How important is procurement proficiency to an organization? According to global business consultants The Hackett Group, Inc., companies with “world-class” procurement departments are operating at about 20% cheaper than average companies. The Hackett Group finds that the savings realized in purchasing costs by these organizations are nine times greater than the cost of the procurement department, or twice the return on investment that average companies are able to generate.
With this much potential to cut costs being realized across the business landscape, Robert Bowman recently discussed on Forbes.com that “procurement continues to be under intense pressure to minimize purchasing costs.”
However, the problem being experienced by too many companies is their inability to realize procurement as a business competence, rather than as a simply functional one. While companies may experience a substantial initial drop-off in expenses during their first year or two feeling that they’ve embraced procurement, it takes a real commitment to erecting a procurement foundation and embracing the procurement process to sustain success.
The Hackett Group’s data suggests that the ability of top-performing procurement organizations to maintain their levels of savings on an annual basis appears to be very weak. The seemingly preeminent procurement organizations prior to 2014 have thus far seen a 17% decline in how much cost they’ve been able to cut this year, and The Hackett Group suggests that these companies are projected to experience an even greater decline in performance next year.
Meanwhile, the so-called “average companies” are slowly increasing their procurement functionality. Though many of them are not all-in when it comes to embracing procurement throughout their organization, these middle-of-the-road companies are generally expected to improve their cost savings by 4-7% in 2015.
In a competitive business landscape, experiencing any level of cost savings is nothing to snicker at. Yet, there is a profound difference in the DNA of companies who understand that procurement is about more than making a fleeting effort every time a unit is looking to reduce spending and more about building towards an organizational competence.
“The world’s leading global companies are looking to the sourcing and procurement function to do a lot more than cut the price of supplies,” writes Bowman.
Chris Sawchuk, The Hackett Group’s global managing director and leader of their Procurement Advisory Practice, suggests that “when you limit the value of the procurement organization to spend savings, you put that organization at risk of being unable to increase that value over time.”
At Vroozi, we’ve always suggested that companies embrace procurement as a competence and a mindset, one that collectively raises the entrepreneurial awareness of all those involved in the organization.
Bowman also indicates that companies able to sustain a high level of procurement competence can expect their employees to help manage accounts, alleviate risk, and provide fresh insights.
“More than just demanding the lowest price, procurement works with suppliers to cut the underlying cost of their goods and services,” Bowman says.
With procurement stemming from the company’s core, employees of procurement-mature organizations help to drive supplier innovation. By establishing and sustaining a spend-entrepreneur mindset throughout an organization, a company will empower its employees to always conduct themselves with the long-term interests of the operation in mind.