August 14, 2014

How World-Class Procurement Organizations Outperform; Focus on Becoming Trusted Advisors, Driving Supplier Innovation

  • New Research Shows Top Orgs Operating at Lower Costs, With Fewer Staff; But Top Procurement Orgs May be Reaching the Limits of Functional Cost Cuts

MIAMI & LONDON, August 14, 2014 - World-class procurement organizations outperform their peers by striving to provide unique value beyond cost reduction, including becoming a trusted advisor to the business, driving supplier innovation, and focusing on risk management, according to new research from The Hackett Group, Inc. (NASDAQ: HCKT).

According to The Hackett Group's research, world-class procurement organizations now operate at nearly 20 percent lower cost as a percentage of spend than typical companies. They also have 27 percent fewer employees. But world-class procurement organizations may have reached the limit of their ability to reduce costs, according to The Hackett Group's forecasts.

World-class procurement organizations now generate purchased cost savings equal to more than 9x the cost of procurement, according to The Hackett Group's research. This is more than double the ROI generated by typical companies. But the ability of world-class companies to generate savings declined dramatically in 2014, dropping by more than 17 percent. The Hackett Group expects ROI at world-class procurement organizations to further decline next year. At the same time, ROI at typical procurement organizations is expected to show a slight upward trend, improving by 4-7 percent in 2015.

"The value proposition of procurement is clearly evolving," said The Hackett Group Principal and Global Procurement Advisory Practice Leader Chris Sawchuk. "Top procurement organizations are running extremely lean. Our forecasts show that world-class procurement organizations are unlikely to be able to generate significant additional cost savings or ROI improvements next year. But they are expanding their value proposition in other areas, to better differentiate themselves.

"A key element of this is the focus on becoming a trusted advisor to the business," said Mr. Sawchuk. "This is a role that procurement organizations have aspired to for some time. But getting there is challenging, because it's a position that is defined by the stakeholders. Procurement needs to create an environment where the business appreciates and respects the value of the insights they can offer, and reaches out to them proactively for guidance before making key decisions. This is a much more complex relationship than one where procurement's primary value is generated by delivering savings."

The Hackett Group's research identified five key areas where world-class organizations are adopting procurement strategies to differentiate themselves: being a trusted advisor to the business; driving suppliers to innovate; providing analytics-backed insights; protecting the business from risk; and employing an agile approach to staffing.

Trusted Advisor - World-class procurement organizations are much more likely than typical ones to be considered valued partners by the business, not gatekeepers or administrators. The Hackett Group's research shows that they have a high level of involvement in planning and budgeting half the time, nearly 4x more often than at typical companies. To achieve this status, world-class procurement organizations make certain to proactively understand what drives the requirements of the business as opposed to simply facilitating the buying process. This makes it possible to reverse-engineer costs and explore potentially less expensive and/or higher-quality alternatives.

Driving Supplier Innovation - World-class procurement groups are very effective at building strong business relationships with key suppliers, enabling them to work collaboratively to reduce costs and sometimes even create customized and unique breakthrough solutions. Procurement organizations have seen positive results from investing in formalizing the innovation life cycle, from idea formation and evaluation to development, productization, and continuous improvement. In fact, The Hackett Group's research found that top-quartile companies now drive more than twice as much incremental revenue as typical companies through supplier innovation efforts, demonstrating the value of this supply chain strategy.

Providing Insights - World-class procurement works closely with the business during operational planning and budgeting periods to provide predictive insights on supply markets. This requires having the tools and expertise to turn data into actionable knowledge. The ability to view spend data by suppliers on a global basis is a building block of more predictive analytics. World-class organizations have a significant level of information available nearly 90 percent of the time, more than twice as often as typical companies, The Hackett Group's research found. They have also mastered this competency to the point that analytics, market intelligence and benchmarking are offered on demand as a service to key stakeholders.

Risk Protection - World-class procurement organizations have formal risk management programs to ensure supply continuity and regulatory compliance. Organizations with a formal and broadly-applied strategy for assessing risk have nearly 25 percent greater procurement ROI than those without them, The Hackett Group's research found. This includes completing supplier risk assessments and working with finance and other stakeholders to determine the best mitigation strategy when risk exposure is identified.

Agile Staffing - World-class procurement organizations are distinguished by the way they attract, develop, and retain talent. Their efforts are not limited by geographical borders, as they hire globally and from other parts of the business, opening the door to new sources of skills and fresh thinking. Many are utilizing global business services, or more traditional shared services organizations, and have also established relationships with external entities such as business process outsourcers to support activities such as providing supply-market intelligence. They also provide greater training hours per associate, invest much more in retention planning, and pay higher salaries.

The Hackett Group's 2014 Procurement World-Class Performance Advantage research is based on an analysis of more than 100 in-depth procurement benchmark studies performed at large companies over the past few years.

About The Hackett Group, Inc.

The Hackett Group (NASDAQ: HCKT) is an intellectual property-based strategic consultancy and leading enterprise benchmarking and best practices implementation firm to global companies. Services include business transformation, enterprise performance management, working capital management, and global business services. The Hackett Group also provides dedicated expertise in business strategy, operations, finance, human capital management, strategic sourcing, procurement, and information technology, including its award-winning Oracle EPM and SAP practices.

The Hackett Group has completed more than 11,000 benchmarking studies with major corporations and government agencies, including 93% of the Dow Jones Industrials, 86% of the Fortune 100, 87% of the DAX 30 and 52% of the FTSE 100. These studies drive its Best Practice Intelligence Center™ which includes the firm's benchmarking metrics, best practices repository, and best practice configuration guides and process flows, which enable The Hackett Group's clients and partners to achieve world-class performance.