CPO Rising: Procurement Performance
In 2019, the tried and true procurement strategies still work. But, fourteen years after the first report in this series was written, the procurement profession needs new, more adaptive strategies and approaches to propel it to the next level of performance. The winners in procurement will be the agile organizations that can leverage their strategic prowess and fluid resources to anticipate and support dynamic business requirements amidst the more rapid changes in industry, supply markets, and customer behaviors. Agility is the characteristic that will help procurement departments advance and thrive in this new age, when innovation continues to expand beyond mere products and services to core business processes and entire business models.
In the context of procurement, agility requires enterprise sourcing and procurement teams to be highly responsive to any changes in stakeholder needs, supplier capabilities, and market conditions. For example, agile sourcing may now also require shorter contracts and thusly, more iterative sourcing. A CPO can develop an agile organization by blending together the collection of key resources, activities, tools, and capabilities to create better coordination and responsiveness. Agility takes training and discipline, especially as procurement executives balance the opportunities at hand with process rigor, investments in technology, and the proper strategic outlooks in a shifting, dynamic market.
Adaptation as Agility’s Precursor
While many procurement leaders will obviously point to the desire for business agility as a starting point for transforming their function, the truth is that adaptation should be the precursor for the agile procurement department. Nearly every business function faces some sort of organizational pressure, whether it is the impact of new and innovative technology, market fluctuations, internal challenges, or major economic events. This necessitates a CPO-led cycle of assessments designed to accelerate the team into an agile business function. The more understanding a procurement team has in its current inner workings from both internal (collaborative) and external (suppliers) sources, the more educated it will be in regard to how it should approach the future. Thus, it is critical that CPOs and their teams consider these potential agility drivers and measure them using these methods and metrics:
- Adaptation to budget dynamics (the ability to do more/better with less).
- Proactive engagement with external stakeholders (i.e. suppliers).
- Responsiveness to disruptive market/regulatory events.
- Adoption/incorporation of supplier innovation.
- Net Promoter scores (NPS) for stakeholders.
- Other types of customer satisfaction surveys.
As discussed, the need to continuously monitor and assess key procurement activities and results is absolutely crucial in adapting to evolving market conditions. In 2019, 48% of all CPOs and procurement teams assess and adjust their strategies regarding team and department management on a quarterly basis; 35% of CPOs do this on a biannual basis, according to new Ardent Partners research. True agility requires continuous monitoring, reassessment, and the adjustment of strategies and approaches.
At the end of the day, there is a delicate balance to the realm of “adaptation:” procurement executives must not only execute continuous assessments of relationships, performance, and other key factors, but must also weave in the power of intelligence to truly understand what the future may hold. Becoming a truly agile procurement function does not just entail the mere measurement of its current and expected performance, but rather true assessments of the relative experiences of its collaborative partners and key stakeholders, as well as how these relationships will impact the future.
The 2019 Procurement Benchmarks
Every year, this report presents the results of hundreds of procurement teams’ performance across several standard performance metrics and key performance indicators (KPIs). These metrics and KPIs help to tell a story about the state of procurement overall, and then enable CPOs and their teams to benchmark their performance against two maturity classes – the Best-in-Class and All Others. One of the goals of this benchmarking is to provide CPOs and procurement teams with insight into where they stand in relation to their peers and how they can improve in the year ahead.
Spend under management refers to the percentage of total enterprise spend (all direct and indirect spend – including capital and services spend) that a procurement organization manages or influences. At 63.2%, Spend under Management for all respondents in 2019 is largely the same as it was in 2018. In fact, between 2012 and 2019, the average spend under management metric has barely moved. Over this same period, fewer CPOs are focused on increasing this percentage despite Ardent Partners’ research that shows this is a valuable pursuit. There are other benefits beyond savings that also result from procurement’s influence, including improved quality and lower risk. More broadly, procurement teams have plateaued in their performance here and other major areas of performance and they must do something to compensate.
Although the average procurement team saved a bit more in 2018 than in 2017, and they have identified slightly more savings in 2019 than in 2018, procurement’s overall savings performance in 2019 reflects a “snapshot” rather than a steady year-over-year trend. Procurement teams sourced more addressable spend in 2019 than in 2018 (51% vs. 46.9%), while they have more enabled suppliers in 2019 than in 2018 (35.6% vs. 32.4%). And, like spend under management, spend and contract compliance rates continue to hover around 65%, suggesting that there might be more than a correlative relationship between the two.
Best-in-Class Procurement Performance
Ardent’s analysis in this report determined Best-in-Class procurement performance by identifying the top 20% of performers in the spend under management metric. As a group, they have placed, on average, 89.1% of spend under the management of the procurement organization, nearly 36% more than their peers. Ardent uses spend under management as a starting point in the development of its Best-in-Class Framework and to drive additional discussion and deeper analysis of strategies, capabilities, and results. Best-in-Class enterprises are known for their top-tier performance across a series of critical procurement, sourcing, compliance, and supply management metrics. Best-in-Class procurement teams are clearly superior to All Other teams in every performance measurement:
- They realized more savings in 2018 and identified more savings opportunities in 2019 than their peers- and they improved upon their own performance from 2018.
- They competitively source more addressable spend and a greater percentage of suppliers that are electronically enabled– compared to their peers in 2019 and to themselves in 2018.
- There is still quite the performance gap between the two maturity classes (89.1% vs. 53.6%). Although the percentage of spend under management in the average organization has plateaued over the past several years, the Best-in-Class rely on this critical benchmark to reinforce its value.
- Although the Best-in-Class tend to save more than others and have more savings targeted, at some level the largest savings opportunities remain with less-mature companies.
Still, Best-in-Class procurement teams are able to outperform their peers due, at least in part, to superior process capabilities and enabling technology solutions. Together, process standardization, linkage, and automation create business conditions that can often result in powerful visibility into many different aspects of a typical business from operational, tactical drivers to strategic big-picture measures, and procurement-centric KPIs and performance metrics.