Accelerating Bottom Line Results: The Spend Management Mandate

Accelerating Bottom Line Results: The Spend Management Mandate June 2004 Accelerating Bottom Line Results: The Spend Management Mandate Part 1 - The Rising Procurement Tide Procurement organizations have evolved dramatically in the last few years, gaining new levels of influence and support across companies. Until recently, many executives considered procurement a tactical, transaction-based support function. But just as quickly as CFOs and CEOs could shout "profit warning" or "reduced top-line growth" in the recent economic downturn, procurement became truly strategic moving to a prominent spot at the executive level of organizations and affecting the way companies think about margin improvement and bottom line results. Procurement's success at identifying and realizing savings has helped it gain influence and trust within companies. During its rise to eminence in recent years, procurement which managers once saw as a back-office assignment catapulted its way to the vanguard of the organization, imparting significant influence to its leaders. And for the first time, executives began to take considerable interest in the activities and potential that procurement could bring to the company. In addition to generating savings, three larger trends turned the corporate eye towards procurement in the past few years. The first, internet connectivity, provided companies with a new medium to identify, negotiate, and engage suppliers and partners on an ongoing basis. Second, the introduction of new tools and technologies empowered organizations with visibility and transparency into specific business issues for the first time (e.g. tools to gain visibility into spending habits and to address maverick purchases). And third, the rapid introduction of global markets as sources of supply, manufacture, services, and demand continued to elevate executive interest in procurement. Taken together, these trends helped executives to think not only about the opportunity to reduce costs, but how to create new forms of value inside and outside the organization through more responsive supplier relationships, faster organizational decision making, and more efficient processes. New levels of connectivity, transparency into business issues and globalization put the spotlight on procurement, a beacon that continues to shine and grow brighter with every new fiscal year. Figure 1 highlights how some of these inputs created new sets of expectations for procurement organizations. Figure 1: Inputs and Expectations New Inputs New Expectations * Internet connectivity * Higher realized savings * New global suppliers * Improved responsiveness * Rise of outsourcing * Better supplier relationships * Information transparency * More efficient processes * Competitive markets * Faster, better decisions * Enabling technology * Broad adoption Tasked with new goals to accelerate their company's bottom line results, the new procurement function had greater responsibility than ever before. To help with their efforts, procurement departments hired more MBAs in recent years than all other functions. But staffing the right people with the right skill-set 2 Copyright © 2004 Ariba, Inc. All rights reserved. Accelerating Bottom Line Results: The Spend Management Mandate to tackle emerging challenges is only part of the solution. Leading organizations must also think about next-level spend reduction by identifying and implementing new ways of doing business that go beyond basic cost reduction and compliance (e.g. manufacturing outsourcing to reduce costs and improve responsiveness to evolving customer requirements). These new focus areas are not just about reducing costs through better negotiations and compliance. While certainly building off of earlier techniques and solutions that focused on cost within procurement, they address broader corporate-level challenges and opportunities. As a result of this evolution, many executives have already begun to explore how the right expertise and technology can help them permanently accelerate their bottom line results by bringing speed, sustainability, and coverage to procurement. And what they are also beginning to learn is that they must bring a new set of capabilities to help them rapidly prove and implement dramatic results, while creating lasting value through enabling information transparency, organizational transformation, and buy-in across the company. Later in this analysis, we will examine how companies can identify these capabilities to accelerate bottom line results rapidly creating incremental margin improvement and reducing total cost. But first, we will frame and discuss how procurement has become the centerpiece for some of the most exciting initiatives in business today and we will also consider how companies are driving new elements of procurement to the frontlines of the organization. Part 2 - The New, New Opportunity Taking a seat in the boardroom The genesis of this executive interest and enthusiasm for procurement often came from the success many companies realized by targeting specific areas like strategic sourcing and purchasing control through enhanced compliance. These areas often represented the proverbial "low-hanging fruit" of procurement, presenting an opportunity for rapid, measurable cost savings and visible returns. But leading organizations have started to move beyond these targeted approaches, embracing initiatives that take a more comprehensive approach to procurement savings and value opportunities. These initiatives form the basis of spend management. Because of this focus on value, executives are beginning to elevate the role of procurement in their organizations, increasingly casting away the perception of procurement processes and technologies as back-office, transactional functions. Thanks in large part to this level of executive sponsorship, spend management is driving its way into the boardroom of many of the world's leading corporations. For one $35+ billion global conglomerate, the elevation of spend management brought with it the active involvement of the CEO, who views procurement as a way to improve EPS while continuing to maintain company growth. In this organization, the CEO and other leaders identified four priorities to drive spend management across the organization. These were: • Creating cross-functional sourcing strategies for both direct and indirect spend categories that spanned company operating units and geographies • Establishing a data warehouse as a means to gain ongoing visibility into corporate spend and savings opportunities • Implementing a low-cost country sourcing strategy that included rationalizing global manufacturing operations • Constructing a company-wide change management and compliance strategy Copyright © 2004 Ariba, Inc. All rights reserved. 3 Accelerating Bottom Line Results: The Spend Management Mandate At the same time, company leadership also mandated that identified procurement savings opportunities had to be implementable and auditable. In addition, all procurement initiatives had to take into account government and regulatory agencies' policies (including Sarbanes Oxley) to set a standard and drive compliance across operating units. In summary, for this global conglomerate, procurement did not only make its way into the boardroom: it became the foundation for an entire range of C-Level initiatives. From Foraging to Farming This movement from opportunistic to proactive represents a significant shift in spend management thinking. Instead of foraging for opportunities in the underbrush of the organization, for the first time, organizations are taking a proactive farming approach putting down roots and making investments to extend the influence and impact of procurement outside of traditional areas. Figure 2 describes the difference in these approaches. Figure 2: From Foraging to Farming Foraging Farming Low-hanging fruit, self- Putting down roots, making an funded investment Individual success Group Success Organizational silos Organizational coordination One-hit-wonder Permanent solutions Point-based approach (e.g.