Business Process Outsourcing

Sourcing and Procurements Untapped Potential

Leveraging Category Management to Achieve High Performance

The economic fallout that manifested in 2008 led global business to a dramatic behavioral shift. Every industry felt the impact and has applied lessons from the past to the strategies they are building for the future. To achieve high performance in this new environment, companies will have to address the seemingly constant pressure to reduce costs while keeping their sights set on the long-term vision.

Procurement is frequently at the center of this conversation. Though not always recognized as a difference-maker in the mainstream boardroom, progressive companies understand that to support their goals, procurement must function as a tightlystructured, forward-thinking and knowledgeable operation. That means aggressively managing costs while delivering sustainable value to enable long term growth.

And by applying the principles of category management, procurement can align its activities with overarching business goals and priorities to deliver both near term and long term benefits without disrupting business operations and supplier relationships.

It is category management that allows companies to make the most of their procurement operations. In fact, the Accenture research Outsourcing and Procurement Mastery identifies high performance in category management as one of the key characteristics of procurement masters.1 All companies classified as procurement masters in this study have implemented a centrally guided category management structure across organizational entities. A recent survey2 by the Accenture CPO Circle further validated the emphasis for a more holistic approach to delivering procurement value. While the CPOs acknowledge their performance is currently assessed on savings and budgetary issues, 69 percent of the executives surveyed believe that their success should be based on the total cost of ownership, way ahead of purely price savings at 36 percent.

To drive performance, the procurement executives need advanced category management to elevate relationships and manage their companies entire portfolio, not just individual price cuts. Most category managers cover multiple categories of goods and services, including contract labor, facilities, travel services and information technology. In an outsourcing environment, the category managers concentration on just one or two categories gives them the depth of knowledge necessary to capture a great deal of insight: they are the true experts in the buying trends, vendor portfolio management and pricing and quality standards. Tapping into such valuable expertise and experience not only empowers companies with greater negotiating leverage but also enables better decision making in what to buy, how to buy and from whom to buy. That can open the door to long-term

planning as more beneficial contracts and relationships allow leaders to better align supplier and sourcing opportunities with the needs of the business. And by helping companies manage their spend and supplier portfolio with an integrated approach, category management goes beyond cost savings to further reduce risk, tighten procurement control and add strategic value.

Figure 1. Sourcing and category management is a collaborative process by working with business and function owners to strategically maximize and sustain the delivery of category benefits. Category directors
Category strategies

Client Organization Business and Functions Sourcing

RFx, Auction

Client Organization

Strategic sourcing plan Sourcing projects

Technology enablement

Spend analytics

Category management
Spend analysis Opportunity assessment Supplier performance management Ad hoc projects

Suppliers

Contracts

Contracts

Sourcing support
Auction services Market analysis RFx support

1. As part of this research, Accenture sought to create and quantify a new termprocurement masteryas a way of categorizing the traits exhibited by the roughly 10 percent of companies that consistently outperform their peers or, in other words, that consistently attain the level of high performance. 2. Source: Portrait of a CPO, Accenture, 2009

Understanding the business requirements

The starting point for integrated category management is the understanding of business requirements, including the specific need of the purchase, the enterprisewide impact, and the channels followed to complete the transaction. While on some levels this is recognized as a fundamental building block, this step is often passed over in favor of a transactional mindset instead of a strategic approach. Acquiring materials without a detailed understanding of how purchases are used or needed by the business, however, is a recipe for long term complications and inefficiencies. Clear identification of business needs is the thread that makes high levels of savings possible and opens the door to other contributions, such as better service, access to innovation and improved quality.

In fact, when given proper strategic importance and shared across the procurement function, insights about business needs serve as the connection between procurement and category management processes. If, for example, the business has an immediate and dire need for an upgrade in manufacturing equipment, other imperatives such as cost and supplier location may be de-prioritized for a finite wave of transactions. If this information is not communicated, the consequences could be immediate and significant. Only by understanding what purchase-related demands are business critical requirements, what are nice to have requests and what are essential but not core demands, can organizations apply the most appropriate sourcing strategy. The positive effects of category management also transcend transactional needs by supplying the company with deep knowledge about less tangible business needs.

Delivering optimal benefits from marketing programs, for example, require a collaborative effort from category managers and business stakeholders on multiple levels. Once the business needs are understood and prioritized, they form a thread that runs through all category management and sourcing initiatives, including establishing service or product criteria, short listing and selecting agencies, negotiating payment terms to contract reviews and more. As shown in Figure 2, the procurement of marketing services can often be plotted from high to low in terms of their value (the Y axis, where value is cost of goods and services as well as the strategic value of the contribution) and commoditization (the X axis). Web hosting and print services tend to be low in value and the product is somewhat commoditized. As a result, this type of procurement can be approached with a strategy focused predominantly on total landed cost.

Figure 2. Identifying different approaches to managing marketing services High Media planning Media buying Strategies that: POS Value Print Advertising production BTL creative PR
Reduce waste from poor processes Reduce cost of doing business

Agency creative Strategies that:

Reduce waste from poor processes Drive high performance

Web hosting Low Commodity/ product Emphasis

Service

Compare these to agency creative or media planning, both of which are high-value contributing, customized services that are innately relationship and expertise based, and where the impact on higher spend areas (e.g. advertising production of media buying) is highly significant. Accordingly, a high-performance business will employ one category management approach for procuring web hosting or business cards, and another for securing agency creative and media planning services. Low cost drives the former while collaboration, expertise and partnership define the latter. Its all about informed segmentation of needs and priorities. Another common sticking point for multinational budgets is funding travel services, especially in a volatile economy. Company mandates may call for specific processes to be followed that limit travel significantly, but a high-performance business will consider the numerous subcategories under travel spend such as lodging, transportation, meetings and events. While the strategies for some subcategories may focus on negotiating price (i.e. accommodation cost), others may be more concerned with reducing overall internal demand (i.e. restricted travel). In order to develop a tailored, segmented approach for different categories or subcategories, the category managers have to actively work with both the stakeholders and suppliers. They have to understand and translate the business needs of varied functions to a set selection criteria and facilitate intelligence-based procurement.

By way of example, an established multi-national company with nearly $US 100 million in annual air travel spend employed a multi-pronged policy change to better control expenses. Working with category managers seasoned in the travel arena, the company segmented its business needs and tackled each area in a coordinated plan of attack, addressing: Priority cross-border travel: by raising the acceptable use of premium class of service from six hours to 10 hours of continuous flight time, travelers were disincentivized from taking long trips unless absolutely necessary. The move resulted in $6 million in annual savings. Travel avoidance: encouraging alternative means of communications through web meetings, video conference and other technology-based services, the company stressed avoiding travel when possible and saved an additional $21 million annually. Preferred vendors and cost allowances: working with category management and purchasing, the company increased the percentage of 14 days (or more) advance purchases and drove travelers to more cost friendly vendors, saving another $8.2 million annually through these two efforts.

Optimizing supplier relationships

As with many business elements, category management is at its most successful when it considers the full picture of the business environment externally as well as internally. This speaks to one of the major advantages of outsourcing such functions, as companies can benefit from the vast reservoirs of knowledge collected by category managers that are well-connected into their industry and operating model, but not overly focused on one specific companys needs. Outsourced category managers have immediate insight into challenges that suppliers struggle with and how contracts can be managed to address their needs as well as the needs of purchasers, thereby creating a mutually beneficial foundation for long term relationships. This is most apparent during difficult economic times, and Accentures November 2008 CPO Circle survey3 yielded some interesting insight on the subject. The majority of respondents felt that economic conditions had affected their supplier relationships and that supplier risk had increased. Almost 20 percent of respondents reported that their suppliers had not been able to meet their supplier level or needs. Almost 15 percent of respondents reported that their suppliers have been put out of business or forced to merge with another company. And not surprisingly, 50 percent of respondents reported that their suppliers had increased or attempted to increase their prices due to the strain in the financial market.

When the supply base is under such clear strain, the spotlight falls on category management. One of its most valuable goals is to ensure that business needs are not only laid out at the beginning of a supplier relationship, but are continuously refreshed in the context of global markets and evolving industry conditions. Accentures procurement research also indicated that there is a tangible ROI for supplier relationship management leaderscompanies that have a formal program for managing their supply base and seeking genuine win-win opportunities. The report revealed that procurement masters achieve 5 percent savings from both sourcing and post-contract activities against total procurement operating spend, compared to 3 percent savings by survey respondents who have not achieved master status. Masters also realize a threefold increase in benefits. This kind of impact was enjoyed by a leading retailer whose construction costs were climbing due to its use of numerous small vendors to meet short-term changes in retail store development. The company faced three central challenges: too many purchasing requests, too many vendors, and too much paperwork to facilitate the transactions in a timely manner. These issues caused significant bottlenecks at a critical time, but internal processes were so entrenched that the management team was unable to see the best solution.

By outsourcing the procurement function, the company had enlisted a partner that would help them respond to the imperative need for new processes as they battled uncertain market conditions. Through the outsourced solution, the retailer adopted an electronic tendering process that enabled it to reduce administrative costs by up to 35 percent among a core group of key vendors. The category expertise from the outsourcing environment enabled the company to build solid relationships with these strategic vendors and successfully embed new savings in subsequent store development tenders.

3. Source: Understanding the effects on procurement in a volatile market, Accenture, 2008

Leveraging industry expertise

Most leaders will agree that even while cost management remains one of the top business priorities, simply slashing costs or prices with suppliers will not produce long-term success stories. Understanding the business requirement and having a holistic approach to managing the procurement portfolio will allow the companies to focus on critical growth strategies and investment, and at the same time cultivating sustainable relationships with vendors. In the Accenture research Outsourcing and Procurement Mastery, a strong link is established between outsourcing and procurement mastery both of which contribute to this goal. Among the 600 procurement executives surveyed, the procurement masters have the tendency to outsource and utilize third party expertise more than the others.

And they achieve 39 percent higher savings than low performances despite running their procurement organizations that cost half as much to operate. Procurement masters recognize that these savings and efficiencies do not materialize without a smooth and fully formed category management function. This function is a key component to achieving high performance, supported by the required industry expertise, vendor relationships and economies of scale for purchasing power. From an outsourcing perspective, category management therefore serves as a pivotal solution for an organization to gain the full benefits of outsourcing procurement: optimal speed and efficacy, access to technology and infrastructure, short-term cost savings, and long-term strategic direction.

Figure 3. Driving sustainable value through an integrated source-to-pay approach Transformational source-to-pay approach
25 precent - 50 precent more savings to the bottom line than stragetic sourcing alone

Ongoing category management

Benefit

Typical current state

Required future state

Traditional strategic sourcing

Savings will erode without an integrated procurement strategy, stakeholder management and control and compliance.

Time

Reference 1. High Performance through Procurement: Accenture research and insights into procurement performance mastery, 2008 2. CPO Circle is an Accenture sponsored peer-to-peer community that brings together senior executives responsible for sourcing and procurement strategy and execution 3. The survey findings are based on input from members of Accenture CPO Circle. The results provide directional information on the views of procurement executives. 4. The Accenture research initiative included survey results from more than 600 procurement executives from Europe, Asia and North America, as well as detailed analysis of more than 200 of those responses.

Copyright 2009 Accenture 2011 All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture.

About Accenture Procurement BPO Services A leader in procurement BPO services, Accenture helps clients across a wide range of industries on their journey to high performance in procurement. By supplementing their procurement capabilities with our full suite of source-to-pay BPO servicessupported by leading practices, innovative tools and our Global Delivery Network organizations can increase their control, generate savings, lower risk and improve their speed to value.

About Accenture About Accenture Accenture is a global management consulting, technology services and outsourcing company. with company, Combining 215,000 people serving more than unparalleled experience, comprehensive capabilities across all clients in more than 120 countries. industries and business functions, Combining unparalleled experience, and extensive research on the worlds comprehensive capabilities across all most successful companies, Accenture industries and business functions, collaborates with clients to help them and extensive research on the worlds become high-performance businesses most successful companies, Accenture and governments. clientsmore than collaborates with With to help 181,000 people serving clients in over them become high-performance 120 countries, the company generated businesses and governments. The net revenues of US$23.39 billion for company generated net revenues theUS$21.6 billion forAug. fiscal of fiscal year ended the 31, 2008. Its home page is 31, 2010. Its home year ended Aug. www.accenture.com. page is www.accenture.com.

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