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Procurement:

The Last Best Place for


Results Improvement
ROSMA answers the procurement performance
challenge

Procurement: The Last Best Place for Results Improvement

More than 130 years ago, in 1881, Joseph Wharton gave an endowment to the University of
Pennsylvania to establish the School of Finance and Economy. His gift sparked management
science as we know it today and brought a steady stream of thought leaders with innovative
concepts, tools, and methods to improve business performance. Icons in the field, including
Towne, Davenport, Gantt, Ford, Sloan, Drucker, Deming, Taguchi, and Ohno, created gamechanging approaches such as JIT, Six Sigma, BPR, Lean, EVA, Balanced Scorecard, and
Competing on Analytics. And advancements in management science have accelerated with
the increasing waves of disruptive technologiesmore, faster, cheaper computational power
that have fundamentally changed how we monitor, operate, and drive our businesses.
Thanks to these innovations and innovators, executives today can quickly evaluate business
health and performance as never before. Quarterly analyst calls feed the Street with sound
bites about plant utilization, recurring revenues, client contract renewals, fill rates, economic
value added (EVA) targets, and business and geographic unit specific cash-flow estimates.
Yet when its time for the voice over on procurement performance on the analyst calls, there
is a hushed moment of silence. For, when asked about procurement performance, most CFOs
go on and on about keeping even with or ahead of inflationsaying little about gaining ground
through procurement efforts. In fact, research shows that in their public remarks, CFOs discuss
safety, sales force, and manufacturing performance roughly 400, 360, and 100 times, respectively, and far more frequently than procurement performance.1
There are exceptions to every rule, of course, as illustrated in the sidebar, A Few Executives
Voices Heard on page 2.
Despite significant improvements in procurement, overall progress has been intermittent.
Perhaps the most striking characteristic of the past few decades has been the increasingly
visible stratification between procurement leaders and the lumbering pack.
Any reader, student, or advocate of the Purchasing Chessboard knows that strategic supply
management is a complex multidisciplinary team sport.2 The variables and complexities of
everything from market dynamics to specification requirements make procurement performance management and accountability a challenge. Far different from many other discrete
operations, procurement processes have governance inter-dependencies at every step across
the source-to-pay continuum. No wonder measuring procurement performance has been
overlooked. Until now, it has simply been too painful and complex.
We see procurement as the last best place to gain professional stature, increase management
visibility, and improve bottom line resultsa place where companies can make an immediate
impact on results and create a long-lasting competitive advantage. With purchased goods and
services comprising the lions share of the value chain across most industries, why isnt procurement laying the groundwork for supply management optimization and driving enterprise
economic performance? How do we replace those awkward moments of silence on analyst calls
with discussions of how procurement is a critical indicator of corporate performance? How do
we build a performance-driven procurement organization?
The answers, in part, lie with a new framework called the Return on Supply Management Assets
or ROSMA, which provides procurement professionals with the ability to finallyand fullytap
into opportunities that have largely been hidden.
A.T. Kearney analysis of Google search results for North America analyst calls for 12 months ending 13 March 2011.

A.T. Kearneys Purchasing Chessboard is a framework that provides best practice sourcing techniques by addressing 64 unique
supplier versus buyer power situations. For more information, go to http://www.middle-east.atkearney.com/procurement/
the-purchasing-chessboard.

Procurement: The Last Best Place for Results Improvement

A Few Executives Voices Heard


In a review of thousands of
analyst calls from publicly
available transcripts on the
Seeking Alpha website, we found
29 companies with executives
(CEOs, COOs and CFOs)
speaking out about the realized
or anticipated results from their
procurement efforts. These
executives did not shy away from
the procurement performance
question. In fact, they trumpeted
the results. Among their more
notable comments:
Weve now pushed about
55 percent of our addressable spend through
e-sourcing CEO
Through more global
procurement, SKU, and spec
rationalization we expect to
claw back about two points of
this market inflation CFO

on a positive side we see


further benefits through our
well established strategic
sourcing processes CFO

procurement efforts directly


created savings in excess of
20 percent from existing
market prices CFO

get the procurement and


logistics savings we realized
$185 million plus and there is
another $60 million to $80
million coming CEO

No doubt, other analyst call


transcripts will affirm similar
successes through procurement
and, going forward, there will be
more questions asked and more
successes shared.

In procurement, we pursued
over 150 strategic sourcing
programs to identify best cost
suppliers and lower total cost
of ownership CEO
we currently expect $75
million in [savings benefits]
from procurement related to
sourcing changes for core
materials CFO
We will see baseline cost
improvements due to our
procurement initiatives
in a very short time these

The 29 companies represented


on the analyst calls: Adidas,
Alcoa, Anheuser-Busch InBev,
Avon, Bristol-Myers Squibb,
Danaher, Dean Foods, Family
Dollar Stores, GlaxoSmithKline,
H.J. Heinz, Hershey, Hospira, ING
Group, Ingersoll-Rand, KimberlyClark, Kraft, MeadWestvaco,
Nestl, Novartis, Office Depot,
PepsiCo, Revlon, Roche Holdings,
Sara Lee, Staples, Starbucks,
UAL, Verizon, and W.W. Grainger.

Somethings Brewing
In 2010, we had the opportunity to work with Tony Milikin, CPO of AB InBev. ABI is renowned for
its commitment to reaching stretch targets and the aggressive use of strategic sourcing to
achieve its financial goals. Bringing procurement performance improvement innovation to ABI
was a challenge that required breakthrough ideas. In working with Tony and ABI, we developed
the supply management productivity index, which sparked a healthy debate among a tough
audience of very successful and experienced ABI procurement leaders. Soon after, Tony shared
our framework with a few other CPOs and the feedback was encouraging. The discussions
helped us realize that we were really on to something (see sidebar: Seeking Alpha and
Expanding Your Moat on page 5).
We then sought input from a broader group of clients, most of whom were CPOs from organizations that use advanced performance management models, such as EVA incentive systems, or
CFO scorecards. Many of the CPOs also had strong financial backgrounds, with some having
also served as CFOs. They were extremely enthusiastic and provided invaluable feedback,
which led to numerous iterations and several proof-of-concept pilots.
The end result is ROSMA, which we believe is not only a catalyst for optimal procurement
performance but also an approach that will bring clarity to the procurement performance
management challenge. ROSMA offers:
A framework to help CFOs understand and articulate value from procurement
Procurement: The Last Best Place for Results Improvement

Broad support from the CFO and executive team to help CPOs deliver game changing results
Insights into the drivers of supply management value, enabling CPOs to set their agendas and
optimize performance
Performance benchmarking on a peer-to-peer basis or among industries

How ROSMA Works


At the highest level, ROSMA measures the economic performance of the procurement resources
applied; specifically, the hard financial results delivered from the activities and investments in
the organizations procurement team (see figure 1). From our growing benchmark database, we
have found that the ROSMA performance range for the middle 80 percent of companies is
between 0.7 and 11.7, but there remain many outliers that deliver weaker results and some that
are indeed value rock stars that have posted single-year scores approaching 20.

Figure 1
Return on Supply Management Assets

ROSMA

Financial
results delivered

Primary
drivers

Spend
coverage

Velocity

Category
yields

Compliance

Additional
benefits

Invested supply
management assets

Period
costs

Structural
investment

Secondary
drivers

Source: A.T. Kearney analysis

Although the aggregate score is helpful, and in time will become one of the metrics the Wall
Street analysts routinely ask about, the distinguishing factor about ROSMA is the value derived
from understanding ones performance against the underlying drivers (spend coverage, velocity,
and category yields, for example). It provides immediate insight into what, where, and how to
improve and optimize procurement performance and to quantify the value of the enhancements.
Procurement: The Last Best Place for Results Improvement

Seeking Alpha and Expanding Your Moat*


Its not that chief financial officers
prefer uncomfortable silence on
analyst calls. Many of our CFO
friends say they would happily
give a plug to procurement
performance, and do so at length,
if only they had a genuine framework to justify the numbers.
ROSMA, we patiently explain,
not only provides the numbers
but also the framework.
To illustrate what extraordinary
improvements in value really look
like, lets explore two scenarios.
We call the first one doing better.
Organization A has typical
quartile-three driver perfomance
(slightly below average) as its
status quo, and wants its to be
performance potential at midpoint quartile-two performance
levels across all of the drivers, or
just above average. The exciting
insight here is that, while doing
better is not an extraordinary
goal, such modest levels of
improvement can generate
substantial financial gains in
performance. We took a sample
of publicly traded companies
(total spend $5 billion, the

approximate size used in this


scenario) and applied the
improvement in financial results
to organization As 2010 results;
the doing better potential
outcome would have increased
its average EBIT by 8 percent.
The second scenario, the
procurement journey, is more
aggressive but not an outlier.
Organization B has typical
quartile-three driver performances as its status quo but
instead of aspiring to simply
doing better, this organization
has elected to become a procurement leader by achieving
threshold-driver performance
of the 2011 AEP leaders, and
capturing additional benefits
from advanced sourcing
practices that we find among
leaders. Unlike the doing better
scenario, which can be achieved
relatively fast, achieving sustained leadership performance
may take three to five years, but
the outcome is game changing.
Applying the same interpretative
framework and improvement
results to the same sample of

publicly traded companies, the


potential outcome for the procurement journey would have
increased average 2010 EBIT by
30 percent. The figure below
illustrates the scenario.
From these readily achievable
scenarios, where is the alpha and
gains in competitive advantage
that can expand the size of your
moat? Delivering excess riskadjusted returns is terrific but
temporary because once you
demonstrate sustained procurement performance, thus
increasing your earnings, the
market will bid up your share
price, thereby increasing the risk
and eliminating the alpha value.
However, the pursuit of alpha
although difficult to sustainis
obviously good and we frequently
see clients that surprised the
market with outsized benefits
from procurement that buoyed
their valuations; occasionally
these have been shared publicly.
Expanding your moat can be
aided by a sustained commitment
to the pursuit of performancedriven procurement.

Figure
Scenario I doing better and Scenario II procurement journey

Total spend
($5 billion)

Structural
investment
(US$ M)

Invested
supply
management
assets
(US$ M)
ROSMA

$27.3

$6.8

$34.1

$21.4

$20.6

$42.0

3.3

23%

201%

$6.8

$34.1

1.1

$22.8

$38.0

11.1

11%

909%

Compliance

Additional
benefits
(US$ M)

Financial
results
delivered
(US$ M)

Period
costs
(US$ M)

3%

60%

$3.4

$37.4

6%

75%

$6.5

$138.8

15%

100%

25%

$3100

61%

3%

60%

$3.4

$37.4

$27.3

$4750

75%

10%

88%

$106.9

$420.4

$15.2

53%

23%

233%

47%

Spend
coverage
(US$ M)

Velocity

Category
yields

Status quo

$3100

61%

Potential

$4200

70%

35%

Status quo
Potential
%

Scenario I

271%

1.1

Scenario II

Scenario I
FRD** change: $101.36 million

1024%

Scenario II
FRD change: $382.99 million

*Alpha is a measure of performance on a risk-adjusted basis; it is the return after compensating for the risk borne.
** FRD is financial results delivered.
Source: A.T. Kearney analysis

Procurement: The Last Best Place for Results Improvement

In short, the breakthrough is an analytical framework with EVA constructs and standardized
definitions to drive leadership performance.
A.T. Kearney has been helping companies explore value from improved procurement practices
for almost 30 years. While weve pretty much seen it all, ROSMA is unlike anything in the market.
The following outlines the primary drivers that form the ROSMA framework. There are also more
than 30 secondary drivers.

Driver 1: Spend Coverage


One of the most common impediments to strong performance is procurements limited access
to spend or spend coverage. Our Assessment of Excellence in Procurement (AEP) research,
which has been conducted routinely since 1992, finds that leading procurement organizations
have up to 67 percent more reach and influence over their organizations spend than average
performers.3 For example, in 2008, followers typically only managed 42 percent of their
organizations external spend, while leaders managed more than 70 percent.

We believe procurement is the last


best place to gain professional stature,
increase management visibility, and
improve bottom line results.
Put simply, if you cant find or influence your spend, then there is no hope of affecting the
value, quality, or outcome of your spending. And if procurement isnt involved, then is there
a clear commitment to applying best practices? Who is accountable for that out-of-scope
spend? Managers must know the total outside spend on purchased goods and services and
have visibility at the sourceable category level, by location and by vendor, including current
specifications and requirements. And all of this must be easily refreshable and accurate. Truth
be told, accurate and timely visibility is poor for most companies, but advances in technology
and a greater appreciation for the value of the information have been enabling improvements
in this area for the past decadeand certainly more will come. But even if you have superb
visibility, we find that lack of governance over and across spend management processes is
ultimately a major block to effective coverage by procurement.
The issue is not whether the procurement team is accountable for a given spend category,
but to ensure that those who are accountable have a clear understanding of best procurement
practices, including how due process is applied and measured. As noted in our most recent AEP
study, best-practice companies have excellent visibility and their procurement organizations
have clearly defined roles and mandates to influence more than 90 percent of their organizations spend. Imagine the analysts discussion with a consumer products company when they
want to explore what your procurement strategy is for media, transportation, or packaging.
If answered honestly, many would have to reply: outsourced, too complicated to source, and
we have to ask our suppliers for our specifications.
A.T. Kearneys latest Assessment of Excellence in Procurement study is available at www.atkearney.com.

Procurement: The Last Best Place for Results Improvement

Driver 2: Velocity
Deming introduced the value and criticality of cycle time in the 1980s as it pertained to innovation, physical supply chain performance, and time-to-market. Sourcing velocity is akin to
cycle time and equally critical for procurement performance on many levels (such as frequency,
volume, and team productivity). Procurement leaders demonstrated spectacular results in 2009
with a full court press, sourcing unprecedented portions of their spend to take advantage of
market conditions and to help their organizations close financial performance gaps during the
downturn.
Although most organizations turned up their sourcing velocity in 2009 and 2010 over previous
years, the gap between leaders and the pack was still substantial. Our last two AEP studies
(2008 and 2011) reveal that leaders manage or have active coverage of nearly 50 percent more
of their spend and source roughly 33 percent more of their covered spend annually than
followers. So, the results are compelling, indicating that in terms of hard savings annually,
leaders deliver just under two times that of the average follower, even if the yield percentages
from sourcing are identical. With a yield percentage difference between leaders and followers,
the savings difference would be even greater.
This is not to say that maximizing velocity is the optimal strategy; it is not. Every category will
have its own natural productive sourcing frequency. For example, some of our clients auction
every commercial print job and even individual limo rides to the airport, which is essentially
a 100 percent velocity outcome for those categories. Transportation, however, may be best
sourced using advanced practices such as collaborative optimization (CO) every 24 to 36
months.4 Still, a structural gap of about 20 percent between leaders and followers against a
larger proportion of spend is unacceptable in terms of lost or deferred savings and sourcing
team productivity. Active sourcing resource planning and pipeline management are required
for leadership performance.

Drivers 3 and 4: Category Yields and Additional Benefits


The ROSMA model has two drivers related to benefits derived from sourcing program outcomes
category yields and additional benefits. Although many different techniques can be applied to
an array of unique supply market situations and can provide value beyond unit price reduction,
virtually all supplier negotiations derive some portion of their value from pricing outcomes. We
believe actively tracking, benchmarking, and mapping yields (that is, what technique was used
by whom on which category when?) gained from price reductions is so important that we
elected to isolate this value element in the category yield driver. All other sources of hard value
gained through sourcing initiatives are captured in additional benefits.
Yields are important and we have found consistently over the past 25 years that performance in
achieving them varies widely across companies, even on common categories, industries, time
periods, and in similar geographies. Our large-scale survey research consistently reveals that
the spread in category yields due to pricing benefits between leaders and followers is about
2 percent across the total spend sourced in any given year (8 percent versus 6 percent in 2010,
for example). Although 2 percent is seemingly a small spread, it implies that the leaders deliver
Collaborative optimization is a sourcing process in which suppliers expressively bid or signal their capabilities, offering preferences and
associated economics, thus expanding the known base of commercial options. Improvement (or optimization) techniques secure
best-fit award options, typically resulting in larger yields and more satisfied suppliers.

Procurement: The Last Best Place for Results Improvement

33 percent to 50 percent higher yields; when projected against the larger spend managed and
the higher sourcing velocity noted earlier it more than doubles the absolute cost savings of
leaders versus followers.
To sustain the advantage, leaders actively track events and negotiations to catalog the techniques applied, results achieved, and to maintain a living playbook of their best practice
events and negotiation strategies. This enables them to benchmark, drive higher yields, shorten
sourcing cycle times, and identify their sourcing masters and the skill development needs
within their teams.
Other performance differentiators, classified as additional benefits, typically accrue from
advanced sourcing strategies. These include strategies that improve working capital, encourage
supplier innovation, and deliver total-cost-of-ownership gains, including improving processes,
simplifying requirements, and reducing warranty costs.

Although most organizations turned up


their sourcing velocity in 2009 and 2010
over previous years, the gap between
leaders and the pack was still substantial.
The Purchasing Chessboard highlights techniques for unleashing additional beneficial value
opportunities and our experience shows that a handful of strategic spend projects (large complex
spend) typically provide outsized gains. Unfortunately, most organizations are too understaffed
or underskilled to support the more complex sourcing opportunities to deliver these additional
benefits on a meaningful scale. Our most recent AEP research queried hundreds of clients
about their usage of all of the chessboard techniques and found that leaders are applying 68
percent more of the nearly 50 advanced techniques that yield additional benefits versus the
typical procurement organization.
Many procurement leaders use advanced techniques and capabilities to pursue additional benefits. Three stand out: access innovation advantage from suppliers (such as cycle time, exclusivity,
or duration); complexity reduction or specifications management; and joint process improvements. For example, the largest automotive maintenance services retailer in North America was
able to secure 24 months of exclusive access to market-breaking battery technology from a major
Tier One automotive parts OEM for its branded line of batteries; the OEM delayed marketing the
technology under its own label in exchange for securing both position and volume with the retailer.
In another example, by using expressive bidding, Big Packaged Goods Company (BPG) was able
to concurrently reengineer flexible packaging specifications and re-source the consolidated
volume requirements to deliver more than 40 percent in savings on a high nine-figure spend
category. There are many examples of buyers and sellers with strategic relationships applying
lean principles to simplify their order and inventory management interfaces, where both parties
have reduced working capital requirements and improved operating flows.
Over the past 18 months, procurement innovators have teamed with Pollenware to auction
accelerated payment timing and other accounts payable obligations to suppliers. The vendors
Procurement: The Last Best Place for Results Improvement

benefit from faster payments and the clients gain superior returns on their capital, compared to
the bank rates on cash managed by their treasury departments.
Untold billions have been spent on technology deployment for improved requisition-to-pay and
spend visibility solutions over the past 15 years. And, no doubt, these investments have improved
the ability to understand spending behaviors and policy enforcements, and dramatically reduced
the operational procurement head count required to support buy-side transactions. But the
improvements were hard fought and often frustrating and, in some cases, the return on investment (ROI) is still unclear.
No one platform is best for all spend categories and with the growing success of categoryspecific solutions, there will certainly be another wave of technology investments to further
enhance our ability to monitor, guide, and report our spend behaviors. These waves of improvements have enhanced our potential to achieve much higher compliance, enabling organizations to actually realize more of the value gained from sourcing activities.

Driver 5: Compliance
Systems alone do not ensure compliance. We have found that value leakage (shortfalls from
the achievable savings secured and contracted in the sourcing process) varies widely even
among those with robust technology platforms. The compliance driver, of course, benefits
from improved spend visibility due to technology enablement but that alone is not sufficient.
Leadership compliance levels are achieved when procurement practices policies broadly
and buying compliance policies in particularare institutionally sacrosanct, and the
enforcement of compliance and procurement policies is rigorous and visible. We have seen
F100 organizations with lagging technology investments achieve world-class compliance
outcomes on huge fragmented spend. Every organization has its cultural appetite for administrative procedures and degrees of intervention and enforcement practices, but lets explore
two extremes.
The first example is one of the most successful business stories of the past 20 years, concerning a firm we refer to as the Ruthless Gladiator Company or RGC. RGC is led by an experienced
team of investment banking and private equity executives who have emerged as the leaders
in their industry through ruthless cost cutting, rigorous financial planning and controls, and
aggressive performance management incentive systems. Procurement has been an integral
element of their success and the CPO sits at the leadership table. Zero-based budgeting is a
way of life and year-on-year improvements are expected, typically delivered and rewarded at
virtually all management levels in the organization. Category-specific wave plans are scheduled,
targets are set and incorporated into budgets in advance, and when individual sourcing
programs are completed all of the associated budgets are recast to the lower of the original
budget or the newly achieved sourcing resultthus there is constant pressure to meet or
exceed their financial goals.
Enforcement is clear at RGC. All cost variances are explored, expense reports are not honored
above strict policy limits, and employees at any level that affect a variance or are off policy are
identified for career-defining moments. RGC materially lags against leading-edge technology
deployment and relies on armies of Excel wizards woven together in its financial controlling
processes. Bottom line: RGC is likely the world standard at compliance attainment, with essentially no value leakage allowed and no flight long enough to justify business class.
Procurement: The Last Best Place for Results Improvement

By contrast, Comfy Pharma Company or CPC is a widely recognized early procurement


technology adopter and process innovator. CPC consistently improves its procurement
practices and is a benchmark leader in most areas. The firm has been a go-to source of talent
for other companies looking for skills and leadership. CPCs challenge has typically not been
delivery of procurement value but rather weak corporate commitment to seizing benefits in
some areas and lack of clarity on spend governance in others. But CPC has world-class visibility,
some terrific category-specific solutions, and consistently high yields on the categories where
governance is less challenged.
Until recently, there was barely any management interest in stepping up corporate policies,
much less follow-through with RGC-like prowess on enforcement of spend in touchy areas
such as travel, marketing, or legal services. For example, the procurement team could deliver
great travel deals, enable them on the market-leading desktop booking software, and monitor
buying behavior and compliance down to carrier, lane, class, booking time window, and even
auction the limo to the airport. But there was no support to align the travel policy to commonly
applied industry standards and virtually no adverse feedback for being non-compliant to the
standards they did have. (Buying a coach ticket in advance is great, but business class and a
room at the Four Seasons hotel is even better!) As a result, CPC was allowing more than $50
million of value per year from travel alone to bleed away, despite having world-class tools and
procurement talent.
Although RGC and CPC are two extreme examplestechnology laggards with extreme compliance rigor versus technology-enabled leaders with lagging executive disciplinebut both have
great procurement people delivering great value. And yet both end up with varied outcomes on
compliance. Compliance is not procurements job alone. At best, procurement can suggest
policy, provide visibility to spending behavior, and report on the benefit stream realized versus
the benefit stream potential that could be gained from its sourcing programs. In the end, only
through executive support, leadership, and setting cultural expectations will the value potential
earned through sourcing programs be fully realized through world-class compliance. The compliance gap just in using preferred supplier contracts between leaders and followers can be
12 percent or more. If it were easy to assess compliance down to contract-specific terms and
conditions (advance purchase opportunities, volume tier incentives, and payment terms, for
example) we would find an even larger compliance gap between leaders and followers.

Financial Results Delivered


Rolling up the drivers thus far (spend coverage, velocity, category yields, additional benefits,
and compliance) is what defines and drives the financial results delivered through procurement
activities. We have highlighted the wide performance variances observed on each of the drivers
across hundreds of organizations. Yet, even with this insight, its no wonder that procurement
was left behind and remains in catch-up mode. The leadership and management challenges to
create awareness, get support, and galvanize all the necessary stakeholders required to shape
a winning team for this multidisciplined sport of procurement are daunting. But the aggregate
value potential is worthy of the effort.
When senior executives understand this aggregate value, they often make first-rate procurement performance a strategic priority. But too often, when confronted with a stream of
singlesone-off controversial category turf battles or fears of disrupting supplier relationshipsleaders elect to postpone the needed transformation rather than embrace it. And the
Procurement: The Last Best Place for Results Improvement 10

gap between those that invested in the procurement transformation journey and those that
postponed it is not only evident in the performance-revealing drivers reviewed thus far but also
in the profile of their investments in supply management assets, which is the denominator in the
ROSMA metric.
We recently had the opportunity to help a company in the commodity processing sector. This
organization, which we will call the Federalist Silo Company or FSC, has survived nearly 100
years and with the current run up in commodities has been able to show strong results along
with the rest of the industry. FSC has been very competitive on commodity buying and
managing it regionally with great aplomb. Enter a new senior executive with a great deal of
strategic sourcing experience. He suggested that there could be $75 million to $100 million of
performance improvement from strategic sourcing. But the other FSC executives considered
this preposterous and delayed its pursuit.

Procurement transformation is not about


getting to the lowest cost of procurement;
it is about delivering attractive levels of
ROSMA and maximizing financial results.
After some prodding, we were given a chance to prove procurement could deliver additional
value. As part of our diagnostic assessment, we found an organization that had no center-led
or supported procurement organization, billions of dollars in spend unaddressed by sourcing
activities, and no material investment in modern procurement tools, talent, or processes. Yet HR
records identified more than 200 employees who held procurement-related jobs (other than
agricultural commodity buying roles) across their network of plants. In this example, we found
high procurement period costs and virtually no structural investment assets in procurement.
Needless to say, the other underlying drivers were disappointing (low or no coverage, velocity =
zero, yields as prescribed by incumbent vendors, compliance to the past, and no effort toward
additional benefits) and their ROSMA if not near zero, was potentially negative. After delivering
half the expected total benefits on just 23 percent of the unaddressed spend, the transformation
accelerated and now is in full swing. New tools, talent, training, and a global center-led organization are taking shape. Why the detour to the FSC story? Although its an extreme example, the
end game outcome contrasted to the starting point situation is very telling.

Period Costs and Structural Investment


Period costs reflect the people costs and mix (head count by roles and rates) as well as other
direct costs of procurement activities. Continuing with the FSC example, they had more than
200 tactical buyers and transaction support staff but almost no one who was capable of driving
strategic sourcing programs or providing category management direction. Benchmarks suggest
that FSC should only have 75 to 80 full-time employees, and the mix and roles should be totally
different from their baseline. To make the end game possible, FSC is actively addressing its
structural investment needs of procurementrecruiting, training, establishment of core
processes, knowledge management and technology. But given this pristine greenfield situation,
Procurement: The Last Best Place for Results Improvement 11

it was easy to document the ROI or ROSMA improvement on this transformation and obtain
management support. When the back of the envelope NPV is easily $500 million and the time
to benefit is within a year, investment decisions are easy.
Although the FSC example is an extreme one, our ROSMA research and database reveal significant variances across companies regarding their investment in supply management assets. We
find many well recognized organizations have invested heavily in technology and have substantially reduced their operational procurement head count. In 2008, the cost of the procurement
function averaged about 1.7 percent of spend for the roughly 500 organizations that participated
in our AEP research. By 2010, because of the downturn, that has dropped substantially to about
1.1 percent. And procurement leaders improved further with 0.8 percent.
However, procurement transformation is not about getting to the lowest cost of procurement;
it is about delivering attractive levels of ROSMA and maximizing financial results. To optimize
procurement one must ensure that the hygiene elements (requisition-to-pay or buying processes,
contracting and other transactional activities, for example) meet service and quality levels at
the lowest possible cost. At the same time, it must get the strategic procurement capabilities
positioned (roles, mix, and skills) to deliver high impact results at an acceptable and sustainable
level of cost. Most organizations have made major structural investments in procurement and
have raised their game on strategic activities, but our research shows that collectively the larger
business community is far from establishing performance-driven procurement practices in their
organizations.
For the vast majority of organizations in our surveys to date, the variation across every ROSMA
driver is notable and the existence of strong, consistent performance across most or all drivers
is almost nowhere to be found. The potential to drive process improvements (TQM and lean
principles) across procurement, both to affect threshold performance on hygiene activities and
deliver large-scale value from strategic activities, is nothing less than extraordinary.

Do You Speak PDP?


Now that we have a clarifying value framework for procurement in ROSMA, we should apply
process improvements and lean principles to optimize and stabilize consistent performance.
Performance-driven procurement (PDP) is the next frontier, albeit an old concept being applied
once again. The concept is simple, the benefits huge, and the challenge great. But the procurement journey to sustaining PDP performance will create competitive advantage.
At least three dimensions of competitive advantage accrue to those that can achieve and
sustain an enterprise commitment to performance-driven procurement:
1. Few have shown an ability to achieve and sustain current leadership procurement practices
and PDP is a level beyond, so early achievers will gain significant advantages for some time.
2. PDP organizations deliver substantial gains, and additional benefits from advanced practices
in supplier innovation, reduced complexity, and enhanced balance sheets.
3. A strong procurement organization, one that supports successful M&A and PDP, will reap
additional advantages by achieving faster scale and value.
Every organization has a unique situation from which it begins its journey to become a PDP
organization. While not an exhaustive list, the following offers a few suggestions to help with the
first steps.
Procurement: The Last Best Place for Results Improvement 12

Secure executive awareness, alignment, and support. It took the better part of 20 years for
most organizations to understand, embrace, and embed EVA or similar value-oriented management systems. ROSMA is just the supply side bookend to these value management models
applied to procurement. Enroll the CFO and then work together to bring the executive team and
business unit leaders aboard. Apply the framework operationally during business unit performance reviews, budgeting, and planning processes.
Assess your position, define your goals and milestones, and publish your CPO Agenda.
Establish your baseline at the detail driver level and assess the current processes and practices
that affect the drivers. With this rich baseline, you will be able to design a procurement journey
that focuses on the immediate high-impact opportunities while building the foundation for
optimizing your organization to sustain PDP in the longer term. Making the agenda transparent
to peers and staff will elicit their support and improve accountability.

We are on the cusp of another profound


change in business strategy, as management science is applied to procurement.
Change your teams game. Embed PDP principles and the ROSMA framework into your performance management practices. Redefine your procurement leadership team operating model
through conversations, measurements, meeting agendas, and reporting practices to reflect the
language and intent of a PDP organization. Adopt tools that can enable and support day-to-day
driver performance, accountability, and activity reporting. We developed a toolkit with our pilot
clients designed for low-cost and broad-based deployment. It is not easy to fundamentally change
your engagement model and embed this disciplined approach, but it does drive performance.
Become PDP conversant. The procurement leadership team must be evangelists for
performance-driven procurementable to engage, confront, and enroll stakeholders across
the organization. Rather than backing down or deferring
a sourcing opportunity, raise the conversation to the management table. Use the ROSMA
framework as a discussion guide to debate the governance, RASIC, sourcing or Chessboard
strategy, timing, velocity, and compliance issues at the executive level.
Rebalance your talent and infrastructure model for success. Your baseline assessment and
CPO agenda should highlight some needs to rebalance head count, adopt more (or new)
technology, and fulfill other requirements. Changing the game will bring a new level of transparency to your teams performance and highlight opportunities and deficiencies. With executive
support for PDP and broad understanding of the value proposition of procurement, planning
and managing resources and investments will be easier.
Build influence to drive additional benefits. The prerequisite for PDP is optimizing for coverage,
velocity, category yields, and compliance. It is paramount to close the gap and take the lead on
conventional sourcing and procurement practices. But major gains and long-term value will be
derived from applying advanced techniques to strategic categoriesand that requires building
credibility, talent, and influence across key stakeholders. Accessing executive support can jump
start this process and transfer skills.

Procurement: The Last Best Place for Results Improvement 13

Just Ahead: Management Science Applied to


Procurement
No doubt the aspiration of PDP and the ideas unleashed from the ROSMA framework will spark
debate and raise many questions. That, alone, is a success. It is time for procurement to move
ahead and no longer be left behind. And it wont be long before Wall Street analysts do in fact
query our executives about procurement and perhaps key ROSMA drivers.
It may very well have been 130 years in the making, but we are on the cusp of another profound
change in business strategy, as management science is applied to procurement. The potential
benefits, if long overdue, are nonetheless extraordinaryand waiting for those willing to begin
the journey.

Authors
Joseph Raudabaugh, partner, Chicago
joseph.raudabaugh@atkearney.com

Christian Schuh, partner, Vienna


christian.schuh@atkearney.com

John Blascovich, partner, New York


john.blascovich@atkearney.com

Enrico Rizzon, partner, Melbourne


enrico.rizzon@atkearney.com

Stephen Easton, partner, London


stephen.easton@atkearney.com

Rosanna Yang, director, Chicago


rosanna.yang@atkearney.com

We wish to thank the more than 80 senior executives who joined in discussions, provided insights, and helped
us test our hypotheses over the past 18 months. We especially appreciate those in our ROSMA study group who
were generous with their time and resources, and the hundreds of AEP 2011 survey participants who helped us
build the ROSMA benchmarks that so clearly validated the opportunity for PDP. Also, we thank the many members
of our CPO Executive Roundtable who reviewed the paper and offered their insights and encouragement. Lastly,
we welcome the participation of procurement professionalscommitted to the advancement of the profession
in growing the ROSMA database.
Please contact us for more information about how to use our online survey and reporting tool to obtain an
assessment benchmark.

Procurement: The Last Best Place for Results Improvement 14

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