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Need for Builders in Strategic Sourcing 4 October 2012

The drive for a company to implement a strategic sourcing program often stems from external factors, such as raw material price volatility, the entry of low cost country manufacturers into a market, or lasting changes in demand patterns. These changes affect all companies in a given industry in parallel, and therefore it is not uncommon for entire industries to develop an interest in strategic sourcing at the same time. A reactionary adoption of process change usually implies that time is of the essence. Once the trend begins in an industry, each company is racing the effect of the original external factors as well as the rate at which their competition matures. The sooner a company can establish a strategic sourcing process, build a team, and start realizing the benefits, the better positioned they will be in the market and in the eyes of their shareholders. In order to speed up the process, many companies work with a third party experienced in building sourcing programs from the ground up. These builders understand how important it is to get a program on the right track from the beginning by implementing the right people, processes and technology. Being a builder requires active patience and listening skills, and offers rewards such as objectivity on established processes and the opportunity to start fresh. Builders also have the advantage of having worked at all points in the maturity curve and can transfer their knowledge between industries as it applies. Laying A Foundation for Strategic Sourcing Source One Management Services, LLC, a leading procurement service provider, is a builder, and although new adopter industries do not represent the majority of their clients, Source One actively pursues industries that are discovering the value of strategic sourcing. Since entering the procurement solution space two decades ago, Source One has seen manufacturing, the services industries, and healthcare through the adoption of strategic sourcing. According to their leadership team, the next frontier is higher education. Many institutions of higher education dont yet realize the scope of the opportunity within their purchasing functions, and may be as much as five to ten years behind the corporate world with regard to strategic sourcing. They are not operating on a centralized or shared services model and are heavily reliant on Group Purchasing Organizations (GPOs) to manage their indirect spend. But being an effective builder is not about judging the current state. The key is to learn enough about the industry that common opportunities for improvement come to light and can be prioritized and executed. Joe Payne, Source Ones Vice President of Professional Services, said, I attended NACUBO as a participant because I wanted to understand what was important to institutions from a practitioner standpoint. I was not there to sell our services, but to engage in a dialogue with the financial leaders at various schools. My goal was to learn more about how the downturned economy and limited government funding was affecting institutes of higher education, and what they were doing about it from a cost perspective. Early in the adoption process, a builders attention must be balanced between listening carefully and simply stating the value proposition for a process such as strategic sourcing. In addition to being less familiar with the discipline and benefits of sourcing itself, teams in new adopter industries have also not yet learned to recognize the value of third party assistance. By assessing peoples readiness to accept new ideas, and adjusting their pace and approach accordingly, builders can establish the relationships and trust necessary to address the immediate challenges being faced in the industry. In the case of higher education, the primary driver of change is tuition rates, which have reached a breaking point. The sticker price of studying and living on campus at the average public university rose

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5.4% for in-state students, or about $1,100, to $21,447 this fall, the College Board estimated. []The 1 sticker price of living and studying for a year at a typical private college rose 4.3% to $42,224 this year. In addition, because of changes in student loan legislation, this industry is highly affected by election cycles. State and public schools have to develop a new five-year plan every two years because of political turnover and changes in the funding they receive from state and federal governments. The cost management effort at institutions of higher education is being led in large part by finance, and their emphasis on the numbers has led them to focus on salaries and benefits. Salaries represent approximately 60% of addressable spend, and so the first wave of efficiency is likely to come through implementing shared services models: consolidating roles across departments and physical locations. Most indirect spend is handled by GPOs or is guided by buy local programs, especially in the case of alumni-owned suppliers. Unit price reduction is not yet a primary driver of change. This combination of characteristics is similar to the conditions Source One found in the Healthcare industry four years ago: Organizations in both industries have highly silo-ed decision-making models, with departments like oncology, pediatric medicine, the college of computer science, and the athletics department operating autonomously. The impact of government policy (or the interpretation of that policy) varies between administrations and has a direct impact on purchasing decisions. Individual preference (such as of a doctor or surgical unit, professor or academic department) has to be prioritized, sometimes over cost. GPOs play an important role in indirect cost management as well as spend analysis and intra-industry benchmarking Leaning on the Master Builder As higher educations inbound interest in strategic sourcing grows, the Source One team will start by looking at the spend profile of each organization to prioritize efforts and recommend the optimal use of GPO pricing. Most GPOs are compensated based on the percent of spend managed, so they are not necessarily incented to negotiate the lowest contract pricing, but rather the highest pricing their customers see as better than they could negotiate themselves. As procurement groups evolve from new adopters to mature sourcing organizations, they will find themselves in the position of having managed all of the low-hanging fruit opportunities. As when they were new, these organizations may look to experienced builders to help them keep their momentum going. Whether you are addressing a CEO, CFO, CPO or Director of Strategic Sourcing, you must understand the values of your audience. Negotiating cost reductions is important, but so are maximizing budgets, securing the best payment terms, optimizing specifications, and perfecting contract length. While low hanging fruit typically involves managing easy sourcing projects and process improvements, the higher fruit may require completely different efforts and skill sets. Procurement needs to develop their ability to market their value and capabilities internally as they mature, because the higher fruit is not just more complex sourcing projects but also advanced marketing and communications. The individually controlled spend categories are often extremely challenging to break into, said Bill Dorn, Source Ones Vice President of Operations. The only way procurement will be successful in penetrating these reluctant spend holes is to not only properly develop their skillsets and technologies, but they must also be successful at internal marketing and managing change. The most mature sourcing organizations are better at strategically leveraging the involvement of consultants and other third parties: focusing on getting the message through to their leadership team regardless of who delivers the message. And although using a consultant is fine for major milestones, procurement still has to be able to handle the day-to-day interactions on their own.

Clark, Kim. College Costs Climb, Yet Again. CNN Money: 29 October 2011. http://money.cnn.com/2011/10/26/pf/college/college_tuition_cost/index.htm

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While at first glance, the difference between mature sourcing organizations and new adopter industries seems huge, no effective organization is ever done maturing. The requirements and expectations change, and the metrics and skill sets have to adjust accordingly. At every stage in the lifecycle of a procurement organization, experienced builders will be needed to help develop the vision and lay out the execution framework based on learnings from a variety of industries. About Source One Management Services Source One has been a leading Procurement Service Provider supplementing client resources with cost reduction, strategic sourcing services and spend management solutions since 1992. Source One's clients benefit from over 20 years of market intelligence and strategic sourcing bestpractices. As one of the few consulting firms that solely provide procurement transformation services, they help companies reduce costs, optimize budgets, and increase efficiencies of operations. Source One's experienced professionals work in tandem with internal procurement departments to develop creative sourcing strategies that result in millions of dollars in savings. Their tailored, outside-the-box solutions help to break the mold of inherited purchasing practices and widen the spectrum of qualified suppliers to achieve best-in-class pricing. The Source One process develops a secure and responsive supply base that is capable of providing quality, delivery, costs, technologies, flexibility and services to meet the current and future business needs. More on the web at www.SourceOneInc.com, Toll Free +1 888 399 7687, or email info@sourceoneinc.com. About Buyers Meeting Point Buyers Meeting Point is an online knowledge and professional development resource for procurement and supply management professionals. Our mission is to support overburdened professionals by making information accessible by centralizing access to resources on our site, by digesting content and evaluating sources looking for the highest quality information, and by making sure all our coverage is done clearly and simply with no presupposition of pre-existing knowledge or experience. There is a world of information available to you and our site and resources provide an avenue for you to gain market knowledge and expertise from others and to apply them where appropriate for your business. Watch our news articles and blog postings for information on webinars, solutions, research reports, publications and whitepapers being discussed by your colleagues. Make sure you get a well-rounded perspective on procurement by reading our Flip Side content featuring "The Sales Guy". We are convinced you will find something among our resources to assist you with your current challenges. For more information, please visit www.buyersmeetingpoint.com or email management@buyersmeetingpoint.com Join Us, Learn With Us, Grow With Us Buyers Meeting Point

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