Whilst researching for a piece of work earlier in the month, I was amazed to discover some 3 million sites referencing procurement benchmarking. Undertaking even a cursory examination of the content of some of the more prominent sites and you conclude that the procurement function has got plenty to chose from, some of the approaches having more merit than others.

The original term ‘benchmark’ is derived from the chiselled horizontal marks that surveyors used for holding a piece of angle-iron which acted as a bracket, referred as ‘the bench’, for a levelling rod. This ensured that the levelling rod could be repositioned in exactly the same place in the future. Only one benchmark was typically required as a reference point. Unlike surveying, the application of benchmarking to commercial activities usually requires multiple reference points, which then need to be compared to a defined group of indicators. The danger with benchmarking in the commercial domain is to focus on too narrow a group of reference points. This can and does inevitably lead to a misleading view of the world around you.

With so much to chose from, and a striking lack of consistency across the numerous approaches that are on offer, it is probably worthwhile presenting some points to bear in mind if you are considering benchmarking your procurement function.

Firstly, when selecting your benchmarking protocol, it is important to choose an approach that covers a broad range of different indicators to include at a bare minimum metrics from the three following groups:

1. Organisational Metrics

Organisational metrics are the data that describe how the procurement activities within the organisation are performed e.g.

• The number of full time employees per €1bn spend
• The purchased spend as a percentage of operating costs
• The fully loaded cost per procurement employee
• The purchased spend per purchasing employee
• The total number of suppliers, by category and legal entity
• The number of suppliers per €1bn spend
• The number of training hours per FTE, by discipline and level
• The headcount supporting Sourcing, SRM, and Order Processing
• The number of non-procurement staff involved in Procurement
• The ratio of managers to staff

2. Purchasing Process Metrics

Process metrics are the data that relate to the process of purchase order capture through to payment e.g.

• Average cost to process purchase order through to delivery and payment
• 3^rd party spend per order
• Average cost to process invoices
• Volume of ‘straight through orders’ (i.e. no human intervention required)
• Level of compliant spend by Category, Supplier and Order Channel
• Average time to process an order
• Average time to pay a supplier

On this, there are only a few examples of surveys that provide any kind of serious insight around the processing of purchase orders. Purchase order processing and trade settlement in securities processing involve exactly the same activities; investment banks drove out significant levels of efficiency and improved levels of control by developing a set of simple and well understood metrics that helped them manage the process. There is no reason why the purchasing function cannot do the same.

3. Category Specific Metrics

Category specific metrics are the data that relate to the specifics of the contracts that have been established with suppliers e.g.

• Price per hour/unit/licence etc. for goods or services delivered by the supplier as compared to sector average, competitor price point etc.
• Payment terms
• Order query response times
• Service levels
• Penalty charges for late delivery
• Guarantee periods
• Late payment charges

It is important that the three areas outlined above are covered in depth because when combined they will give you the most balanced view of overall procurement effectiveness. Knowing that your procurement function is world class in terms of functional capability is of little value unless you know that the contracts that you have in place with your suppliers are actually saving your organisation money. Knowing that you have superior price points within your contracts is valueless, unless you know that people are using them. Effective benchmarking is about bringing together multiple sets of data, taken over different points in time, using different methodologies from a mixture of providers and interpreting this data in a balanced way and presenting a clear set of next steps. There is no ‘silver-bullet’ solution and it is the ‘next steps’ that are important.

All of the three areas outlined above can be rolled up into a ‘practises’ benchmarking study which looks at the way the various activities within the procurement function operate, such as Strategic Sourcing or Supplier Relationship Management. These studies capture selected metrics from the different areas and reference them back to world class standards. They also assess subjectively via interviews the activities within the procurement function to validate findings, and develop next steps. These studies are an excellent way to understand ‘what should be done’ as opposed to ‘what we are currently doing’.

Other valuable guidelines to bear in mind when considering benchmarking also include:

• understanding the definitions and constraints used for the applicable benchmarks
• ensuring that the population of reference data is relevant to your sector, large enough to be of value and covers a time period that is germane to the operational period in question
• deploying a study protocol that combines both objective and subjective data, ideally in such a way that they reinforce each other
• being clear about caveats that need to be attached to the metrics; price paid only tells one part of the story – is it the average price paid over time, or does it include the impact of supplier rebates?
• the inclusion of a broad range of reference points - internal, competitor, non-competitor, regional, best in class and world class
• make sure that you are comparing apples to apples - it is highly unlikely that your own data will match that of your study; understand the limitations, and the resulting implications.

Remember that benchmarking is not an exact science; in capturing data, approximations need to be made which may not necessarily work for your organisation. Engaging multiple providers and who employ different methodologies will allow a more balanced picture to emerge.

With at least 3 million possible perspectives on the topic, it is undoubtedly going to be difficult, (and fun) to know where to start; one thing is sure, there is plenty to choose from.

I thought I would share with you some of the interesting results on global sourcing trends that came out of the recent survey, carried out in partnership with Efficio.

Over half (53%) of the European companies surveyed in the 'The evolving role of procurement' said they spend up to a fifth (20%) of their total spend with low cost countries - more than double since 2000 (22%). 12% spend up to 40% of their total spend with countries such as Eastern Europe, South America, India, the Far East and China, whilst 8% earmark more than 40% of their total expenditure.

The top concerns and challenges, ranked by companies who spend over a fifth (20%) of their total spend with low cost countries, include:

1. Product quality - 61%
2. The quality / resources of the supplier - 56%
3. Logistics of dealing with a low cost country - 49%
4. Complexity of managing a remote supplier - 46%

Despite these challenges, the survey reveals a surprising cross section of industries that spend significant amounts with emerging markets – extending far beyond IT/telecoms and manufacturing.

Total spend outsourced to low cost countries across European Industries:

• Retail and leisure 38%
• Telecoms 32%
• IT 27%
• Banking / financial services 21%
• Oil and chemicals 21%
• Logistics and transportation 20%
• Media and entertainment 18%
• Manufacturing 18%
• Business services 15%
• Other (aviation/utilities/mining/pharmaceuticals) 0-7%

The survey was conducted from May until August 2006 via an online questionnaire answered by 279 senior executives mainly with regional or global responsibilities in large European companies. To download a copy of the survey please click here.

A carton of baby milk was the evidence presented to the latest European Leaders in Procurement forum as real life evidence of how innovation from suppliers can be harnessed.

The demonstration was passed to participants at the forum by Haide Villuendas, global purchasing director, raw materials at Netherlands-based Royal Numico.

More than 100 senior procurement executives from several European countries took part in the event on the theme “value creation and innovation.”

Stephan Biesenbach of Swedish energy company Vattenfall opened the forum with challenging comments on the need to develop procurement talent.

“The biggest challenge now is to get the people we need to do what we have to do,” he said.

 

Christina De Luca, CPO of the refining and marketing business at BP made the apparently startling admission that she had no procurement strategy.

“I have not a procurement strategy but to help our businesses achieve their strategies,” she said.

The need to develop good relationships with suppliers was not just the responsibility of senior management.

“It’s not just about the individuals at the top looking after the relationship. It’s about everyone. So you need to do a lot of work with your global community.”

Results of the survey of senior executives by the ELP Network and consultants Efficio showing how the status of procurement has risen dramatically in the last six years were unveiled at the forum.

“The change has been a long time coming but in the past few years it has exploded,” Alex Klein, VP and COO of Efficio said. “Procurement has moved from the back office to the front office.”

Dynamic, enthusiastic, tenacious are the sorts of words that would have been at the top of your list for either describing your company or the type of person you wanted to recruit. Well, no longer! It isn’t just the words that might depict the fact you are aiming at a younger audience but the same applies if your approach is perceived to exclude the more recent entrants into the working world. In other words mature, considered or a certain number of years experience will not be tolerated as criteria for recruiting an individual.

As a recruitment consultancy we are extremely aware of the new Age Discrimination Act but as hiring Manager how aware are you? Even since the Act became Law we have been asked the age of an individual on several occasions, which is now something we are not at liberty to divulge for obvious reasons. You might argue that you need to know someone’s age to see if they will fit the culture of your organisation or your department but this can no longer be a consideration.

I’m sure the majority of large organisations have been aware of the Act for some time and have adapted their recruitment, retirement and dismissal policies and proceedings accordingly, but for those who haven’t then change now to avoid severe consequences.

A few months ago, I was in a conversation with a senior IT executive at a Fortune 500 company with a substantial European presence. He had just wrapped up an RFP to select offshore IT providers to handle project work that was conducted inhouse. The project spend was substantial – in the range of €150 million as best as they could tell. He had an interesting problem on his hands - "Now that I have these providers in place, how do I get my managers to send them work?" In other words, how should a manager recognize that a project had the characteristics to be outsourced?

Large sums were riding on getting this right – the average Indian offshore rates are a third of the European or North American rates. This was an area on which I had a point of view. I had begun my career at a major application outsourcing shop, one of the Tata companies, and had stayed in the industry for several years. The bane of the IT outsourcing industry in the early days was figuring out what types of work could be outsourced. There were plenty of failures on both sides – suppliers overcommitting and buyers trying to sweep a mess under the carpet by outsourcing it. We had our own "Top 5" reasons for why outsourcing projects failed:

1. Outsourcing a bad/ineffective process to a partner - outsourcing to shift a problem to someone else

2. Poor project scope definition (this is why managers find it easier to just hire contract workers –project scoping takes discipline)

3. Excessive focus on cost reduction – heart surgery by the lowest bidder?

4. Vendor mismatch due to over representation of capabilities

5. Internal resistance from managers who oppose outsourcing/offshore

Few companies have embraced outsourcing as completely as General Electric. In 2000, they talked about a 70/70/70 model – 70% of all GE work would be outsourced, of that 70% would go offshore, of that 70% would go to India. GE and others came up with tightly defined and repeatable criteria to help their managers make the right outsourcing decisions at the project level. The unit eventually took in outside investors and began serving other companies besides GE.

Back to my conversation with the IT executive. The €150 million was being spent by hundreds of managers making thousands of independent decisions. They were the front line. There was no central coordination. The executive wistfully spoke of wanting something that was as easy to use as Quicken or Turbotax. It was a good analogy – those tools have taken a numbingly complex subject (the tax code) and made it accessible to mere humans. They did it by creating an elegant decision tree that guides users through only the things that are relevant. Companies will have to solve this problem for outsourcing if they are to see the full benefits of the global service delivery model.

With 2006 rapidly drawing to a close, and Christmas soon to be upon us, as I take stock of the last 10 months, I am beginning to seriously wonder whether there is a revised model for procurement outsourcing for indirect categories.

Having been actively involved in outsourcing procurement functions for over five years and sat on both sides of the fence as a buyer and seller of offerings, there are two issues that are becoming very apparent;

• Very few CPOs will voluntarily decide to outsource their own function
• The complexity of procurement outsourcing deals is hugely underestimated

Outsourcing of services evolved to allow organisations to do things that they themselves would not or could not do competitively. For functional areas such as IT, HR, Facilities Management, and Finance there are mature category specific offerings in the market place that appear to be successful - this is not to say that there are bad deals in the market, but I would suggest that this is down to poor execution rather than the underlying principle.

Now, based on the fact that Dun and Bradstreet estimate that the global outsourcing market is worth some $4 tn p.a. there appears to be no shortage of CIOs, CTOs, CAOs, CFOs or COOs who are willing to sanction an outsourcing arrangement of some kind. The question is why hasn’t procurement taken off, after all it is nothing more than a mix of offerings that are already available in the market place. I would suggest that there are three parts to the answer.

• Firstly, offering maturity is an issue; service providers and clients are still feeling their way into the solutions, and word of client experiences to date travels fast on the grapevine.
• Secondly, procurement outsourcing is poorly understood. Value is generated from two components - savings resulting from improvements in sourcing and raising levels in compliance. When comparing these drivers to the value generated from transferring procurement headcount to a third party, the run rate reductions from headcount savings are minimal. And it should not be forgotten that procurement outsourcing is a form of transformational outsourcing, structured in the form of a multi – year finance deal, focused on remediating the procurement function. Procurement outsourcing is not undertaken to reduce the run rate of your procurement function and is certainly not a ‘your mess for less’ offering.
• Thirdly, procurement outsourcing is legally, and technically complex. My first experience of presenting the concept to a seasoned CIO brought me down to earth. His considered view was that there were very few, if any industry specialists who could successfully pull off a project involving category process re-engineering, change management, strategic sourcing and technology rebuild and roll out in one fell swoop. This does not mean that the problems are insurmountable – the body of knowledge exists to address them – it just means that the risk profile of the project is slightly greater than what would normally be encountered.

So where next? Is there an opening for a procurement outsourcing market segmented vertically, rather than horizontally? Conventional procurement BPOs require the service provider to deliver a purchasing capability across all categories from the simplest to the most complex, which requires a huge breadth of technical, market and process expertise, (the horizontal solution). Category specific solutions have evolved quite successfully in areas such as print, travel, office supplies, temp labour, and mobile phones, each having their own niche providers running their own technology platforms very successfully, (the vertical solution). This concept is even more interesting when you consider that embedded within major outsource arrangements, (IT, HR, FM etc) there are vertical buying solutions; each IT heldpdesk needs to be able to buy PCs, each temporary staff helpdesk needs to be able to request temps etc. And to my knowledge they all seem to work successfully.

Is this the way forward? Is there a more defined role for procurement functions to adopt the role of portfolio managers having responsibility for a range of vertically outsourced buying processes that support non-core and even core categories? I would say there is. The horizontal offerings are still developing, and require a strong balance sheet to fund. Vertically segmented offerings, aligned by category, would allow greater competition in this space, provide greater flexibility and allow processing risk and expertise to be shared across a number of service providers. The added competition would also help drive the price of the offerings down. Such a development aligns well with trends in the procurement technology market with the advent of category specific solutions to cater for the huge differences that categories present in capturing and processing underlying orders.

One thing is clear – procurement remains an area rich with opportunity, with organisations still keen to explore novel solutions to address the same old problems. May be 2007 will be the year when we see a procurement group tender some or all of their indirect buying processes to a portfolio of service providers.

Let’s see what the next 12 months holds…

The ‘S’ word is getting a real hammering these days, often wantonly, often inappropriately, and often - just plain too often. If people thought more clearly about its real definition, then we would all be better off – so here is a view.

Most people sprinkle ‘strategic’ around in the context of having some sort of plan – ie ‘We have done a strategic category review’. This is not really a good use of the word – it is simply using a fancy word when ‘plan’ would do just fine. Of course it should be well thought through, be linked to the business needs, and have a longer term perspective – that doesn’t really qualify for the strategic title.

Secondly it is used to as a plea to become more involved – ‘we need to do more strategic purchasing’. Most of the time this just means that buyers don’t really get involved early enough, and want to be more a part of the business. Fair call – and not strategic.

There is only one clear definition of a strategic action:

    Deferred Pleasure.

A strategic decision is one that, on the face of it, only makes sense in the longer term. If in military terms a location is deemed to be strategic, that means you should put disproportionate effort into defending or gaining it. The same is true in purchasing. You could take a position on a category, or with a supplier, where you are taking the risk that in the longer term you will be better off. Committing to 100% supply ( or indeed deliberately taking a supplier off your supply list ), taking a long term price fix and investing in joint development are all examples of strategic purchasing.

The interesting challenge lies for the wider business – just how many business unit managers would thank you for saying ‘I know you are paying more for this than you have to right now – but its strategic!’

We may want purchasing to be more strategic, and if we really mean it – are we or others actually ready for it yet?

A Global 50 company recently invited me to speak to their top suppliers about the value of e-sourcing. At first, I felt a bit like Colonel Custer being sent off to resolve the pesky “native problem” at Little Bighorn. (And we all know how well that turned out for Custer.) However, as I investigated the issue, I uncovered much evidence on how e-sourcing is actually helping suppliers and the entire supply chain by making negotiations more fair, more efficient, and more effective at determining best-value relationships, enabling suppliers to differentiate on their total solution attributes — not just price.

Knowing that my audience would be predisposed to act hostile, I avoided emphasizing the basic fact that e-sourcing is strategic sourcing. (Although, Gartner Group research sums it up best: “e-Sourcing has developed from a crazy e-business idea to become a standard tool in the process portfolio of all large enterprises…Leading edge adopters now use e-sourcing for practically 100% of their procurement requirements across direct and indirect goods.” And, if that wasn’t enough, CAPS drives the point home reporting that “all of the evidence suggests that electronic reverse auctions are here to stay…”)

Instead, I set out to dispel “The 7 Myths of e-Sourcing.” Here are some of the highlights of my case:

Myth #1: e-Sourcing is all about lowering prices. False. Thanks to tightening supply markets and maturing sourcing methods (and e-sourcing functionality), price-only negotiations have gone the way of Member’s Only jackets. Advanced auctioning capabilities enable buyers to evaluate suppliers on a myriad of price and non-price factors, such as lead-time, delivery, quality, and payment terms. Nearly all e-sourcing users engage in multi-threaded negotiations (e.g., e-RFI-to-e-RFP-to-auction), enabling qualification and evaluation on all attributes of a supplier’s capabilities and costs. And many optimization-based sourcing tools allow suppliers to offer alternative bundles or bids that boost their profit margins and further differentiate their offerings.

Myth #2: e-Sourcing is unfair to suppliers. Untrue. In most cases e-sourcing introduces greater integrity into the sourcing process than existed in the offline mode. e-Sourcing mandates that buyers clearly articulate their selection criteria and award decision framework to all participating suppliers. Suppliers go into a negotiation full knowing how they will be judged and how the award decision will be made. Any clarifying questions asked by suppliers and corresponding answers from the buyer are available for all suppliers to see, further leveling the playing field. This was best summarized by a VP of Sourcing at Cadbury Schweppes “We emphasize fairness and open disclosure on both sides of the sourcing process. We have shut down ‘backdoors’ for internal stakeholders and suppliers.”

Myth #3: e-Sourcing is unfair to incumbents. Nope. Competitive incumbents are in a better position to be exposed to more business volume and new business opportunities, particularly considering that any strategic sourcing initiative goes hand in hand with a supply base rationalization effort. Better e-Sourcing tools also enable the ability for users to incorporate “transformational” elements that give “credits” (in the form of switching costs or innovation credits) to good performing incuments. As a result, incumbents don’t need to be the lowest price bidder in order to win the business. Consider the approach taken by Eastman Kodak: “We sat down with incumbents to explain why we were [using e-auctions] and prepare them with the right strategy and techniques to competitively participate in the event.”

Myth #4: e-Sourcing makes it difficult to win new business. On the contrary, e-sourcing dramatically shrinks sourcing cycles. These efficiencies alone enable buyers to negotiate more spend volumes, across more spend categories, with more suppliers. As noted in the previous example, qualified incumbents in good performance are in a position to expand existing business and be exposed to new business opportunities. One large industrial manufacturing used its e-sourcing strategy to cut the number of MRO suppliers from nearly 2,000 to just 20. Incumbents retaining the business are doing 4X to 10X the volumes than in the past, and they’ve added new, more profitable revenue streams, such as integrated supply relationships.

Myth #5: e-Sourcing lengthens the sales cycle. There is ample evidence that e-sourcing shortens sourcing and, hence, sales cycles. And as an old boss of mine would say, “In a sales cycle, getting to no fast, can be as valuable as getting to yes.” His point was getting to “no” enables you to focus your salesforce on the opportunities they can win.

Myth #6: e-Sourcing burdens suppliers with new cost, technology, and resource requirements. Wrong again. There is compelling evidence that e-sourcing also reduces overall SG&A costs. A recent study from the University of North Texas found: “A supplier can reduce its cost of sales (salesperson commissions, advertising, etc.) using reverse auctions.”

Myth #7: e-Sourcing eliminates buyer-supplier relationships: I recently asked a supply management executive at a major life sciences company how he was able to drive such aggressive use of reverse auctions. His response, “I tell suppliers, ‘If you believe your customer relationship is all about negotiating, then you don’t have a relationship.’” This isn’t just rhetoric. Many companies have begun partnering with suppliers to remove cost from the entire supply chain. New multi-tier sourcing, co-sourcing, and buy-sell approaches are being embraced by a wide range of enterprises (particularly in the aerospace, automotive, and high-tech sectors) looking to gain better visibility into costs and risks inherent in the sub-tier supply and to aggregate spend volumes and remove costs from the total supply chain.

For more e-sourcing strategies and tips, visit www.supplyexcellence.com