Transforming Sourcing and Procurement

While there is a great deal of complexity associated with procurement, organizations have increasingly turned to transforming their sourcing and procurement functions to generate the next round of gains.

Interest in the value of procurement is not a passing fad. In fact, by all indicators, its role is growing exponentially. Achieving excellence in procurement, building a strong brand, and securing a bolder legacy for talent are vital platforms for any chief procurement officer.

Telcos

Telecom companies are competing in an increasingly fast-paced, complex, global economy. In today’s dynamic, intricate telecommunications environment, to a much greater extent than companies in most other fields, they rely heavily on third parties such as network equipment suppliers, IT vendors, and handset manufacturers. On average, two-thirds of their OpEx and most CapEx are spent with external suppliers. In essence, telcos are resellers of technology and apps sourced elsewhere.

They rely on suppliers to obtain differentiating innovations (such as software-defined networking solutions and set-top boxes with enhanced user experiences) before their competitors get them, to support them in shortening the time to market for new products and services (for example, by offering highly adaptive billing systems and responsive customer care services), and in general, to enable them to deliver a host of competitive advantages that are unique in their marketplace. This means that an effective procurement function has to be able to fully understand and actively participate in the complete product development cycle. All this is occurring as margins for most operators continue to be squeezed and boards impatiently demand additional year-on-year savings.

Even though cost containment, rising competition, and market uncertainty are likely to be major business concerns for the telecom industry over the next six months, they are willing to increase their focus toward expansion in current markets and development of new products. Furthermore, India is projected to offer significant growth opportunities for the global telecom industry due to expansion in mobile and smart device utilization and connectivity, significant growth in subscriber base of mobile Internet data, and rise in m-commerce. On average, the global telecom industry’s procurement expenditure is projected to increase by 10.8 percent over the next six months.

It is anticipated that capital expenditure on new product development and IT infrastructure development will increase over the next six months, while internal operating cost reductions and increased use of technology will be the main procurement objectives for organizations over the next six months. A decrease in supplier prices is also in the offing.

CSPs continue to focus on cost efficiency. These include a focus on direct cost optimization; commercial efficiencies; network and IT transformation opportunities; centralized procurement and shared services; zero-based budgeting; and cost and CapEx synergy savings. Zero-based budgeting methodology is being implemented. Some of its components include an absolute cost reduction across group functions, establishing productivity targets for group operational units such as data centers and shared services to drive efficiencies further across the organization, and setting multi-year targets for each of the telecom circles to drive margin expansion. This goes a long way to achieve greater operational leverage and expand margins.

Outlook. Leading market research and analyst firms reveal the expected investment pattern of the global telecom sector. Following an initial dip in 2017, CapEx in this segment is set to increase at 0.8 percent CAGR and touch the USD 353-billion mark in 2020.

The previous equipment investment cycle in this sector, from 2011 to 2015, was driven by LTE rollouts and related fixed networks. The current cycle is expected to be driven by a handful of large service providers, and various regional and national agendas. Significant 5G-related spending is expected in 2019 from operators looking at strengthening their fiber-based fixed broadband and backbone networks.

In the coming years, leading telecom service providers will focus on reducing CapEx as well as OpEx by transforming their infrastructure. Many communications service providers will invest in IT systems, cloud, and big data analytics to optimize their network and enable customer-centric services. Internet of things (IoT), operations and business support systems (OSS/BSS) transformation, and network functions virtualization/software-defined networking (NFV/SDN) will help enterprises drive better efficiencies and improve service offerings. These providers will seek alignment with the digital services market to play an active role in the digital transformation of economies around the world and multiply revenues.

Service providers that do not take the full-fledged digital route, but choose to remain traditional and only adopt a few digital technologies will enhance overall efficiencies and improve customer delivery. However, this segment faces the risk of losing out to over-the-top players like Google.

With leading players in Asia, such as China Mobile, Reliance Jio, and Bharti Airtel, invested in 4G, it will be another couple of years before we see significant investments in 5G. However, it is predicted that by the end of 2022, there will be more than 550 million 5G users globally. This growth in the number of 5G users will also drive greater traction for IoT, if hurdles such as cyber security risks and low ROI are addressed.

Major economies across the globe are poised to witness an increase in their GDP and this will translate to revenue growth for telecom operators. However, to know how well this sector adapts and optimizes growth opportunities and carves new inroads into the digital future, we will have to wait and watch.

Enterprise

Private equity firms are financially driven, and because their holding periods have lengthened over the past decade, they have been driving transformational programs beyond financial engineering. They go to procurement first, have high expectations, and understand what good procurement looks like, and some have very specific action-oriented profiles for their CPO candidates.

Research Insights by A.T. Kearney. Two complementary global research platforms provide an objective view of the value created by procurement, ROSMA (Return on Supply Management Assets) Performance Check Benchmarking collects the financial performance of procurement as reported by CPO organizations, and Voice of the Stakeholders captures views of non-financial non-procurement executives about the performance of their procurement organizations.

With cumulative insights from more than 1780 executives and an additional 367 executives participating in this year’s research, the findings are powerful:

• Top-quartile performers continue to deliver more than seven times their cost and investment base in procurement. This elite group consistently delivers more than USD 1 million in financial benefits per procurement employee, and in 2016 the number grew to USD 1.7 million. This quartile is strong, typically leading across most or all procurement value drivers. This group has a low functional cost-to-serve and reports the highest levels of value creation from advanced sourcing methods. These leaders continue to strengthen and extend their productivity lead.
• Middle-tier performers deliver accretive results consistent with prior periods. They generate value three to five times their cost and investment base. There is no apparent shift in this segment in terms of its relative size, range in procurement as a driver of productivity, or overall results. Although stable, this group has yet to show an upward results trajectory that signals improving productivity.
• Bottom-quartile performers demonstrate some improvement over the prior periods, but the average team is marginally accretive and 50 percent are dilutive. Because a sizable portion of procurement teams lacks the discipline or capability to report on their performance, the bottom quartile’s profile is likely to be indicative of a larger portion of procurement organizations.
• Earnings potential. Improving procurement performance – outcomes and variability – can result in large percentage earnings gains. Indeed, lifting the bottom quartile to average can increase earnings 15 percent, and a mid-tier performer that reaches the top-quartile average can see up to 21 percent earnings improvement. There is a reason why procurement synergies are the main source of value in a merger. As long as there is performance variability there will be opportunities for improvement, transformation, and consolidation.
• Performance variance. This remains large across all seven value drivers regardless of industry, geography, or size. Most procurement organizations have weak or limited performance-reporting capabilities with two factors – variability and lack of transparency – creating ambiguity about the value of procurement and undermining the profession’s credibility.
• Metrics. Most procurement organizations have flawed metrics; they cannot measure well and the benefits cannot be found. Only 21 percent of stakeholders report that procurement has well-defined and respected performance metrics. (In last year’s research, 74 percent of CFOs said procurement lags most or all functions in performance tracking.) In addition, 68 percent of stakeholders say procurement’s reported results are sometimes, frequently, or widely questioned. And they believe that 78 percent of procurement organizations either realize less than 60 percent of the promised contracted savings or they do not know the amount of savings realized. Contrast this with stakeholders’ views of leading procurement organizations – 96 percent have clear and respected performance metrics, and 70 percent have reporting rigor and depth comparable to other functions, with their results accepted 69 percent of the time.
• Raising the bar. Good-to-great teams are advancing a progressive agenda to raise the bar for – and brand of – procurement. These teams are able to sustain a high score, thanks to operations technology with robotic process automation (that reduces functional costs below 30 basis points) and a mix of talented professionals with analytics and supply market expertise. These professionals will act as trusted advisors and build partnerships with CFOs and stakeholders.

The ROSMA Performance Check Benchmarking and the Voice of the Stakeholders research illustrate what good looks like for stronger teams. The seven attributes of good procurement tell a compelling story:

Strong procurement teams are recognized by their stakeholders as integral business partners with a seat at the business leadership table; they consistently work together on most or all projects and are brought in early in the process.

All stakeholders, from both business and finance, say that procurement leaders are accountable for results, stakeholder satisfaction, and team productivity.

Procurement has well-defined and respected performance metrics that all stakeholders understand and support. What counts gets measured, and what is measured gets done.

Finance and procurement jointly (or finance independently), routinely, and thoroughly evaluate procurement performance; results are shared with stakeholders and are widely accepted and only occasionally challenged.

Principal stakeholders (the C suite, finance, and the businesses) are aware of and understand procurement value drivers, including the concepts of coverage, velocity, yield, and compliance, and they know the desired performance ranges for each.

Principal stakeholders have a rich understanding of how procurement creates and delivers hard value to the business’s financial results and thus are considered effective in the spend-management process.

Top-quartile performers deliver a strong performance, despite which if this quartile sustained 75th percentile performance across main results drivers, productivity would increase another 50 percent.

Technology. Technology has accelerated the evolution of procurement over the past 20 years and will continue to do so over the next 20. Technology is expected to transform the profession and is already advancing how procurement engages and executes. Two emerging areas are expected to fundamentally change the performance equation, performance management solutions and advanced digital technologies (specifically robotic process automation (RPA), artificial intelligence, and machine learning).

By 2020, A.T. Kearney expects technology providers to offer fully featured and proven procurement performance management (PPM) solutions, which will be mainstream by 2023. It is not yet clear whether a dominant player will emerge in this space, but the impact on procurement could be similar to what Salesforce brought to sales resource management in 1999 – only much faster. In time, the profession will broadly adopt PPM technology.

Enterprise Transformation. Indian enterprises have begun to embrace new-age technologies to improve the operational efficiency, business processes, and customer experience to address the competitive environment. Digital transformation is transforming businesses by improving business agility, empowering stakeholders, and providing new revenue models. CIOs are adopting digital technologies at various levels based on the immediate need of organizations and revenue goals.

Advanced Digital Technologies. Adoption of robotic process automation (RPA) has entered the rapid growth phase, particularly in transactional process applications, thanks to its compelling value proposition: improved accuracy, 24/365 uptime, and strong economics. Already proven in accounts payable, repetitive customer service transactions, and select finance activities, the technology will quickly penetrate procure-to-pay. And when combined with natural language processing, select buying functions within procurement will also migrate.

There are already people-less business process outsourcing (BPO) providers taking advantage of technology. Even with today’s vendors earning value-based premium pricing models, the savings delivered from replacing operational headcount from emerging market BPO operations with RPA are typically 50 to 75 percent – or even higher when applied in developed economies. Coupled with advances in machine learning, RPA will also quickly bring more insight to strategic activities in procurement, but perhaps not as quickly as the change to operational procurement. By 2025, RPA will reset the operating models, processes, and resources of most global 1000 procurement organizations.

But this is not the end of the story. Rather than leaning back and enjoying the fruits of their work, CPOs who reach this stage encourage their people to get out from behind their desks and visit suppliers to better understand how procurement is creating value for the company. The more time spent with suppliers, the more shortcomings can be identified in the value-creation process. Forward-thinking CPOs also expect their people to understand how the company is creating value for customers. The further the procurement team progresses, the more dramatic the results will be. The most knowledgeable teams will challenge industry beliefs to define breakthrough products and services delivered with breakthrough processes at a radical cost advantage for both customers and suppliers.

Procurement

The trajectory to disruptive procurement will differ by division, region, and product or service line. However, what are common to all successful trajectories are the procurement professionals who spend less time at their desks and more time with suppliers and internal stakeholders.

In the future, good procurement is destined to be even bolder and more daring than today, spurred by a wealth of opportunities to manage the value and brand of procurement. Either by choice and leadership or through interventions, the performance variance within the profession will shrink, transparency will increase, and the negative stakeholder voices will join to become a single positive declaration of success. In the eye of disruption, the bar for leadership performance gets even higher.