Procurement Transformation – Best Practices and Notes from the Field – Transcript

By Tom Kellaway and Natalie Henfrey
May 1, 2024
Season 5, Episode 24

Tom Kellaway:

The other thing that we see with high-performing procurement organizations – what we call Digital World Class® performance – is the culture of high performance. That means creating a culture of transparency, of ownership, of accountability, as well as consequence management.

Announcer:

Welcome to The Hackett Group’s “Business Excelleration Podcast.” Week after week, you’ll hear from top experts on how to achieve Digital World Class performance.

Natalie Henfrey:

Hello, my name’s Natalie Henfrey. I’m a director in Procurement Transformation at The Hackett Group. Welcome to this week’s episode of the “Business Excelleration Podcast” series. We’re seeing a real surge in demand for helping transform procurement, so we’re producing a series of podcasts to talk through what’s driving this demand, what approaches we can take to help and to provide some real-life examples. I’m here with Tom Kellaway. Tom, do you want to say hello?

Tom Kellaway:

Hello everyone. My name’s Tom Kellaway. I’m a principal in the Benchmarking practice here at Hackett. Nice to join you today.

Natalie Henfrey:           

The Hackett Group publishes research into procurement key issues. Every year there’s a podcast and 2024’s is already out. You should check it out. Tom, did you want to share some highlights?

Tom Kellaway:

Yeah, absolutely. Really good podcast on the procurement key issues that I would recommend listeners take a look at. But just a very quick recap. Obviously, it’s been a tough period, I think, for procurement organizations – clearly inflationary price pressures. There’s possibly been a lot of supply chain shocks, and lots of challenges in terms of the geopolitical and macroeconomic environment for procurement organizations to have to navigate through. But, of course, there are ways that procurement organizations can respond to those challenges. Obviously, technology being a good example of that in terms of the growth of AI and what we see procurement organizations and CPOs focused on at the moment in terms of when we ask people to look at their top 10 priority areas. So procurement is obviously responding to those challenges. The top three – no surprises really – spend reduction, supply assurance and inflation mitigation. Clearly obviously linked to those external factors that procurement organizations are having to handle.

The rest are, I guess, more internal around how procurement organizations transform their ways of working to be able to respond to those challenges and perform better. Things like looking at the operating model, creating more agility, focusing more on the value versus more or less on the transactional processes. Analytics is obviously critical, as well as obviously broader digitalization. Things like AI, obviously the news, lots of really good use cases in procurement when it comes to AI. And then one or two external priorities as well. For example, addressing ESG continues to be a focus for procurement organizations.

Natalie Henfrey:

Fundamentally, you can’t sustainably achieve the top three if you don’t modernize the function. So address the here and now challenges whilst proactively taking advantage of the opportunities. This is what leads to sustained high performance. All of this is driving the increase in demand that we’re seeing. Clients are looking to refocus their people in a procurement function that can better deliver the business’ strategic priorities. So Tom, how can Hackett help?

Tom Kellaway:

Well, I think what’s interesting, firstly, is the breadth of different organizations that we’ve been working with – from smaller procurement organizations maybe have 30, 40, 50, 60 people in them, through to some of those global giants where there’s hundreds, if not thousands, of people working in procurement, let alone the much broader supply chain areas. And they’re in various different industries, different sizes, shapes of organizations. But though every client situation is unique, many of them are turning to us to better understand how can they apply that fact-based approach to procurement transformation. And obviously when Hackett talks about fact-based, clearly we’re talking about that benchmarking data that we have, as well as obviously the insights around our best practices. And what we try to do is approach each client situation and apply the right modular inputs to be able to build the right solution for clients. So there’s no one-size-fits-all solution to those clients’ problems, but all of them can leverage our intellectual property, and, of course, combining what we call that as-is diagnostic, with that support to be able to build the to-be designed for the future procurement organization, is particularly popular right now. Though Hackett really believe it’s important to be able to get that stake in the ground.

Now, why is that and what does it involve? So the why, well, I think lots of clients will obviously focus on building the optimal service delivery model or having the right people process technology in place. But the other thing that we see with high-performing procurement organizations – what we call Digital World Class performance – is the culture they built. And that culture of high performance is really, really important. And that means creating a culture of transparency, of ownership, of accountability, as well as consequent management. And obviously creating transparency on performance through that benchmarking assessment to understand where are you today? How does that compare to others? What’s driving those differences, and what you can do about it is super important? Couple of things on that – obviously in terms of that root-cause analysis is whenever you’re looking at a performance difference, there’s always going to be an element of that gap being driven by the cost of doing business.

Yeah. As I said, some companies are different industries, different sizes, different levels of complexity. That impact is going to often contribute to some of the performance gap, but Hackett, what we want to be able to do is differentiate between that cost of doing business – the inherent complexity that a procurement function has to deal with the organization. But really we want to understand the addressable opportunity. So why is it that there is a gap, and how is it best addressed through the applicable use of proven best practice? And that’s really fundamentally what we’re focused on helping clients understand in that as-is assessment. What is the addressable opportunity that they can close? But I want you to talk a little bit about, I guess, how we realize that opportunity.

Natalie Henfrey:           

Yes. So, that’s the first part of the story. While you know the issues, the causes and the improvement potential, we’ve also got to create a plan to get to the target level. We do this by building or refreshing our procurement target operating model. This involves understanding the vision and ambition of the organization. Not all organizations want to be what we call Digital World Class – designing a target state to plug the gaps between the current and the future ambition state, designing the change initiatives that you need to get you there. You’ve got to cost it, understand the benefits, a business case, and then, of course, you’ve got to build the road map that will show you how, in which order and which priority, and over what time period you get the results.

Tom Kellaway:

That’s probably enough about Hackett. So let’s talk about, I guess some real-life examples, right? You and I have worked with a number of clients recently on these. I know that you’ve spent a lot of time working with – we can’t mention their name – but a global pharma company to refresh their procurement strategy and help them build out, flesh out their digital road map. Why don’t you share with the listeners some reflections from that project?

Natalie Henfrey:           

Yes, that’s right, a multinational pharmaceutical company. They needed an independent look into why, despite heavy investment in technology, they still weren’t registering as Digital World Class in procurement. The procurement function was established and mature. It had all of the features that you would expect. They had a digital road map, but adoption of the existing platforms was an issue and funding was also piecemeal. We combined a database approach to uncovering the issues with hypotheses on what the potential fixes could be. Our understanding of best practices looks beyond just the technology and led us to understanding and recommending improvement initiatives that address the inconsistency of processes and capabilities, within the organization, and crucially change management. So no new investment was needed in technology. It was just about making more of what the client already had through the targeted set of initiatives. Ultimately, the client was able to demonstrate the continued value of digital tools to boost procurement effectiveness. They refreshed their digitization strategy and sought future funding with much greater confidence, having identified the benefits from it. But Tom, you worked with an organization recently at the other end of that scale, right?

Tom Kellaway:

Yeah, absolutely. Yeah. So, first in a very different industry. So I guess a complex engineering organization – complex products to order. Procurement, as you say, was at the absolute other end of the performance spectrum. So fundamentally, it was very much performing and very much perceived as a purchasing function to be honest. And this was despite the fact that actually, if you could have built a Digital World Class performing function here, the opportunity for that function and for the business, in terms of how important procurement was to that business, would’ve been transformational. A good example, not just in terms of better sourcing decisions, better pricing, but even if you just go back to the basics, obviously they had a complex bid process when customers required a product. A bid process to be able to go through to win that billion pound bid. Now, if procurement had been involved in that bid process, they could have much better informed I guess the price book that the sales teams was doing to be able to build up the quote for the customer.

But because procurement wasn’t involved in that and there was a lack of confidence in procurement’s ability to be able to provide the right insight around product input pricing, meant that you had sales teams who were therefore having to put in too much fact into those bids. And obviously, that’s what that meant was the business was uncompetitive. They were losing bids because they were building too much fact into their pricing because they didn’t have that certainty and assurance that procurement could deliver the right products at the right time at the right price. So lack of high-performing procurement was harming the business even before they then got into actually … when they did win work, then obviously they were running into problems in terms of poor supplier performance that created issues with product quality and that was obviously delaying the delivery of the end product. That obviously invariably came with bad media press – that came with penalties and other damages that they potentially had to pay out.

So if you could get procurement right, the opportunity for this particular client was really powerful. So part of what we were doing – part of the value of building that as-is picture of performance – was two-fold. Firstly, we could start getting consistency across the organization, both in procurement and also outside of procurement, of actually quantifying the impact of an underinvestment in the procurement operating model. So, for the first time, create that transparency on this is the cost of not investing in procurement was really powerful. The other bit that we did was to then do a little bit of education, I guess, around the potential for procurement for that organization because a lot of people didn’t really appreciate what good procurement could bring to that organization. So we could paint that picture around actually if you were a high-performing procurement organization, these are sorts of the benefits you could drive to the business in terms of efficiency, effectiveness and experience, to be able to then coalesce opinion around the criticality of moving from where they were today to where they needed to be in the future.

Having that stake in the ground allowed them to be able to – allowed us to be able to – build the initiatives that they needed to, that we could obviously have that certainty around how long those initiatives were going to take? What the benefits are? How much it was going to cost? How they should phase and prioritize those initiatives? So it allowed them to start shifting from that traditional purchasing organization into a much more strategic business partner to be able to start unlocking both some short-term value, but also build that longer-term capability in the organization – get procurement much more involved – make it a much more embedded part of the commercial value proposition for that organization. And they’re on that journey right now. They continue to work with Hackett through our Advisory Services, where they can continue to tap into Hackett’s expertise as they drive that transformation journey at their own pace. But I think that’s a good example that goes back to what we were reflecting on at the very beginning was that different organizations in different industries, different levels of maturity, but they can still benefit from that as-is and to-be approach to procurement transformation.

Natalie Henfrey:           

Great to hear. So to wrap up, there’s a lots going on that’s driving change in procurement, external shocks and also internal opportunities. The potential for procurement to improve on what we call the three Es, which is effectiveness, efficiency and experience. It’s certainly there. But in order to be able to achieve it, you need to address, not just the immediate challenges – whether that’s keeping the light on trusting, improving practices – but also the underpinnings of the function, as that might be through more mature or even emerging approaches such as AI, which is a topic for another time.

Tom Kellaway:

Just to jump in there. And I think what you just mentioned there is another really good reason why it’s worth taking that really structured, factor-based approach. We’ve heard a lot of noise about AI, but actually rather than necessarily running off and pinning your hopes on it, while that might be part of a digital road map actually, there may be other areas that an organization needs to prioritize or focus on. A good example, getting your data sorted out before you start running off and applying AI, or actually just driving better core automation to be able to free up your resources time, for example. So being very clear about your starting point, using that to be able to set the appropriate vision for the organization – to be able to articulate the end state and understand exactly what those steps are on that journey. How long is it going to take? How much is it going to cost is important. And obviously that’s where you can combine the focus on the service delivery model – the investing in people, process technology – but at the same time building that culture of performance management. That is so important, and so clearly observed when we work with, and we continue to support, Digital World Class performing organizations. So just wanted to add that as well.

Natalie Henfrey:           

So combining fact-based benchmarking expertise with procurement, operating model know-how, and taking independent advice, but what’s right for you is not necessarily what someone who wants to sell you a new tool will do. We hope you found this podcast informative. Thanks for talking with me, Tom. We’ll post the links to the procurement key issues in the show notes.

Announcer:     

Thanks for listening. If you like this episode, please share it. You can find show notes, transcripts and related research at www.thehackettgroup.com/podcast. Subscribe on your favorite listening app so you never miss an episode. We welcome your feedback by rating this or any episode, or send us an email at podcast@thehackettgroup.com. The Hackett Group is a strategic consulting and executive advisory firm. Learn how we can architect your digital transformation journey, including Gen AI, at www.thehackettgroup.com.