The Sourcing Industry Group and Oliver Wyman Procurement by Oliver Wyman Group

THE SOURCING INDUSTRY GROUP AND OLIVER WYMAN PROCUREMENT JOURNAL 2016

FOREWORD Welcome to the first edition of the Sourcing Industry Group and Oliver Wyman Procurement Journal. This collection of articles offers unique and timely insights to help senior Procurement executives shape strategies for success and improve performance throughout their organizations. In recent years, Procurement functions have faced a significant and rather unique set of challenges, requiring innovative and transformative solutions. Procurement functions are asked to generate “harder” savings (as opposed to “softer” cost avoidance), requiring them to explore new territories in terms of scope and/or types of levers addressed. Sourcing strategies category management approaches need to better align to the companies’ overall vision and objectives, raising the profile and demand of the Procurement function. Simultaneously, global organizations are moving faster than ever. Procurement has a critical, strategic role to play, for example: to accelerate the go to market in new geographies through agile sourcing strategies; to capture suppliers’ innovation and immediately adapt to new, disruptive technologies. To stay ahead of evolving challenges, leading Procurement organizations are dedicating significant efforts to establish a stronger set of capabilities to support new, transformative profiles. Harder, better, faster, stronger. SIG and Oliver Wyman created this Journal for the senior Procurement Executive responsible for guiding their companies in what may be the most challenging period in the history of Procurement. This Journal represents our latest thinking and experiences shared during our joint Chief Procurement Officer Roundtables throughout the year. It reveals how companies have addressed these challenges to become best-in-class, providing Procurement executives an invaluable tool as they work with their suppliers, business counterparts, and management teams to take advantage of the opportunities that accompany every challenge. We trust that you will agree. Yours sincerely,

Dawn Tiura President and CEO SIG

Mike Matheis Partner Oliver Wyman

Damien Calderini Partner Oliver Wyman

TABLE OF CONTENTS

1 8 15 22 32 43

PROCUREMENT OUTSOURCING A SMART MOVE, REALLY?

VENDOR RISK MANAGEMENT

TALENT PROCUREMENT THE NEXT CHALLENGE

PROCUREMENT: FROM A TRANSACTIONAL TO A STRATEGIC FUNCTION

OPEN INNOVATION: THE MEANING BEHIND THE BUZZWORD AND WHY CPOS SHOULD KNOW ABOUT IT

DESIGNING THE PERFECT PROCUREMENT OPERATING MODEL A MOVING TARGET

PROCUREMENT OUTSOURCING A SMART MOVE, REALLY? CONTEXT The market for Procurement Outosorcing manages over $200 billions in spend, resulting in annual contract fees of about ~$2 billions, growing with approximately 10% annually. Although the Procurement Outsorcing market is growing, it still represents a very small portion of all direct and indirect spend that companies manage internally. Major Procurment Outsorcing service providers are traditional big Business Process Outsourcing (BPO) players such as Accenture and IBM. A relatively small number of companies have engaged in Procurement outsourcing, but the trend is increasing. Companies that have engaged in Procurement outsourcing want to go further, while those that have not are still very reluctant to consider it. On paper, the benefits (flexibility, savings, expertise) seem very appealing but in reality, the outcomes are often disappointing. Among the companies that have outsourced, strategies differ on what categories are eligible and if all of the procurement process or part of the P2P only should be outsourced. The main objective quoted when deciding to outsource is cost savings – both on cost of goods and internal resources – but, more often than not, results are considered disappointing. Procuerment Outsorcing does however seem to have the potential to free up internal resources that can then be redeployed and focused on high value-add activities and categories. Hence, when considering Procurement Outsorcing for your organization, it is important to clarify the strategic objectives and desired outcomes. This may require a change in mind-set:

Exhibit 1: Procurement Outsourcing: Strategic considerations UNLOCKING THE TRUE POTENTIAL BENEFITS FROM PROCUREMENT OUTSOURCING REQUIRES A CHANGE IN MINDSET What cost savings can I achieve through procurement outsourcing?

LOWER COGS

INCREASE OPERATIONAL EFFICIENCY

How can I best optimize the mix of resources available (internal and external) to maximize the ROI of my function? FOCUS INTERNAL RESOURCES

INCREASE ORGANIZATIONAL FLEXIBILITY

LEVERAGE EXTERNAL EXPERTISE

WHEN DO I OUTSOURCE? Procurement Outsourcing is an option at any maturity stage of your internal procurement operations. However, depending on your organization’s maturity, the operating model and benefits for Procurement Outsourcing will take different shapes.

Exhibit 2: Increasing complexity of procurement levers PROCUREMENT LEVEL SOPHISTICATION Complex

Simple Buy Cheaper

Buy better

Buy less

Manage risks

Contribute to growth

Optimize costs TYPE OF PROCUREMENT LEVER

At the earliest stages of maturity, procurement levers mainly revolve around buying cheaper since little has been done to pool volumes, negotiate prices by leveraging strategic intel and position, etc. At this stage, Procurement Outsourcing can provide a short-term benefit by tapping into larger buying volumes, and leveraging existing relationships and optimized supplier panels to buy at the better (lower) price. These benefits however, do not necessarily provide a sustainable benefit – once tapped into, further (price) improvement is unlikely to be obtained. At later stages of maturity – when your organization has mastered a specific procurement task or category, Procurement Outsourcing can be a tool to offload relative repetitive and “transactional” tasks to a third-party provider, and to free up your skilled resources to attack the next set of tasks or categories. In such a model, Procurement Outsorcing resources are typically used as staff augmentation, giving your organization the flexibility to scale and adjust in an agile way. While this is an attractive option to make sure you keep your internal teams motivated and challenged, we should not underestimate the need and effort required to manage and monitor the third-party provider.

HOW DO I OUTSOURCE? Given the maturity of your procurement organization, you have been able to determine what to expect from Procurement Outsourcing, which should give you a good idea of the expected benefits. However, how do I leverage a third-party organization and how do we best setup our operating structure and contract? As with everything, there are several approaches, each with their distinct pros and cons.

Exhibit 3: Approaches to Procurement Outsorcing ONE STEP AT A TIME

PRIORITY PROJECTS ONLY

1 3 Pilot

Growth

BIG BANG

Steady-state

Experiment with safe categories and capabilities first; expand when benefits materialize

Award prioritized projects to specialized service providers with highest expected impact

Outsource entire parts of the procurement function in a single major transformation

 

•• Low-risk and commitment •• Explore and exploit strengths of model •• Benefits emerge and accrue slowly •• Limited scaling and leverage in early stages

•• Focused execution •• Limited project distraction for internal resources •• Limited transferability of strengths and capabilities across projects

•• Immediate scaling of benefits •• Exploit end-to-end service provider capabilities •• Limited strategic control •• Missteps have large and longterm impact

For a longer-term Procurement Outsourcing approach, you can roughly take two approaches: outsource one step at a time, or outsource everything with a big bang. The former allows you to test the waters first and provides the opportunity to tailor the way you interact with your provider through a slow learning process. The benefits however will accrue also with a slower pace, something the latter approach does not suffer from. The big bang approach however is a higher risk, higher reward approach: the benefits scale quickly, but if something goes wrong, it will have larger and longer lasting impacts that are harder to reverse and take back control over. Where organizations who do Procurement Outsorcing well typically have success with, is utilizing the third-party vendor on a project to project basis. Whenever the company has a large project that enters new territories of sourcing, collaborating with a third-party sourcing provider allows you to experience the benefits for the project, without entering long-term contracts and commitments to hand over tasks and control to the outside vendor. Whatever your preferred approach, we would always recommend to test the waters first through a pilot program before committing all the way. Pricing schemes for Procurement Outsourcing contracts can take various shapes, but are typically structured around three main drivers; resources, transactions, and performance. Copyright © 2016 Oliver Wyman 3

Exhibit 4: Contract and pricing types

More advanced/complex

Resource based pricing

Hybrid pricing

Transaction based pricing

•• Most basic and standard contracts •• Fairly fixed and therefore highly predictable •• Service providers charge based on the amount of staff required to execute a specific task or function over a specific time

•• “Pay-as-you-go” model – predictability depends on the capability and accuracy of predicting transaction volumes •• Charges based on the volume of tasks or transactions executed – does not consider the effort required to execute a specific activity or task

Payment based on achievement of specific business results (savings, compliance, contract coverage, etc.) Performance based pricing

Typically not used as stand-alone – hybrid models with mix of resource or transaction-based model

WHAT DO I OUTSOURCE? Procurement Outsourcing can be used as a tool to outsource both individual procurement tasks across multiple categories, as well as entire individual categories end-to-end. To identify the eligible categories of spend, we need to take a deeper look into the types of categories and the corresponding value drivers for each. Typical area of focus for outsourcing are the indirect, non-core categories of spend such as office supplies, travel, etc. However, other category types can just as well be considered for Procurement Outsorcing. That said, categories of spend that are critical to the organization’s day-to-day operations should be handled carefully, as letting go of strategic control can pose a significant risk. Same holds true for those categories and processes for which your organization has develop highly customized and sophisticated ways of working that will prove difficult to teach and replicate or automate with the third-party organization and resources.

Exhibit 5: Category types Non-Core

TYPICAL AREA OF FOCUS

Core Indirect

Direct

Exhibit 6: Category value drivers

The value drivers of the category also play an important role. Those categories characterized as “buy cheaper” are easier to outsource. Categories driven by “spend better” and “spend less” levers require more strategic and skilled approach to unlock benefits, and hence typically only transactional, contract management and supplier relationship management activities are outsourced. The scope of outsourcing is not only defined with the various categories of spend, but also by the types of activities and process: from transactional activities and tactical and even strategic procurement activities.

SPEND SMARTER

Any optimal scope should take into account the stakes, the value drivers, and the level of maturity of the outsourced process and category.

Typical levers accessed through PO

KEY TAKEAWAYS

Initial spend

Buy cheaper

Spend better

Spend less

Final spend

Procurement Outsourcing has proven to be both a highly successful and disappointing tool for procurement organizations in today’s world. It can be done in many ways, with different approaches, operating models, contract structure, and scopes and at various maturity stages of your internal organization. However, a clear checklist of DOs should always be taken into consideration:

WHY? •• Look beyond direct savings on COGS •• Create labor arbitrage •• Free up skilled internal resources

WHEN? •• Anytime beyond a point of minimum internal maturity, but with varying levels of sophistication of the expected benefits

WHAT? •• Categories for which value drivers can be accessed through a third-party •• Not-mission-critical operations that you’ve mastered internally first

HOW? •• Pilot “safe” categories/processes first •• Define clear measures of success •• Enforce strong tracking mechanisms to maintain strategic control When considering if Procurement Outsourcing is right for you, always make sure that: 1. Upfront, clearly define and articulate the desired objectives and expected benefits towards the objective 2. Consider multiple objectives and outcomes that go beyond cost savings – outsourcing relationships with a third-party are often way more complex and cannot be characterized by the single objective of cost savings

VENDOR RISK MANAGEMENT

CONTEXT Vendor Management, broadly speaking, is becoming a primary focus of Procurement organizations. It can be defined has how companies manage their relationships with vendors in order to maximize value. Traditionally, the aim was to create value by identifying potential savings opportunities. However, value destruction has become a growing concern and Risk mitigation has climbed higher on the Procurement agenda. Activities can be outsources but responsibilities can’t. Regulatory bodies are enforcing stricter rules and holding companies responsible for their own actions but also for those of their vendors. Car manufacturers have had to call back millions of vehicles because of faulty parts from a tier 2 or 3 vendor. Banks have paid millions because of the behavior of some of their Sales and Marketing suppliers. Yet, the number of suppliers a company needs to deal with is always increasing. And the situation is even more complex when considering second and third tier suppliers. Many firms have upped their game on Vendor Risk Management and embraced best practices. For instance, some of the more advanced companies have replaced the Total Cost of Ownership (TCO) with the Risk Adjusted Total Cost of Ownership (RaTCO) to make sure Risk is always part of the equation.

“

Breaches can lead to cost increase, immediate revenue losses, decreased market shares... all of those should be taken into account when assessing a potential risk

RISK ECOSYSTEM Companies are exposed to a wide variety of Vendor Risks – not all of which are obvious or easy to identify and quantify. However, it is critical to identify the different risks and understand one’s exposure to them, in particular how they may affect one’s business and its shareholder value. It is equally important for the Procurement function to share this taxonomy internally so that all key internal stakeholders are aligned. Risks can be segmented around 4 main categories: 1. Operational risks: Risks directly impacting product development and delivery operations, resulting in faulty or unavailable products and services. Examples: Vendor default, shipping delay, competitor preferential treatment 2. Global risks: (Financial) risk exposure due to global nature and footprint of procurement activities. Examples: currency exchange rates, commodity prices and availability, country of origin 3. Reputational risks: Brand and reputational risks impacting your organization through (in)direct association with a specific vendor, its location, and practices. Examples: social and environmental impact, labor conditions, political support 4. Compliance risks: Risks emerging from vague and/or uncontrolled contracts, agreements, and performance tracking. Examples: quality assurance and testing, security breaches, IP rights

Exhibit 1: Vendor Risk Management: Risk ecosystem PROCUREMENT ORGANIZATIONS ARE EXPOSED TO A WIDE VARIETY OF VENDOR RISKS – NOT ALL OF WHICH ARE OBVIOUS AND EASY TO IDENTIFY AND QUANTIFY

OPERATIONAL RISKS

GLOBAL RISKS

VENDOR RISKS

REPUTATIONAL RISKS

COMPLIANCE RISKS

THE RISK EQUATION

Exhibit 2: The Risk Equation SUCCESSFUL RISK MANAGEMENT OPTIMIZES THE RISK EQUATION BY LIMITING THE POTENTIAL COST OF RISK AND MITIGATING IT APPROPRIATELY IF AND WHEN IT OCCURS 2

Total cost risk materializes

Potencial costof risk

Risk of occurrence

Risk of mitigation

Mitigation reduces the risk of occurrence and/or the total cost if risk materializes • Solving the risk equation is a continuous and evolving process as change is inevitable in the vendor panel and exposure to external factors

Exhibit 3: Vendor Risk Management: Total cost of Risk ADVANCED PROCUREMENT ORGANIZATIONS QUANTIFY POTENTIAL COSTS AND RISK OF OCCURRENCE TO PRIORITIZE THEIR EFFORTS

RISK OF OCCURRENCE

This risk equation has two main parts: 1. The “total cost of Risk”: what would the cost be if the risk occurred and what are the odds of that happening? 2. The Risk mitigation factor: how much can the cost of the risk or the eventuality of the risk occurring be influenced?

TOTAL COST OF RISK

PRIORITIZATION AND SEGMENTATION TotalHigh cost if risk materializes

Advanced companies view Vendor Risk Management as precise science – where inputs drive outputs – and not as an uncertain “art”: successfully addressing each term of the Risk Equation will make for an efficient risk management approach. This Risk Equation is used at the category level to identify areas to focus on and then supplier by supplier.

Highest “total cost of risk” Action plan

Attention

Observation High

High TOTAL COST IF RISK MATERIALIZES

The main intent of this step is to prioritize. Companies do business with thousands of suppliers and therefore need to identify the higher stakes and focus efforts. Measuring the value destruction if the risk materializes as well as estimating the odds of it happening will help segment the vendor database. It will become possible to identify vendors in the “observation” zone, those in the “attention” zone and, finally, those in the “red zone”, where the total cost of risk is the highest. The main difficulty companies typically face to assess the “total cost of Risk” is when trying to put exact values on the cost if the risk materializes and on the odds of it happening. The key is not precision, but directional information that will support decision making. Procurement functions will find it helpful to involve other internal stakeholders (legal, marketing, sales, finance) to build a common method. Once the set of criteria is defined, this becomes a rating and ranking exercise where, again, internal stakeholders will be very helpful.

RISK MITIGATION Once the suppliers to focus on (in the “red zone”) have been clearly identified, the next step is to design appropriate responses to mitigate the risks. By nature, not all risks can be avoided and, in many cases, the response needs to aim at minimizing the impacts once a risk has occurred. Therefore, mitigation plans need to be both preventive (to minimize the odds of a risk occurring) and corrective (to minimize the consequences once a risk has occurred). Efficient mitigation plans will mix different approaches: •• Continuous monitoring of supplier specific information, both “strong signals” such as financial health for instance and “weak signals” such commercial dynamism (gain or losses of important opportunities), innovative capacity as well as more global data points, such as technological shifts, geo-political situations, etc. •• Strategic sourcing levers such as double-sourcing, hedging, safety stocks, etc. It is important to involve all key internal stakeholders and communicate on these mitigation plans as some options may be conflicting with immediate financial gains (the cheapest option isn’t always the one with the best Risk Adjusted TCO) A similar approach is required for both existing suppliers but also for new suppliers. Best in class companies have included this “risk assessment” in their overall supplier on-boarding process. Immediately, every new supplier is rated on its total cost of risk and mitigation plans are designed accordingly.

“

We dedicate most of our efforts on monitoring. We identify our risk very well but then we don’t invest enough in building robust actions plans to either avoid the risk or “soften” its consequences

OPERATING MODEL To often, vendor risk management is a one-time effort, typically following an incident. However, designing and implementing a robust and efficient Vendor Risk Management approach, delivering sustainable results requires building a comprehensive operating model.

Exhibit 4: Vendor Risk Management: Operating Model BEYOND PROCESSES, A COMPREHENSIVE OPERATING MODEL IS REQUIRED TO ENABLE AND SUSTAIN EFFICIENT VENDOR RISK MANAGEMENT GOVERNANCE • Internal top management sponsorship • Active involvement of Sr. Executives for strategic suppliers

RESSOURCES • Supplier segmentation and selection • End-to-end assessment process • Active mitigation planning

PROCESS

• Tailored practicalities (meetings, frequencies, typical agendas…)

• Dedicated team

TOOLS

• Incentives and impact on i ndividual objectives

• Supplier segmentation, detailed scoring and evaluation frameworks

• Appropriate skills (training)

• Automation and IT tools

Indeed, efficient Vendor Risk Management is the result of fully aligned governance, processes, resources and tools. Best-in-class companies have set-up dedicated teams to address this objective. Procurement Analytics and Category Managers are closely linked to these dedicated teams and decisions are taken collectively to optimize the Risk-Adjusted TCO.

“

Be ready to arbitrate: sound risk management doesn’t always come with highest savings potential. Create a positive tension in your teams and make sure everyone is focused on finding the optimum solution

KEY TAKEAWAYS Vendor-related risks pose a significant challenge to every company and Procurement has a critical role to play. If you decide to engage in a process to improve your vendor risk management skills, here are some key items to have in mind: •• Increased inter-dependency with vendors means increased exposure to potential risks – you can outsource processes but you can’t outsource responsibilities •• Vendor Risk Management is becoming a bigger part of the Procurement agenda – and expectations are high from Sr. leadership •• Risks come in wide variety of natures – understand which risks you are more exposed to •• Optimize your risk equation – prioritize efforts and define mitigation plans •• Set-up a dedicated Operating Model for an efficient and sustained Vendor Risk Management – develop the right skills and incentives •• To improve and accelerate the delivery of risk management value, multifunctional risk management operating models (involving legal, marketing, sales and finance) can be very useful

TALENT PROCUREMENT THE NEXT CHALLENGE CONTEXT First, an observation: the typical profile required to deliver the value that leading organizations now expect from Procurement is becoming more sophisticated and evolving over time. There are three periods in this evolution: 1. Until the late 90’s, Procurement organizations were staffed with “Buyers”, who had a cost reduction mindset and solid execution and negotiation skills: we call this “the Negotiator” period 2. The need for sourcing professionals came along with the introduction of “Strategic Sourcing” in the early 2000s. True Procurement expertise, business sense and project management skills became a must have: we call this “the Expert” period 3. More recently, globalization, digitalization, the need for advanced cost savings levers and increased risks of all kind have led to the emergence of a new profile: “the Procurement manager”. That person must not only possess all of the capabilities of his predecessors but also leadership, problem solving, change management capabilities, strategic thinking, risk mindfulness and growth orientation: we call him “the Networker”. With a demanding list of capabilities for its managers, it is fair to say that Procurement has now entered the war for talent. According to a CPO we recently interviewed, hiring this talent is turning into a real challenge. Some companies have already adapted and are “re-branding” their job titles to fit the new job expectations; a buyer is now considered to be an entry-level position, and senior positions are branded “Strategic Procurement Managers” and anecdotally – earn twice as much Most CPOs we spoke to are faced with the demand for more “sophisticated” profiles. Yet, as shown in Exhibit 2, the current resource mix and the fairly simple compensation system indicate that this issue has yet to be addressed.

Exhibit 1: The typical profile of Procurement resources is constantly evolving toward a higher level of sophistication 1970’s

2000’s “SOURCING PROFESSIONAL”

“BUYER” •• Execution •• Negotiation skills •• Cost reduction

2010’s

•• •• •• •• •• •• •• •• ••

“THE NEGOTIATOR”

Execution Negotiation skills Cost reduction Expertise Business sense International Project-oriented Procurement excellence More cross-functional view

“PROCUREMENT MANAGER” •• •• •• •• •• •• •• •• •• •• •• •• •• •• •• •• ••

Execution Negotiation skills Cost reduction Expertise Business sense Procurement excellence Project manager Networking Leadership Communication Problem solving/analytical Change management Global Growth oriented Strategic Risk management Co-innovation with suppliers

“THE EXPERT”

“THE NETWORKER”

Source: Oliver Wyman

Exhibit 2: Current resource mix and fairly simple compensation schemes indicate that not all Procurement organizations have yet embraced this evolution EDUCATION: HIGHEST LEVEL ATTAINED BY PROCUREMENT EMPLOYEES*1

COMPENSATION SCHEMES: SHARE OF VARIABLE COMP*1 Graduates 4.0%

10% 25%

66%

College and High School 75% • Only 25% of the current resources have graduate degrees while the rest has either a college or high school degree

0–10%

10–20%

>20%

Total

• Although almost all companies have introduced a portion of variable compensation, the most common KPI remains savings genereted

*1 SIG/Oliver Wyman Procurement Maturity Assessment 2014

In this context, especially when Procurement resources are scarce, it takes extra effort to reconcile the objectives of current or potential team members with those of CPOs: to professionalize the Procurement organization, build a balanced structure with the right profiles and capabilities, and optimize resource allocation.

Exhibit 3: The goal of talent management is to address these challenges and reconcile CPO objectives with employee ambition to create a high-performing organization CHIEF PROCUREMENT OFFICER

PROCUREMENT TEAM MEMBER

I NEED TO: • Professionalize my organization

I WANT TO: • Have an interesting job

Attract

• Attract & retain talents • Find the right balance between profiles & capabilities

• Be part of a well managed team • Develop my skills Talent managment

• Have evolution opportunities • Be well compensated

• Optimize resource allocation • Promote my organization

Develop

Retain

THAT IS WHAT TALENT MANAGEMENT AIMS TO DO: ATTRACT, DEVELOP AND RETAIN TALENT.

ATTRACT: WIN THE GLOBAL TALENT BATTLE In this context, competition to attract talent has become fierce. Procurement functions are no longer hiring from a limited pool of specialized resources. Instead, they are competing for talent in a larger pool, not just against other companies but also against other parts of their own organization. With the internationalization of workforce, competition for talent has become global. Attracting talent requires a sharp focus on increasing the attractiveness of the Procurement function. The following activities can help increase its appeal: 1. Be visible internally: Procurement functions can make better use of internal communication tools to promote themselves among their organization. They should highlight the contributions they make toward the company’s overall success. It is also good practice to formalize an internal communication plan and leverage newer, nontraditional forms of media (video, online, social media) 2. Communicate externally: Procurement functions need to build their own brand and promote it outside the organization. Every opportunity to communicate externally is a chance to increase the attractiveness of the function, for example through conferences, press, etc. They also should develop their brand on campus both at undergraduate and graduate schools. It is important to adapt external communication to the appropriate industry and reputation of the company as a whole

3. Offer great opportunities: Offering a clear career path within Procurement is necessary to increase the appeal of the Procurement function. This requires providing “alumni” success stories from both inside and outside the Procurement function, as well as demonstrating the position of Procurement as a stepping stone toward positions with increased responsibility, either within or outside of Procurement 4. Selecting the right people during the recruiting process requires mapping the hard and soft skill gaps of the current Procurement team and using these gaps to define target profiles. When making hiring decisions, it is also good practice to take into account the company goals as a whole and to involve “internal clients” in the selection process. This will demonstrate that the procurement function is connected to the rest of the business and could also help ease day-to-day business and simplify rotation programs

DEVELOP: MIND THE (CAPABILITIES) GAP! Exhibit 4: Which skills for tomorrow’s Procurement resources? SATISFACTION RATE ON KEY COMPETENCIES Conformity to purchasing standards Negotiation Financial skills Understanding of job techniques Understanding of categories Strategic vision

Core competencies

Listening and synthesis skills Networking

Multidisciplinary expertise

Ability to influence Individual leadership

Communication

Working autonomously Leadership and change

Communication with clients and suppliers 0%

20%

40%

60%

80%

100%

With the proliferation of skills required to be a great Procurement professional, developing Talent has become an issue for CPOs. According to an Oliver Wyman survey, organizations are skeptical about the current competencies in their organization for skills that will matter tomorrow, with satisfaction below 50% for most “non-core” competencies. In order to bridge the capability gap, Procurement functions should focus on the following: 1. Train: Training will be a major lever in increasing competencies; the difficulty lies in the right balance between soft and hard skills needed: −− Soft skills: Multicultural competencies, managerial competencies, project management, leadership & coordination, market knowledge −− Hard skills: transactional procurement skills, analytical skills, legal competencies, knowledge of IT systems

Defining the right balance of in-house and outsourced training is also important. For smaller organizations, leveraging external sources and promoting self-teaching can be efficient. 2. Coach/Mentor: CPOs must clearly define an onboarding process for new team members to ensure rapid integration. A mentoring program can promote knowledge sharing among team members for both hard and soft skills and ensure knowledge transfer inside the team to maintain supplier relationships and internal connections 3. Foster mobility: CPOs should foster mobility inside the Procurement team (across category portfolio and jobs), as well as create conditions for successful rotations outside of Procurement by being supportive of rotations and keeping an open line of communication with other functions. They should also work with HR to reinforce the presence of Procurement in leadership programs and encourage international mobility

RETAIN: KEEP CALM AND EMBRACE CHURN There are several methods to improve employee retention; we have highlighted a few of the most important levers: 1. Engage: CPOs should set a clear vision for the Procurement function. They need to sell this vision to their team, and work to highlight the contribution of the Procurement function to the success of the company as a whole. In order to maintain high levels of employee engagement, CPOs should define the appropriate job cycle (how long someone should stay in a given position) and increase the level of diversity/scope covered by a position over time 2. Measure performance: In order to encourage positive behaviours and ensure long term success of the Procurement function, we recommend incentivising the Procurement team not only on real impacts (e.g. actual cost savings) but also developing clear performance management KPIs that go beyond savings to encourage improvement of soft skills (leadership, cooperation with internal stakeholders etc.) 3. Reward: Recognizing and celebrating individual contributions is fundamental. Providing an attractive compensation package vs. internal and external benchmarks and setting a sufficient level of variable compensation will ensure the team stays motivated. Variable compensation criteria should be carefully chosen to reward those who demonstrate strong performance (savings, competency development, internal clientsâ&#x20AC;&#x2122; satisfaction etc.) 4. Encourage churn: The most important idea, which may be seen like a paradox, is to actually embrace churn. Hiring the best people requires planning for their departure, since they may want to pursue other career paths in the future. CPOs should set a target churn level and actively manage to it through forced attrition (terminations, resignations) and driven attrition (rotation, transfer). We have observed that leading Procurement organizations have a 15 to 20% annual churn rate, which means the average employee tenure is 5 to 6 years

Exhibit 5: Variable compensation is generally low and performance criteria are still focused on savings performance PORTION OF VARIABLE COMPENSATION

No particular incentive Less than 5%

ON WHAT CRITERIA DOES VARIABLE COMPENSATION DEPEND?

Savings performance

Improvement of procurement processes

5% to 10% 10% to 20% More than 20%

0% 20% 40% 60% SHARE OF VARIABLE COMPENSATION

Internal stakeholders satisfaction Capabilities enhancement

20%

40%

60%

Source: Oliver Wyman/EBG

KEY TAKEAWAYS The typical profile of Procurement resources is constantly evolving, and the focus has shifted from Buyers (“Negotiators”) to more sophisticated Procurement managers (“Networkers”). As a result, attracting, developing and retaining talent is becoming even more complex for CPOs: •• The competition to attract global talent among firms and between internal functions is fiercer than ever •• The development of comprehensive talent pools requires greater emphasis on soft skills through training and mentoring •• Encouraging virtuous churn has become a key component of talent retention At a time when Procurement is morphing into a service provider to the business, only Procurement organizations capable of attracting, developing and retaining exceptional people will achieve both their own goals and the broader business objectives of the organizations they serve.

PROCUREMENT: FROM A TRANSACTIONAL TO A STRATEGIC FUNCTION The Procurement function has evolved tremendously over the past four decades. From fulfilling a simple “buyer” function in the 1980s, to now playing a key strategic role in today’s leading organizations. Procurement has come a long way over time and continues to grow increasingly sophisticated. This evolution from a transactional to a strategic role has taken place progressively: 1. In the 1980s, Procurement divisions started becoming more common in organizations. The automotive sector and other manufacturing industries were at the forefront of this change as they started to track procurement in a more systematic fashion 2. Procurement divisions became increasingly structured and professional in the 1990s, as new technologies were being introduced into the workplace. In the early 2000s, Procurement steered away from its “cost-cutting” image through the emergence of strategic sourcing and the recognized need for well-educated sourcing professionals who possess solid project management skills as well as true procurement expertise 3. Today, Procurement continues to undergo significant changes and leading organizations have already integrated the function at the core of strategic considerations, understanding that it will play a central role in transforming the value chain. In order to play this role however, Procurement cannot limit itself to being an independently operated entity. It needs to become an agile function, deeply rooted in the organization’s DNA and involved upstream in cross-functional decisions

“

In any given organization, the Procurement function will typically go through a series of transformations after its initial “genesis.” These intermediate stages of development take place before Procurement reaches the “agility” phase: the point when it becomes a strategic function, one that drives a competitive advantage and delivers significant benefits in the long term.

Our goal was shifting from a reactrive function to be a proactive business partner

Going through this series of transformations will significantly increase the long-term ROI of the Procurement function, which would otherwise see its ROI decreasing over time as lowhanging fruits become already picked. Not only will a transformed Procurement function be able to deliver on cost: it will also take a larger role in risk management and contribute to the overall growth of the company by enabling open innovation. Exhibit 6: Evolution of Procurement ROI with function maturity GENESIS

DEVELOPMENT

AGILITY

ROI

Procurement resources are centralized, with a growing volume of transactions covered

Continuously improved TCO performance is re-injected into accounts

Greater professionalism and desire to move forward on the “Spend smarter” aspect

Collaborative mechanisms established with the BUs

The business “owns” the procurement lever, as procurement is embedded into the BUs

Cost-based performance sources become rarer

Procurement becomes a strategic function, driving competitive advantage

Initial focus on simple price levers, followed by more complex ones MATURITY

At first, Procurement resources are centralized into the nascent Procurement function. From there, successive steps need to be taken to increase the value delivered and to help the function mature. As the Procurement function makes its way up the maturity curve, it engages in more advanced, sophisticated, and cross-functional activities, while its ROI increases. In the ultimate stages, once Procurement is truly embedded in the organization’s culture, resources and processes are once more disseminated into the business so they may lie closer to the pulse of the organization. Procurement, then, is still embodied by a function—but has transformed into a truly cross functional system involved upstream in key strategic decisions, allowing it to realize significant savings and generate sustainable value. We shall examine the maturation process step by step in order to understand how an organization can arrive at this destination.

A TRANSFORMATIONAL JOURNEY A. GENESIS PHASE: EARLY DEVELOPMENT AND “PUSH” MODEL The “genesis” phase is the first development stage of the Procurement function. It is usually characterized by a low level of trust in the Procurement system, and a lack of recognition for the performance generated. Of the savings that are stated by the function, only a low proportion (~20%) is actually translated into budgets, and the performance is only loosely tracked. This phase can be described as the “push” model phase: Procurement is assigned performance targets unilaterally by top management, and it then needs to “push” these targets onto the business side. A large majority of performance-boosting initiatives are forced onto business stakeholders by Procurement during that phase.

Exhibit 7: “Push” model A “PUSH” MODEL DRIVEN UNILATERALLY BY SENIOR MANAGEMENT Senior management

Procurement director

Country/ BU director

Prescribers/ users

Savings targets

PUSH Strategy and initiatives

Buyers

Naturally, this model is far from ideal because it reduces Procurement to a transactional function that is only involved downstream. Detaching Procurement from the core business greatly hinders its capabilities, making it challenging for the function to have any leverage with respect to specifications, needs, and consumption. In this situation, Procurement’s means of action are restricted to taking margin from the supplier. To address these shortcomings, the reach of Procurement has to be extended in two directions: firstly upwards, so as to engage senior leadership, but also sideways in order to kick-start cross-functional collaboration and to access more sophisticated levers.

B. DEVELOPMENT PHASE: INFLEXION POINT AND TRANSITION TO THE “PULL” MODEL The inflection point that characterizes the transition from “genesis” to “development” is reached when the organization’s senior management understands the importance and the need for a change. CEO, CFO, and CPO need to concurrently agree on the path forward, for Procurement to thrive and evolve into a key strategic function. One key indicator of the transition, alongside numerous others, is the level of trust that is shown with respect to performance reported by Procurement functions. Often, at stages of lower maturity, Procurement organizations claim very significant savings that are not always recognized by finance and the business. In some extreme cases, Procurement statements are completely disregarded and the ROI of the function comes under challenge from finance and the business. Once the inflection point is reached, a significantly larger portion of Procurement’s performance is actually translated into budgets and tracked into the company’s balance sheet and P&L. By that point, in essence, finance and business stakeholders are playing an active role in the performance of the function—hence they are more inclined to recognize their own efforts. Typically, the proportion of performance objectives shared with the business by Procurement and of cost savings translated into budgets will increase from 20% before the inflexion point to some 60% afterwards. The “development” phase is characterized by greater cross-functional collaboration. During that phase, top management assigns shared objectives to business stakeholders and Procurement. These objectives are not distinct and cumulative; they are truly similar, encouraging business stakeholders to turn to Procurement for help in order to reach their targets. They are now in a “pull” mindset; collaboration takes place in project mode.

Exhibit 8: Alignment of objectives, which drives the “pull” model A “PUSH” MODEL DRIVEN UNILATERALLY BY SENIOR MANAGEMENT Savings targets

Senior management

Procurement director

Country/ BU director

Prescribers/ users

Savings targets

PUSH Strategy and initiatives

Buyers

C. AGILITY PHASE: SUSTAINABLE INTEGRATION INTO THE BUSINESS AND “EMBEDDED” MODEL The maturation journey doesn’t end at the “pull” model. Crucially, during the development phase, the collaboration between Procurement and the business tends to be project-based. Even though this stage is truly necessary, as the entities are progressively taught how to work together, performance will erode over time if there is no further evolution. Moreover, as the focus of top management evolves and top-down pressure diminishes from year to year, there is a risk that the organization will fall back into the “genesis” stage. The only way to mitigate this risk is to truly embed best practices into the organization in order to create a virtuous cycle. Procurement must be physically embedded into the business functions, and it must co-build continuous improvement plans with them, so as to deliver on a shared ambition.

Exhibit 9: A virtuous circle of sustainable integration into the business A VIRTUOUS CIRCLE OF SUSTAINABLE INTEGRATION INTO THE BUSINESS Senior Management Ambition

Country/ BU Director

Funnel

Procurement Director

Continuous improvment plans

Prescribers/ Users

Buyers

The following table highlights a few major differences between the “pull” and “embedded” models.

Exhibit 10: Differences between “pull” and “embedded” models “PULL” MODEL

EMBEDDED MODEL

•• Annual objective of procurement performance, aligned with the budgeting exercise

•• Multiannual ambition of procurement performance, taking into account the complexity of identified levers

•• Action plans/initiatives defined without input from business units, regarding resources and efforts required

•• Feasibility is secured and resources are committed as a result of cross-functional dialogue

•• The procurement community reports directly into the Procurement function

•• The procurement community is disseminated outside of the Procurement function and represented by “performance leaders” inside business units

•• Performance metrics are strictly defined and significant efforts deployed to reconcile the procurement performance and financial statements

•• Performance metrics are streamlined and mostly based on trust (business partnership)

In essence, the journey of the Procurement function can be translated into these three different phases: from a “push” model to a “pull” model, which eventually needs to become “embedded”. There is tremendous value at stake for organizations that decide to take the path towards Strategic Collaboration, which justifies the effort required to get there. The progression is linear in the sense that it is not possible to jump directly from “push” to “embedded” without transitioning through the intermediate “pull” step. Moreover, this journey requires a constant dedication and effort, especially around the inflection points that mark a transition from one phase to the next. The rewards, however, tend to be significant across the board: •• For organizations as a whole, who see an increase in their long-term performance as they benefit from a sustainable decrease in cost structure, a more systemic management of risks, and growth that is sustained by open innovation •• For procurement functions, which clearly demonstrate their value and get elevated in the organization •• For Procurement professionals, who gain visibility and are offered ever more career options on account of their elevation •• For CPOs, who tend to take on more strategic roles—this explains why it is increasingly common for CEOs to be ex-CPOs The new digital revolution is so disruptive of the whole value chain, that Procurement will play a major role across all industries. Therefore, the “embedded” Strategic Collaboration model is relevant to every organization across all fields.

Exhibit 11: Most common challenges today – % of participants who indicated challenge as main challenges

Talent management

Strategic collaboration with key stakeholders

Cost savings

A CRITICAL FIRST STEP The 2015 Procurement Maturity benchmark conducted by SIG and Oliver Wyman found that this notion of strategic, cross-functional collaboration is not foreign to CPOs. In fact, CPOs clearly understand the value that lies in reaching that state, but they also perceive the required change as one of their main challenges today. In order to develop Strategic Collaboration in their organization, CPOs must recognize that, although they may be an agent of change, they cannot get there on their own. It is crucial for them to on-board senior executives along the way. Indeed, the first key step in the shift towards Strategic Collaboration consists of a significant change in the operating model and governance around the Procurement function. As with all topics related to cross-functional changes and governance in general, CEOs are best positioned to lead the transition and to address some of the main challenges, which may include identifying the best way to engage with stakeholders and creating the right conditions to give Procurement a seat in all relevant discussions.

Concurrently, CPOs need to ensure that Concurrently, CPOs need to ensure that their organizations are able to actually step up to the challenge – and, once the opportunity arises, to demonstrate value and strategic thinking. Likewise, a critical role is played by CFOs as they establish the appropriate conditions for building trust through transparency and through the tracking of performance.

Exhibit 12: Pre-requisites to Strategic Collaboration development

1 Operating model and governance Move from push to pull HOW TO OVERCOME PERFORMANCE BARRIERS? System Value management creation Create transparency Deploy categoryand reconciliation based excellence

CPO Responsibility

CEO Responsibility

CFO Responsibility

When CEOs, CFOs and CPOs are aligned, they will create the conditions for success together. Getting to this alignment stage, however, is no easy feat. The 2015 SIG/Oliver Wyman survey found that most organizations have not yet reached that point, remaining instead on the brink of transitioning from “genesis” to the “development” phase. Around one fifth of players has passed the inflection point of materializing this alignment and is now positioned in the “development” phase.

Exhibit 13: Distribution of organizations along maturity phases GENESIS

DEVELOPMENT

AGILITY

20%

10%

ROI

70% of organizations

Sustainability “Self-sustaining system” • Embedded into BUs • Growth oriented performance Inflection point “Senior management vision enabling collaboration” • Cross-functional governance

• Performance tracked and measured by Finance

• Transparency on cost optimization • Objectives shared with BUs

“

MATURITY

We told the same thing to the same people again and again

Moving to the third stage is equally difficult, as the state of “agility” requires that organizations have made these changes sustainable. The evolution from “genesis” to “development” is often accomplished in project mode, without transitioning project approaches into a “business as usual” mindset. The difficulty is that, if the shift into “business as usual” does not occur, performance will eventually decline and organizations may actually fall back into the “genesis” stage—making sustainability an issue of the utmost importance. According to the SIG/Oliver Wyman Procurement maturity benchmark, around one in ten companies are operating at the “agility” level.

HOW TO GET STARTED Procurement has evolved tremendously over the past 40 years from being a “buyer” to becoming an essential strategic function that drives a competitive advantage. In order to stay ahead of the game today and prepare for the challenges of tomorrow, organizations must engage in strategic collaboration around Procurement. In order to do so, they must prove they can: •• Engage senior management on the procurement vision •• Make the change systemic by breaking down silos in order to make the procurement system visible and appealing to all stakeholders •• Build a truly cross-functional system that makes Procurement and business stakeholders “business partners,” equally involved and equally accountable •• Translate the overall company’s objectives and equip Procurement leaders with the means to share and implement this vision while deploying the Procurement system •• Ensure the new system’s sustainability by making it a part of the company’s DNA and by fostering cross-pollination of talents in and out of Procurement To kick-start or re-ignite your journey, here are the next steps: •• Assess where you are today, applying a hard, honest look at your organization and your function in order to know where you are starting from and what your priorities may be •• On-board your leadership, using value-based demonstrations •• Outline your plan with a clear timeline and identifiable milestones, and have a target and measurable ROI •• Employ a project approach with a clear transition to “business as usual” by designing your organization accordingly in terms of resource allocation, skills and capabilities, and tools and systems •• Continuously track and report progress

OPEN INNOVATION: THE MEANING BEHIND THE BUZZWORD AND WHY CPOS SHOULD KNOW ABOUT IT Open innovation is a hot topic for Procurement today. CPOs have heard the word many times and often talk about it, but without always knowing how powerful of a tool it can be or what transformation it entails for the Procurement function. The 2015 SIG/Oliver Wyman Procurement Maturity benchmark has actually shown that a majority of players have not yet engaged in Open Innovation in a meaningful way – and 47% of respondents have not done so at all. The benchmark does, however, also highlight a long term trend of growing interest in Open Innovation from companies across sectors over the past 10 years. Among Open Innovationsavvy players today, very few had initiated their journey 8 years ago, with the vast majority engaging sometime in the past 4 years. Henry Chesbrough, considered the father of Open Innovation, once defined the concept as “The use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively”. The Open Innovation paradigm can in fact be understood as the antithesis of the traditional model of vertical integration: under vertical integration, internal innovation activities give rise to products and services that are internally developed and then distributed by the firm. On the other hand, Open Innovation is above all a company-wide project that is: •• Outside-in: by encouraging internal innovation to rely on external output •• Inside-out: by selling patents and technologies for which the company has no use, thereby creating new revenue streams and providing access to new markets

“

Procurement plays an increasingly important role in helping R&D collaborators set up the right ecosystems and the right partnerships, that will allow to generate future innovation SVP of a pharmaceutical company

Over the past decade, developing new products and services internally has become increasingly expensive as R&D cycles have accelerated. In 2015, CPG, aerospace, and electronics companies generated a significant percentage of their revenue – around 11% – from products they had developed in the past year according to the 2015 APQC Product development benchmark. Keeping up with this pace requires sizable R&D investments which are continually rising. While internal R&D still has a major role to play, substantial capabilities can be found within a company’s own supplier base. Pooled together, the resources of suppliers far outweigh the internal R&D firepower available to a company internally, and Procurement can help tap into this too often dormant wellspring of ideas. As Procurement shifts from its traditional – and outdated – cost-cutting role towards more strategic responsibilities, top management is expecting CPOs to actively contribute to growth. The SIG/Oliver Wyman Procurement maturity benchmark has shown that the 10% most mature Procurement functions are already contributing significantly to their organization’s growth. Harnessing Open Innovation in today’s market is becoming a growing necessity for CPOs in tackling current Procurement challenges and in better meeting CEOs’ expectations of tomorrow.

THE POTENTIAL ROLE OF PROCUREMENT IN OPEN INNOVATION Procurement can leverage a broad innovation network. Suppliers are naturally a part of it, but the network extends far beyond this subset alone

Exhibit 1: Procurement’s Open Innovation network

1 6

Suppliers

Communities

Clients, customers and users

OPEN INNOVATION

Digital platforms

Employees

Strategic partners

CPOs also have a role to play in defining and engaging in partnerships with key players within this network: •• Suppliers: Procurement can obtain access to information collected by its suppliers and thus gain extensive insights into client and customer expectations in addition to new materials, components, and service; it can also engage in co-development with suppliers •• Strategic partners: Procurement is well positioned to define the terms of cooperation with Strategic Partners such as associations and universities, whose leading-edge academic teams provide access to new technologies •• Digital platforms: Procurement can help identify and source innovative digital platforms, which provide easy access to top ideas from nearly millions of students, engineers, and scientists •• Communities: Procurement’s extensive external network makes it a potential actor for engaging with communities in order to stay abreast of emerging usages, new needs, and current trends or habits Building a strong network of suppliers with whom companies can trustfully collaborate and engage in meaningful partnerships around idea sharing is the first key step down the path towards Open Innovation. Once valuable partners have been identified, there are several strategies Procurement can leverage in order to launch Open Innovation initiatives: •• Outcome oriented goals without constraints: Give opportunities to your suppliers to test ideas without constraints and reward good ideas without judging other suppliers. •• Innovation tour: Organize visits to regions advanced in specific areas and encourage team to attend industry forums. This strategy is already being leveraged successfully by a mobile telecommunication company organizing regular visits to Asia. •• Innovation forums: Organize forums inviting suppliers to propose ideas, commit to investments and provide spend visibility for winning ideas. A large cosmetics company developed the packaging and point-of-sale material for one of its products using this approach, inviting suppliers to provide suggestions and investing in the best ideas. Suppliers were highly engaged and attracted by the prospect of getting additional business. Over 4 years, this initiative led to the creation of 200 innovative products. •• True partnership with special relationship at CEO level: Encourage CEOs to share their innovation strategy and vision and lead joint R&D efforts. •• Become your suppliers favorite customer: Build long term mutually beneficial relationships with a few suppliers and ensure first hand access to “small” innovations. Procurement functions therefore clearly have a role to play in their organization’s Open Innovation journey. In order to fulfill this role effectively, however, it is often necessary for CPOs to adjust the way the function operates.

HOW TO RETHINK THE PROCUREMENT OPERATING MODEL TO SUCCESSFULLY ENGAGE INTO OPEN INNOVATION In order for Procurement to leverage Open Innovation efficiently, CPOs must rethink the function’s Operating Model. Five key dimensions of the function must be examined: its strategy, organization, processes, people, and culture, as detailed in the exhibit below.

Exhibit 2: Key steps to rethink the Procurement Operating Model

ple

Enhance the Procurement value proposition

• What type of innovation DNA?

Adapt the Procurement teams structure

• What balance agreed upon with R&D between internal vs. external Innovation?

• Should dedicated teams be structured or should it be part of the category management work?

• How to incentivize partners to participate into Open Innovation?

• How to structure teams – per category, per product, per technology, per geo, etc.?

Implement agile and inclusive processes

• How to adapt the Procurement process to small, agile, and innovative start-ups? • What SRM mechanisms can stimulate your suppliers and make you become their “favorite client”?

Grow Procurement talents

• What profiles and skills are required? • What career path? • How can you source this kind of talent?

Proc

Strategy

ure

Strategy

Cult

Proc

ple

Strategy

ses Peo es

Strategy

Proc

ses Peo es

Strategy

ses es

Create an open culture

• How to create a collaborative culture? • What is the right set of tools to manage Open Innovation?

The following sections present a deep dive into each of the five dimensions and highlight the required adjustments to the Operating Model.

1. STRATEGY The first major change pertains to the function’s strategy, as Open Innovation significantly enhances Procurement’s value proposition. The function must take into account the company’s DNA and the desired type of innovation as Procurement defines the role it will play in Open Innovation initiatives.

Exhibit 3: Components of the Procurement function’s strategy TYPE OF INNOVATION • More distruptive • More incremental

COMPANY DNA • Open innovation as an additional resource • Open innovation at the core of the company’s strategy

WHAT KIND OF “OPEN INNOVATION” STRATEGY FOR PROCUREMENT FUNCTION ?

ROLE OF PROCUREMENT • Procurement is leading Open Innovation initiatives • Open innovation function has the lead and is leveraging Procurement for process and contract matters

Company DNA is more of an input than an actionable lever, but this input is essential for Procurement in defining its role and vision for the organization’s “Open Innovation strategy”. Operating under a clear mandate with explicit objectives is helpful as Procurement will often be operating in “push” mode, trying to sell the Open Innovation model both internally and externally.

2. ORGANIZATION Once the new strategy line is established, Procurement must adopt the internal organization that is most appropriate to the new value proposition. One of the key decision points revolves around whether Open Innovation should be part of overall category management and have dedicated resources.

The exhibit below presents three possible organizational patterns.

Exhibit 4: Three possible internal organization patterns Pattern #1:

Activities

EXPERTISE

• Market knowledge • Cost modelling • Benchmarking

CATEGORY STRATEGY

• Mid term action plan • Mid term action plan

SCOUTING

• Scouting and development of new suppliers

• Supplier INNOVATION innovation leveraging

KEY DEALS

• Management of strategic deals with key suppliers • Frame contract mgt.

SRM

• SRM for strategic and preferred suppliers

Category manager

Pattern #2:

Pattern #3: Long term Short term innovation innovation

Category manager

Innovation buyer

Category manager

Innovation buyer

Category manager

Source: SIG-Oliver Wyman Procurement Maturity Benchmark

•• Pattern #1: innovation embedded in category management. This type of model often falls short as category managers tend to be too focused on category strategy •• Pattern #2: innovation buyers. This model requires additional resources and seamless communication with category managers, but has proven to work well overall •• Pattern #3: hybrid. Innovation buyers are in charge of short term innovation, and category managers are in charge of long term and disruptive innovation We usually observe an evolution in Open Innovation adopters’ organization from pattern 1 to 3. Companies typically start by adopting Pattern #1, testing and learning, but they will usually not meet significant success in the beginning stages – as a result, they will switch to the preferable Pattern #2 and dedicate specific resources to innovation. Over time, they adjust the focus of Open Innovation resources to be concentrated on short-term innovation, leaving long-term initiatives to be handled directly by the category manager (Pattern #3).

3. PROCESSES Over time, some companies have developed clear Procurement processes in order to be more efficient internally or to respond to regulatory requirements. Rigid processes, however, can greatly hinder Procurement’s capacity to capture innovation from highly agile players such as start-ups. This is especially true in Financial Services where the emphasis on risk management and the heavily regulated environment have led players to develop intricate processes that prevent them from collaborating effectively with their most agile partners. In some cases, companies intentionally streamline their processes to facilitate interactions with these key partners. Both Adjusted and Accelerated processes can result in a Proof of Concept; in both cases, engagement thresholds and validations must be settled to be risk compliant. These two processes offer a path towards greater agility, which often allows for capturing more innovation from suppliers. Their difference lies, crucially, in the question of speed, as every step in the process can be faster when there is a panel of legacy suppliers as in Process #2. Procurement processes examples are shown in the exhibit below.

Exhibit 5: Example of procurement processes PROCESS #0: REGULAR PROCUREMENT PROCESS purchasing 1 Define strategy

2 Source

3 Negotitate

• Finalize and sign contract

• Review and compare suppliers offers

• Manage the competitive bidding process : RFQ, short list, offer analysis…)

• Organize the competitive bidding process based on segment strategy and supplier prequalification if relevant

4 Contract

PROCESS #1: ADJUSTED PROCUREMENT PROCESS Define purchasing strategy

Source

Negotitate

Contract

PROCESS #2: ACCELERATED PROCUREMENT PROCESS WITH LEGACY SUPPLIERS Define purchasing strategy

Source

Negotitate

Contract

Source: Oliver Wyman

To maximize these supplier benefits, Open Innovation must be embedded into the company’s approach to Supplier Relationship Management (SRM). SRM is a strategic topic that targets both existing and new suppliers – it should be preventive and forwardlooking in nature. Open innovation is not a topic for suppliers only part of SPM (Supplier Performance Management). Indeed, organizations have a lot to gain by becoming the “favorite customer” of a handful of key suppliers, carefully selected thanks to the supplier selection matrix shown below.

Exhibit 6: Supplier selection matrix Star Capable today and in the future

Develop

Innovation thanks to SRM Partners

Supplier potential • Existing capabilities • Future capabilities

Dilemma Capable or not today and maybe capable in the future

Laggard Capable or not today and not capable in the future

No Specific SRM (SPM only) LOW

MEDIUM

HIGH

Source: Oliver Wyman

Supplier selection is often based on qualitative prospective vision – reference is best practice – and operated by senior representatives. Developing privileged relationships with suppliers allows organizations to negotiate valuable benefits, such as first hand exclusive access to suppliers’ latest innovations.

PEOPLE In addition to adjusting internal processes, Procurement must build a well-rounded skillset in order to leverage Open Innovation effectively. Talent management is therefore paramount in allocating the right people to the new challenges that Procurement is facing today. In addition to the core Procurement expertise, it is increasingly desirable for Procurement professionals to be: •• Business oriented: to better understand business expectations, competitor positioning, and what role Open Innovation plays within the organization •• International: to better understand and work within global innovation networks •• Influential and leaders: to sell and engage on Open Innovation visions both internally and externally with key partners •• Impactful communicators: to collaborate efficiently with internal stakeholders and suppliers Some of the most advanced Procurement functions have been working on expanding their resources’ skillset for over a decade by encouraging mixed career paths and making sure that their talent can have experiences outside of Procurement; for instance, work in R&D for a few years before returning. Some CPOs have even set a 20% turnover objective per year to encourage profile diversity. CPOs seek out external hires for certain categories for their advanced skills, and make a mix of training modules available to develop the full spectrum of competencies. Embedding Open Innovation objectives into compensation schemes is also essential. Compensation incentives push users to engage more actively than when there is no clear target. For example, some CPOs have set concrete annual objectives of a minimum number of innovations per buyer, resulting in an end product developed by the company.

4. CULTURE While established, traditional methods of working may sustain and grow the core business; they often fail in fostering an environment that is truly supportive of Open Innovation. All too often middle managers will learn of outside inventions, only to discard them in favor of the status quo. Companies must accept that they cannot master all of the patents used in their products, and steer away from the “not invented here” mentality that causes them to reject outside advancements due to potential legal concerns. Instead, they should lead employees to think of innovation as part of everyone’s job: everyone bears with the responsibility of innovation, not just those with the word in their job title. In order to do so, Procurement must develop the right set of tools to foster internal collaboration, interact seamlessly with suppliers, and ensure visibility on all interactions with suppliers across the company. Gradually, Procurement will need to transition from a projectbased approach to “business as usual” in order to truly embed Open Innovation into the company’s culture and DNA. Copyright © 2016 Oliver Wyman 40

PATH FORWARD At a time when developing products internally is becoming increasingly expensive and CEOs expect CPOs to contribute to growth, Open Innovation appears as an attractive development objective for Procurement. CPOs are ideally positioned to engage in idea sharing partnerships with a variety of agile players, including but not limited to suppliers, each of which provides a bountiful source of unexploited innovation. In order for Procurement to become an agile Open Innovation partner and develop a diverse network of collaborators, CPOs must rethink the function’s operating model entirely. This begins by clearly defining the new role Procurement will play within the Open Innovation process and onboarding the team on the vision for tomorrow’s more outwardfacing Procurement function. Once the team is engaged and understands the value at hand, the function must step back and rethink its internal organization and processes to adapt and prepare for the new role Procurement has to play within the organization. This includes defining who will be accountable and responsible for fostering innovation initiatives, rethinking Procurement processes to facilitate collaboration with agile players, and reevaluating needs in terms of skill sets and resources. Finally, these operational changes must be accompanied by a change of mindset. Step-by-step, CPOs must take action to lead, with the help of other senior executives, a transformation of the organization’s culture in order for innovation to become second nature to all employees. Harnessing the power of Open Innovation elevates and gives visibility to Procurement within the organization. By offering CPOs a way to contribute to growth, Open Innovation initiatives extend the functions’ influence on their organizations’ key strategic topics. Over time, Procurement will develop into an innovation and serendipity pole, core to the company’s development strategy. This Open Innovation mindset must become embedded in the organizations’ DNA to the point where every employee starts thinking to themselves, “We are all innovators”.

DESIGNING THE PERFECT PROCUREMENT OPERATING MODEL A MOVING TARGET When it comes to defining the most efficient and effective operating model for procurement functions there are, unfortunately, no easy answers. The operating model of a procurement function needs to be consistent with a company’s overall strategy, global organization, and culture. It also needs to be aligned to its supplier market. Balancing internal and external pressures is a difficult task – and the target is often a moving one! Indeed, procurement functions must adapt, perhaps more frequently than the rest of the company, as they are impacted by changes such as new corporate strategy, evolving manufacturing footprint, disruptive supplier innovations, changing supplier panels, and higher savings objectives, all of which require increased flexibility. In our conversations with CPOs, we often hear the same questions: should my organization be centralized or more locally managed? The company is continuously evolving, how should I adapt the procurement organization? What is the right sizing of my organization? Should I consider outsourcing part of my organization?

LOCAL MANDATES VS. CENTRALIZED ORGANIZATIONS There are three key structural dimensions that drive the thinking on designing the procurement operating model: supplier market, user needs, and stakes. Each of them will shape the operating model differently, for each procurement spend category

Exhibit 1: Three dimensions to balance between local and central SUPPLIER MARKET

Staffing and set-up will depend on: • Market structure: local, continental, or global structure • Relative weight of company to market (more centralized if larger)

USER NEEDS

Three pertinent elements: • Regularity of need (more centralized if more regular) • Customization required vs. market standards • Homogeneity of overall company needs per location

COMPANY STAKES

• Highly strategic categories may best be managed closer to the business it impacts, whereas less strategic categories may be managed at corporate level to maximize standardization of needs

1. Supplier market: on this dimension, you will be looking at two main things: how the overall supplier market is structured and what the relative weight of the company is to this market. A supplier market is typically local, continental or global, and the weight of a company’s purchase ranges from insignificant to significant. Obviously, the level of emphasis (staffing) and the set-up will depend on these factors. The more significant the overall weight of a company’s spending and the more global the supplier market, the more centralized the procurement organization. When the supplier market is very fragmented and the spending is relatively small, local mandates are very relevant 2. User needs: here, three elements are at play: −− The regularity of the need: is it a yearly one-off that can be managed locally or does it involve daily consumption that should be handled centrally? −− The level of customization required against market standards: are you buying market standards (centrally) or do you require a high degree of customization at site level? −− The overall homogeneity of your needs: is it one-size-fits-all for the entire company or does every site need custom specifications? Answering these questions will allow you to decide if a category should be addressed locally or dealt with at the corporate level 3. Stakes: you need to assess what the actual stakes are for the company, for each procurement category. If a category is highly strategic, you may consider managing it close to the business it impacts, in a decentralized manner. On the contrary, categories that are least strategic will often be managed at a corporate level to maximize standardization and allow efficient demand management Many organizations tend to over-emphasize the importance of the first dimension and attempt to perfectly “mirror” the supplier market. However, that often comes at the expense of an increased integration with the rest of the company and limits the procurement function’s ability to truly engage in advanced and collaborative levers (e.g. influencing specifications and consumption, challenging needs, encouraging standardization). In many ways, these three drivers may seem to call for conflicting decisions: consolidate and disseminate, align to internal stakeholders as well as to suppliers. In reality, no organization can strike a perfect balance along these three dimensions. A choice must be made to focus on a given dimension depending on the company’s DNA, culture, organizational model, and overall level of maturity.

PROCUREMENT ORGANIZATION MODELS AND CONTINUOUS ADAPTATION TO THE COMPANY’S PROCUREMENT MATURITY We have observed four main organizational models, depending on the level of centralization of the function and the level of reporting of buyers to the Procurement organization (linear or functional).

Exhibit 2: Procurement organizational models CENTRALIZED MODEL Business Unit 1

Business Unit 2

MATRIX MODEL Group Procurement head

Buyers • Buyers report to Group Procurement Dept. which makes decisions over all Procurement strategy

COORDINATED MODEL Business Unit 1

Business Unit 2

BU1 Procurement head

BU2 Procurement head

Buyers

Business Unit 1

Business Unit 2

BU1 Procurement head

BU2 Procurement head

Buyers

Group Procurement head

Buyers

• All buyers report to Group, which co-arbitrates with BUs • Some buyers are hosted by BUs; some are transversal

DECENTRALIZED MODEL Group Procurement head

Buyers

• Buyers report into BU Procurement structures • Group Procurement provides coordination, guidance

Business Unit 1

Business Unit 2

BU1 Procurement head

BU2 Procurement head

Buyers

• Buyers report to BUs (no Group Procurement Dept.) • Coordinated initiatives may exist between the BUs

Again, the best organization will be the one that is adapted to your company’s DNA and strikes a balance between the constraints of the supplier market and the organization of key internal stakeholders. But, the really important piece is evolution, as the models are in flux – a sort of “balancing act” is underway between centralization and decentralization as Procurement continues to mature. We distinguish three different stages of maturity: the emergent phase, the consolidation phase, and the balance phase.

Exhibit 3: Procurement organizations are observed to mature in three major stages enabling levers of increasing complexity EMERGENCE

CONSOLIDATION

EQUILIBRIUM

SOPHISTICATION OF PURCHASING LEVER COMPLEX

LEVEL OF CENTRALIZATION

2 3

3 1

OPTIMIZING COSTS

Contributing to growth

Risk mgmt.

Spend less

MATURITY

Spend better

Buy cheaper

TYPE OF PURCHASING LEVER

1. The first phase is the emergent phase: At first, users are acting as buyers and are, by essence, largely scattered across the organization, with no real involvement of professional buyers. Then, top management becomes aware of the potential and decides to professionalize and formalize the procurement function. The underlying idea is that a new role – the professional buyer – must emerge to challenge line managers in their often historical relationships with suppliers. This is a phase that typically sees Procurement organizations start as a “coordinated model”: relatively small teams and still somewhat decentralized. At this stage, the focus is mostly on trying to influence internal stakeholders and progressively expand scope, as well as quick wins. During the emergence phase, the nascent Procurement function is focusing on a limited scope while there exist many “acting-as” buyers in the business. Sizing of the Procurement function and need for a CPO is a key topic.

Exhibit 4: Exhibit 4: Key sizing issues to consider

1 2 3 4 5

The business sector Mix of Procurement categories, level of centralization of Operations

The size of the company Which has a strong influence on the leverage of Procurement teams

The company’s footprint Which is a major complexity driver (countries, subsidiaries, sites…)

The typology of the Procurement concerned Production spend, core business indirect, overhead, commodity services…

The pocket of expertise already existing in the business …and the ability of a Procurement function to leverage it

2. The second phase is the consolidation of the new procurement organization: The procurement function is now given ambitious economic objectives based not only on price levers, but also on the mandate to challenge needs. This ramp-up of procurement is often a source of friction, but forces the emergence of collaborative work with line managers and helps demonstrate the value in upstream decision-making processes. It embeds the “buyer-user” tandem in the DNA of an organization. During the consolidation phase, increasing coverage rate is a priority for CPOs. Coverage rate, however, is soon not enough as the most mature companies begin focusing on the effectiveness of their coverage.

Exhibit 5: Focus on coverage rate INCREASING COVERAGE RATE • CPOs tend to build an operating model with the “coverage rate” in mind – and rightfully so, to a degree, as CPOs now have the mandate and they need to deliver and expand their scope

• Best-in-class companies see >90% coverage with Procurement involvement as natural

• Two main levers to increase coverage rate:

1. Early involvement – Procurement is involved once users and influencers first express needs

NEW MANDATES ON SPEND CATEGORIES

2. Short-list – Procurement is involved in short-listing suppliers after needs are expressed

INCREASED GEOGRAPHICAL PREROGATIVES

• There are three key indicators to track:

3. Downstream – Procurement helps to select suppliers and to negotiate/draft agreements

Major efforts to promote Procurement internally can help convince the entire organization of its value

For successful global expansion, key local constraints must be identified and understood

3. Then comes the equilibrium phase: after consolidating procurement activities, recognizing the central role of the function and formalizing essential operational processes, most mature companies tend to re-distribute parts of strategic sourcing directly into their business units. The procurement function then morphs from a central organization to a fully integrated and embedded function, closer to business units and stakeholders. More complex collaborative levers are used at the level most appropriate; Procurement is not only involved in optimizing cost, but also in managing risks and contributing to growth. Once the Procurement function is mature, CPOs often consider opportunities offered by outsourcing, which can cover many different patterns of tasks. Deciding whether to outsource is analyzed per category at sub-process level and important questions to consider include: When do I outsource? How do I outsource? What do I outsource?

Exhibit 6: Processes and tasks eligible to Procurement Outsourcing

1 procurement strategy

2 Engage with supliers

4 Manage performance

data 1.1 Spend management & market analysis

event 2.1 Sourcing management

3.1 Orders placements

Supplier 4.1 performance tracking

5.1 Team management

1.2 Demand management

Proposal 2.2 evaluation & negotation

3.2 Invoicing

Vendor 4.2 relationship management

5.2 Communication

1.3 Purchasing strategy

Contracting 2.3 & contract administration

3.3 Litigations management

Purchasing 4.3 system performance management

tools 5.3 Process, and methods

Supplier 1.4 sourcing and qualification

2.4 Contract implementation

Define

PATTERN #2

PATTERN #3 PATTERN #4 PATTERN #1

Administrate provisioning

Run transversal activities

5.4 Project management

PATTERN #5

PATTERN #6

KEY TAKEAWAYS The ideal operating model for Procurement is never a one-size-fits-all solution, and is a moving target. There are three key structural dimensions that drive the thinking on designing the Procurement operating model: supplier market, user needs, and stakes. We have observed four main organizational models, depending on the level of centralization of the function and the level of reporting of buyers to the Procurement organization (linear or functional). However, the really important piece is evolution, as the models are in flux. Typically, Procurement organizations go through multiple phases, from increasingly centralized before reaching a more sophisticated equilibrium. We find that most advanced Procurement functions reconsider their organization every two years, as their overall companies evolve, supplier market change and performance levers become increasingly sophisticated. This effort usually starts by a thorough review of the current organization and a mapping of the potential gaps. The outcome is not necessarily a major change but can also be targeted improvements.

CONTACTS FOR ANY QUESTIONS ABOUT THIS JOURNAL:

FOR ANY QUESTIONS ABOUT UPCOMING SIG EVENTS:

MIKE MATHEIS Partner Oliver Wyman mike.matheis@oliverwyman.com

DAWN TIURA President and CEO dtiura@sig.org

DAMIEN CALDERINI Partner Oliver Wyman damien.calderini@oliverwyman.com STEPHAN PICARD Engagement Manager Oliver Wyman stephan.picard@oliverwyman.com

STEPHANI MCGARRY Vice President, Global Events smcgarry@sig.org

ABOUT OLIVER WYMAN Oliver Wyman is a global leader in management consulting that combines deep industry knowledge with specialised expertise in strategy, operations, risk management, and organization transformation. Oliver Wymanâ&#x20AC;&#x2122;s global Value Sourcing & Supply Chain Practice is one of our key capabilities in Operational Efficiency. In addition to our dedicated team, we have created a Procurement Expertise Center. Leveraging a wide internal and external network of experts, this Center of Expertise supports our teams on all key Sourcing topics, from category expertise to organizational focus. For more information, visit www.oliverwyman.com. Follow Oliver Wyman on Twitter @OliverWyman

RELATED INSIGHTS For other points of views, please visit Oliver Wyman’s website:

http://www.oliverwyman.com/insights/value-sourcing.html

THE PROCUREMENT PLAYBOOK: STRATEGIES AND PLAYS FROM 100 CPOS Oliver Wyman’s playbook on the evolution of the Procurement function’s missions and on the Procurement operational model

OLIVER WYMAN VALUE SOURCING AND SUPPLY CHAIN JOURNAL 2016 A compendium representing Oliver Wyman’s latest thinking and experiences on how companies have addressed today’s myriad challenges to become bestin-class

Copyright © 2016 Oliver Wyman All rights reserved. This report may not be reproduced or redistributed, in whole or in part, without the written permission of Oliver Wyman and Oliver Wyman accepts no liability whatsoever for the actions of third parties in this respect. The information and opinions in this report were prepared by Oliver Wyman. This report is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accountants, tax, legal or financial advisors. Oliver Wyman has made every effort to use reliable, up-to-date and comprehensive information and analysis, but all information is provided without warranty of any kind, express or implied. Oliver Wyman disclaims any responsibility to update the information or conclusions in this report. Oliver Wyman accepts no liability for any loss arising from any action taken or refrained from as a result of information contained in this report or any reports or sources of information referred to herein, or for any consequential, special or similar damages even if advised of the possibility of such damages. The report is not an offer to buy or sell securities or a solicitation of an offer to buy or sell securities. This report may not be sold without the written consent of Oliver Wyman.