
 144% higher spend cost reductions
spend
 90% higher spend cost avoidances  28% lower Direct - PR Cost as a % of Direct
Spend
 58% less suppliers per $B  19% lower Indirect - PR Cost as a % of
 22% less suppliers that represent 80% Indirect Spend
of direct spend  32% lower Purchase Operations cost as a %
of spend
 10% less suppliers that represent 80%  12% higher Span of Control
of indirect spend  174% more POs processed per FTE
 54% faster Direct Receiving cycle time
 50% higher spend influence in direct
 63% less cost per PO
materials/services
 23% less FTEs per $1B of spend
 33% higher spend influence in indirect – 39% less direct FTEs per $1B direct spend
materials/services – 29% less indirect FTEs per $1B indirect spend
– All cost, FTE, and wage rate data available at
 42% less PO Pricing errors a process group level
* Many of these metrics are also available at a more granular spend category level below the indirect/direct materials and services levels
But Procurement performance must start with the Value of the Procurement
“services” promised…and delivered
Source: The Hackett Group 2010
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17. Procurement organizations used the recession to improve along INFO RMA
TIO N
O RG ANIZATIO N
Procur
ement
Service
Deliver
SERVICE
PLACEME
NT PRO CESS
SO URCIN
ENABLIN
G
PRO CESS
DESIG N
traditional metrics – and saw the payoff in ROI
SKILLS & G
TALENT
y TECHNO L
OGY
Effectiveness: Total spend cost savings
Total spend cost savings (reduction and avoidance) as a percent of
8% 7.0%
annual spend
7%
6% 5.5%
4.9% 5.2%
4.8%
Return on investment
5% 4.4% Ratio of total spend cost savings to the cost of
4% 3.1% procurement, 2010
2.7% 2.3% 2.3%
3% 2.1% 2.0%
2% 11.3
1%
0%
2005 2006 2007 2008 2009 2010
Non-World-Class World-Class
Efficiency: Cost of procurement
Procurement cost (labor, outsourcing, technology, other) as a percent of spend 174%
1.2% 1.10% 1.07%
1.04% 4.1
0.98% 1.01%
1.0% 0.85% 0.85%
0.80% 0.81% 0.83% 0.82% 0.82% 0.80%
0.8% 0.74% 0.74%
0.68% 0.64%
0.61% 0.63% 0.64% 0.60%0.62%
0.6%
0.4% Non-World-Class World-Class
0.2%
0.0%
1996 1998 2000 2002 2004 2005 2006 2007 2008 2009 2010
Non-World-Class
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18. Once service mix (value) and performance levels are established,
capabilities can and must be built
Business Procurement Suppliers
Procurement Value Spend / Supplier Value
Procurement
Value:
Evolve the Service Value
“What do we aspire to be?” which
Requirements becomes “What to execute?” Requirements & Spend
(and investments)
Procurement Procurement
Performance: Capability:
Recalibrate the Service Execution Redevelop the Service Capability
“What is the level of performance “What capabilities do we have
for both efficiency and today or need to acquire to
effectiveness?” change?”
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19. The Service Delivery Model provides a framework to answer key INFO RMA
TIO N
O RG ANIZATIO N
Procur
ement
Service
Deliver
SERVICE
PLACEME
NT PRO CESS
SO URCIN
ENABLIN
G
PRO CESS
DESIG N
questions
SKILLS & G
TALENT
y TECHNO L
OGY
Who?
Process
Sourcing
Where? What?
Service Process
Placement Design
Service
Delivery
How? Information
Components Enabling How?
Technology
Skills and
Organization
Talent How?
Who?
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20. Consider each component of the service your Procurement INFO RMA
TIO N
O RG ANIZATIO N
Procur
ement
Service
Deliver
SERVICE
PLACEME
NT PRO CESS
SO URCIN
ENABLIN
G
PRO CESS
DESIG N
organization provides, to build an agile organization
SKILLS & G
TALENT
y TECHNO L
OGY
Clear understanding of How and where
Shared services (SSCs) In-house versus outsource
which activities and processes and
Centers of Excellence Onshore versus offshore
processes are to take sub-processes are
BU or Corporate Center Physical versus virtual
place where sourced
Process
Sourcing
Scorecards, KPIs, Decision-making Processes,
master data frameworks BU-level
exception- handling
elements, and Single version of the Service Process standards
rules, mappings, etc.,
reporting truth, global master Placement Design Enterprise-wide
associated with
data standards standards
functional roles and
Local standards
responsibilities
Service management
Defined roles and Service
Independent or responsibilities, Delivery
integrated services organizational
organization entities, structure Information
Components Enabling
and reporting lines Technology
for service delivery
Automation
Skills in functions and Online self-service access
Architecture of the Online and Web access
business operations Skills needed to
Skills and technology platforms Digitization
Formal training and skills deliver and Organization
Talent required to support Level of IT and systems
development opportunities successfully service delivery integration
Retention of top performers transform services
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21. Procurement capabilities: Service Placement
Shared Services and COEs are increasingly serving as the delivery model for Procurement
services versus just the corporate versus SBU debate
% Process Allocations to Model Type
(by transactions for P2P; by spend for rest)
Shared Services COE Corporate Center Local/BU
Service
Process
Placement
Sourcing Requisition & Purchase Order Processing 29% 11% 7% 53%
Supply Data Management 29% 20% 14% 37%
Information
SDM Process
Customer Management 19% 15% 17% 49%
Design
Components
Supplier Scheduling 15% 3% 16% 66%
Organization Supplier Management & Development 17% 26% 17% 41%
Enabling
Technology
Skills and Receipt Processing 15% 7% 10% 68%
Talent
Compliance Management 10% 35% 9% 46%
Sourcing Execution 8% 27% 24% 41%
Function Strategy 6% 42% 16% 36%
Sourcing & Supply Base Strategy 5% 43% 17% 35%
Source: The Hackett Group Procurement Benchmark
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22. Procurement capabilities: Process Sourcing
Today, Procurement BPO is still heavily transactional, but market intelligence, tactical sourcing,
and full category management are increasingly in play
Percent of Firms Citing Processes Where BPO Will be
Used as Major Strategy
Service
Process
Placement Invoice processing Transactional 62%
Sourcing
PO processing and PO communications to
Transactional 46%
Information supplier
SDM Process
Design Market intelligence and supply risk data
Components gathering
New capability building 38%
Supply data management (e.g., catalog
Transactional 38%
Organization management, supplier master updates, etc.)
Enabling
Technology Full category management of non-strategic
Skills and Sourcing 31%
spend areas
Talent
Tactical sourcing (non-recurring / spot / one-
Sourcing 31%
time buys / three-bids-and-a-buy)
Supplier qualification and certification activities 27%
Source: The Hackett Group Procurement Benchmark Source: The Hackett Group 2010 Key Issues Study
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23. Procurement capabilities: Enabling Technology
Investments are required, but utilization is the key to performance improvement
Technology Cost per FTE, 2010
World-Class: $16,960
Service Non-World-Class: $13,118
Process
Placement
Sourcing
Percent of organizations with greater than 75% utilization of
primary business application functionality
Information 88%
SDM Process
Design
Components
55% 60%
Organization
Enabling
Technology
Skills and
Talent
Non-World-Class World-Class
Source: The Hackett Group Procurement Benchmark
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24. Procurement capabilities: Skills and Talent
Talent is the number one area of focus across G&A in 2010
Percentage of Organizations with a High Degree of High
Potential and Critical Staff with Formal Retention Plans
25%
Service
Process
Placement
Sourcing
Information
SDM Process
Design
Components
5% 400%
Organization
Enabling
Technology
Skills and
Talent Non-World-Class World-Class
A key success factor for world-class organizations is that • World-class organizations spend 18% greater time
they fundamentally place a higher degree of importance training their staff than non-world-class
and focus on developing cost analysis skills. organizations and have a workforce with 29% more
Source: The Hackett Group Procurement Benchmark
professionals.
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25. What Are World Class Organizations Doing?
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26. Ten Things Done Well by World-Class Procurement Organizations
1. Leverage the full capabilities of its supply markets
Helps the firm safely harness the power of supply markets to get more value from external spending (i.e., gate opener –not
just gatekeeper).Value can mean spending less, but also to get more utility from spend to influence (not just support) the
business strategy.
2. Have flexible rather than rigid operating models
Adapts its “service delivery” and transformation model to an extremely diverse set of budget owners (and functional partners)
in the value chain rather than fixating on just how to organize, control the resources, or follow a rigid n-step sourcing
process. It also takes a leadership role in helping construct not just product supply chains, but internal service chains as
well.
3. Create clear value propositions that are understood and valued by stakeholders
Creates a very clear value proposition and “brand” that can be understood, articulated, and championed by the spend
owners themselves. Performs “customer management” processes to ensure that they’re getting most value from not just
suppliers, but Procurement itself too.
4. Engage in business spend planning, not just “spent analysis”
Works with the business to perform “spend planning” as part of financial/operations planning and budgeting, gaining earliest
influence, and providing forward-looking economic spend/supply information rather than forensic “spent analysis” activity.
5. Explicitly align to the business through a project portfolio plan
“Connects the Dots” in tying metrics, processes, and capabilities to this value proposition in the trenches (rather than working
on these individually).There are currently too many disjointed activities within a typical Procurement project portfolio.
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27. Ten Things Done Well by World-Class Procurement Organizations
6. Protect the business from supply risk and from itself
Uses formal risk management and market intelligence techniques to provide the business not only with visibility into risk,
but also with a governance structure and process to gain consensus with Finance /Business on which risks to treat and
how to best systematically treat them with limited funds.
7. Shift the game from talent to knowledge
Moves from a purely talent management model (“throw the best people at it”) to a knowledge management model by 1)
shifting from current FTE staffing models to more flexible/variable resourcing models and 2) providing better IT support for
better capturing and re-using knowledge/intelligence.
8. Turn data into information, intelligence, knowledge and insight.
Uses information management as a weapon to transcend basic ERP/e-sourcing to a more thoughtful information
architecture that helps manage extended supply chains and external intelligence.
9. Measure suppliers, but also tap their hearts, minds, and budgets
Not only measures the suppliers through automated scorecards, but works collaboratively with suppliers to reduce total
supply costs (not just supplier margins) and create innovations that will deliver economic value. Becomes a “Customer of
choice” not just when you most need them, but also when they most need you.
10. Use P2P transactional processes as an asset – not a liability
Provides not just “hands free” processes to make life easier for Procurement, but rather a failsafe “guided buying”
experience to channel employees to preferred buy-pay channels. This implies integration between P2P and sourcing as
well as a deliberate “P2P transactional channel optimization” methodology (i.e., think about applying Lean to the P2P
“transaction factory‟).
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28. Closing Thoughts
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29. Especially When Uncertainty Prevails, we must…
Continue to Evolve our Value…
…and Do More with Less…
…but we must Develop our Capabilities….
…To Be More Rapidly Flexible for Growth and Contraction
Agility!
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