The Role of Technology

High Performance Through Procurement:

Consulting Technology Outsourcing

Kevin Potts, Emptoris, and Rob Woodstock, Accenture

Procurement mastery”—significantly outpacing competitors in areas such as sourcing, category management and supplier relationship management—can be immensely profitable. A recent Accenture study1 makes this clear: “Procurement masters achieve 30 percent higher savings than companies with lesser capabilities. Yet masters’ procurement organizations cost about half as much to run.”

With such stellar potential, it’s surprising how many companies never move ahead with a major procurement-optimization effort. To some extent, their reticence indicates old school thinking: “Procurement is basically a clerical function—a cost center. As long as we’re reasonably efficient, there’s more benefit in devoting our strategic energies to other things. Right?”

Procurement Insights, Research and Rewards............................................. 3

Four Technology Keys to Procurement Mastery.......................................... 5

1. How Technology Improves Spend Management................................... 6

2. How Technology Improves Supplier Performance Management...........................................................................10

3. How Technology Improves Sourcing.........................................................13

4. How Technology Improves Contract Management..............................17

High Performance and Procurement Technology........................................19

Not, at all. Like supply chain management in general, procurement’s potential to foster growth and reduce costs is significantly greater than most companies imagine. The mission of this Point of View—a collaboration between Accenture and Emptoris—is to help readers understand the nature of procurement mastery (how we define it), the rewards of procurement mastery (why the investment and effort are worth it) and, most germane to this paper, the tools and technologies that connect procurement mastery with high performance.

1High performance through procurement: Accenture research and insights into procurement performance mastery.

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Contents

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In late 2006, Accenture solicited procurement-related input from executives at leading companies across North America and Europe. Information from 225 respondents was ultimately gathered. Eighty two percent of that group are chief procurement officers or directors of procurement.

Via the survey and follow-on interviews, Accenture’s goal was to establish clear, measurable distinctions among procurement “masters,” “midrange performers” and “laggards.” Using these metrics-based distinctions, we would then be able to determine the relative level of benefit (particularly cost savings) achieved at each level. Details on this categorization process—how procurement masters were defined and how their success was measured—is detailed in “About the Study”.

About the StudyTo understand the nature and rewards of procurement mastery, the study first sought to develop criteria for defining procurement masters, midrange performers and low performers. Our research team asked 225 executives 25 questions for each of six core components of procurement: strategy; sourcing and category management; requisition to pay; supplier relationship

management; workforce/organization; and technology. For example, in sourcing and category management, we asked respondents about formal supplier collaboration processes (1 = minimal, 5 = extensive). For requisition to pay, we asked about the use of common requisition portals (1 = none, 5 = fully standardized). In this way, Accenture was able to create basic distinctions between low performers (17 percent of the survey population), midrange performers (67 percent) and procurement masters (16 percent).

To understand the relative rewards attained by each performer category, Accenture then tracked low performers, midrange performers and masters to the documented benefits attained by the respondents’ procurement organizations:

Total cost of ownership savings y(compared to “controlled, normalized spend”)

Total cost of ownership savings yas a percentage of procurement operating costs

Percentage of spend controlled by ythe procurement organization

Percentage of new product designs/ yintroductions in which procurement has a material role

Share of suppliers managed through ya formal process

For a company with US$1 billion in controlled spend, a procurement master would incur costs of US$8 million and savings of US$82 million, while a procurement low performer would incur costs of US$16 million and savings of only US$63 million."

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MidrangePerformer

Low Performer(17%)

(67%)

-1 +1

(16%)Master

Procurement Insights, Research and Rewards

Survey results confirm that procurement masters achieve significantly greater financial benefits than the balance of the survey population. The right side of Figure 1 shows that survey respondents qualifying as masters achieve savings equal to 10 times the cost of running their organizations, based on controlled normalized spend from one year to the next. By contrast, the savings achieved by procurement low performers are only four times their costs (left side of Figure 1). In effect, masters spend half as much as low performers, yet they save 30 percent more. For a company with US$1 billion in controlled spend, this means a procurement master would incur costs of US$8 million and savings of US$82 million, while a procurement low performer would incur costs of US$16 million and savings of only US$63 million.

Figure 1. Comparing cost savings. On US$1 billion of controlled, normalized spend, procurement masters save 10 times as much as it costs them to operate their procurement organizations.

Figure 2. The six procurement characteristics assessed for Accenture's High performance through Procurement research.

Accenture also observed that procurement masters enjoy a significant edge in every one of the six procurement specialty areas that were used to segment respondents (Figure 2). For example,

1. Procurement Strategy: Masters are five times more likely than low performers to use a balanced scorecard approach and almost 20 times more likely to benchmark procurement performance against competitors. Masters also were found to be almost four times more likely than low performers to outsource one or several procurement functions.

2. Sourcing and Category Management: Procurement masters are 16 times more likely than low performers to have a dedicated sourcing analyst pool that provides support during the sourcing and category-management process. And procurement management is centrally led at 100 percent of masters’ organizations, compared to only 26 percent of low performers’ organizations.

3. Requisition to Pay: Seventy nine percent of masters have successfully implemented a common and automated requisition-to-pay platform, compared to just 3 percent of low performers.

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4. Supplier Relationship Management: Eighty four percent of masters use a supply-base segmentation strategy that aligns approaches and types of relationships with specific supply markets and supplier characteristics. Almost no low-performing organization operates similarly.

5. Workforce and Organization: Procurement masters face fewer organizational challenges. And the challenges they do confront are generally less constrictive or severe than those faced by procurement organizations of lesser stature. This implies that a more effective operation structure encourages pursuit of greater savings and increased effectiveness.

6. Technology: The use of technology to support sourcing programs is 10 times more prevalent among masters than low performers. Plus, 87 percent of masters report that they harmonize master data and use common technologies to support their requisition to pay processes. Less than 5 percent of low performers do either.

Cost to procure Savings delivered

Low Performer Master

$16

$634x

10x

$8

$82

1. Procurement Strategy

2. Sourcing and Category Mgmt.

6. Technology

3. Requisition to Pay (R2P)

4. Supplier Relationship Mgmt.

5. Workforce & Organization

Vision, mission, core valuesOperating model

Performance management Category strategic planning

Strategic sourcingCategory policy setting

Category mgmt. frameworkCompliance monitoring

Transaction processingAssisted buying

Master data managementFulfillment

Supplier performance mgmt .Contract management

Supplier development andintegration

Having the right network of competent people

Organization that facilitatesworking together

Technology that deliversright information

Systems cover all functions: strategy to operations

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The Accenture survey makes it abundantly clear that procurement performance pays—that companies willing to invest in better processes and technologies are amply rewarded. Better processes are difficult to achieve but somewhat self-explanatory. They are: collaborative, information-driven strategy setting; exceptional supplier relationship management; holistic procure-to-pay cycles, and so forth. But what about procurement technology? We know that procurement masters make better decisions because of technology and that they are more likely to leverage cutting-edge tools to make a financial and competitive difference. But what are the specific challenges that procurement technology can help companies surmount? What do those technologies look like? And how can companies quantify their value? The

remainder of this report looks at some of the key challenges faced by procurement organizations and the technology innovations available to surmount those barriers.

Four Technology Keys to Procurement Mastery

From a technology perspective, exceptional spend analysis is synonymous with two interconnected capabilities: maximizing organization-wide visibility and (then) tracking, monitoring and enforcing spend activity. At most companies, spend visibility is limited to “spend by vendor” and “spend category.” This is a complex problem that has only gotten more difficult as companies’ spend becomes more global. Nowadays, for example:

Spend data is generally dispersed yacross myriad internal data sources. The ability to draw and consolidate information from multiple locations in an efficient, repeatable manner is rare.

To maximize procurement efficiency, ycompanies need highly accurate and granular classifications of spend data. However, the information available to them is frequently “dirty” or incomplete.

The most significant shortcomings yare often outside the company. Vendors systems may be just as (or even more)

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limited than those of their customers. Classification and naming schemes may also be different.

Visibility problems undermine companies’ ability to produce actionable business insights. Instead—without clean, consistent information on stock keeping units (SKUs), prices, stakeholder preferences and supplier performance—they develop ad-hoc (workaround) processes to manage sourcing events. These companies are similarly ill positioned to quantify savings opportunities to C-level executives, and thus to secure approval for budget increases or improvement initiatives.

Not surprisingly, visibility problems sabotage companies’ ability to track and monitor spend activities and thus attain high levels of compliance. This is actually the heart of the spend-management challenge: Businesses must be able to identify opportunities and track savings. Have we chosen the most-fruitful spend-reduction initiatives? Did the program which

procurement leaders recently lobbied for actually produce the 23 percent savings they predicted? How much has “rogue spending” dropped as a result? What is the exact level (and impact) of ”leakage” and what can we do about it? Most companies lack the data-gathering and measurement abilities to answer such questions with certainty.

1. How Technology Improves Spend Analysis

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Leading-edge procurement technology is geared to maximizing visibility—using “spend analysis” to acquire, update, consolidate and share information in ways that encourage and support the identification of savings opportunities.

Best-in-class spend-analysis technology combines three key capabilities: a deep knowledge base, automation and content. The knowledge base provides extensive vendor and item information: millions of vendor names, item descriptions and associated information. Automation (for example, machine-learning algorithms incorporated in trainable auto classifiers) helps to rapidly and accurately relate spend data to a commodity structure. Content (aka, a library of information) contains data on spend transactions, ”parent-child” commodity structures, etc., and thus provides maximum visibility into companies’ spend initiatives.

These applications extract transaction data from multiple systems and databases, and then represent (normalize) the data in a single format. Best-in-class applications go beyond providing basic spend visibility by zooming into real opportunities and tracking the results of savings initiatives for those opportunities. Users can make better decisions about what they are buying and what those items actually cost. They also can begin quantifying spend for specific commodities or categories, eliminating spend duplication across multiple suppliers, and doing a better job of leveraging discounts and early payment options (some suppliers offer discounts of up to 2 percent for payments made within 10 days). Simply put, spend analysis helps companies make better procurement decisions and build a stronger case for continuous improvement.

Complementing these extraction and normalization capabilities are data-enrichment functions: intelligent

databases that consolidate transactions (for example, across “parent-child” organizations), cluster them (for example, across similar suppliers) and map them to various commodities, contracts and other sources of data. Armed with this capability, companies can discover when multiple business units are sourcing from the same supplier but possibly working with different price and payment terms (this scenario is common in companies that have grown through mergers or acquisitions). Together, extraction, normalization and data-enrichment capabilities help companies attain a single-lowest price for each supplier, along with new opportunities to capture volume discounts.

Technology Solutions for Spend Analysis

Best-in-class applications go beyond providing basic spend visibility by zooming into real opportunities and tracking the results of savings initiatives for those opportunities. Users can make better decisions about what they are buying and what those items actually cost."

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Quite often data warehouses are considered to be able to provide the same results as spend analysis. This is not true. Data warehouses do aggregate information, but it usually is too broadly based—too likely to be “all things to all people.” Data warehouses’ approach to spend analysis is to roll up information and then analyze the data offline, without making changes to the data in real time. Because the user is working with summary data, this approach limits the ability to slice and dice in a way that is specific to the user’s needs. To drill down and do further analysis, a user must leverage specialized spend-analysis technology.

With spend analysis, data is held in memory, which allows a user to drill down into the spend data (physical transactions, not just roll-up summaries) in real time. Spend analysis attacks one problem—managing spend—in a focused manner that targets procurement decision

makers’ needs with aggregated, normalized and enriched data. Users can parse data in myriad ways to gain greater spend visibility and tap the improvement opportunities that greater visibility provides.

Key metrics such as lowest potential cost, percentage of spend under management and suppliers’ commitments to their contractual obligations shift regularly. That’s why spend analysis also provides frequent (monthly or even weekly) data refreshes that help companies acquire, consolidate and present the latest spend, sourcing and contract information. Procurement organizations that rely solely on traditional data warehousing fall short in this area as well. Most data warehouse reports are insufficiently granular and wait times for the information are often lengthy. Delays also ensue when a different view is requested. Spend analysis avoids this problem by putting the reporting process in the hands of the

procurement organization instead of IT. Reports can be examined collectively rather than sequentially, thus making the company more responsive to market dynamics. Bottom line? Spend analysis provides data enrichment, consolidation, speed, accuracy, granularity and sophisticated, proactive reporting.

A related spend-tracking/monitoring issue is contract compliance—understanding the extent to which contractual obligations are being followed. Most companies have not implemented a contract management (CM) solution. But those that have—and integrated the solution with accounts payable information—enjoy particularly detailed data that are tightly associated with terms and conditions and service-level agreements.

Spend Analysis and Data Warehouses

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Beyond the benefits they currently enjoy, spend analysis users are better positioned to leverage capabilities whose unveiling is just around the corner. A good example is benchmarking and best practices. Today’s tech-savvy company knows what it is paying and is confident that its costs are low and that its suppliers are in compliance. But no commodity manager really knows what (or how well) the company’s competitors are doing. In the near future, spend analysis technology will incorporate data on what the market is doing with respect to direct and indirect (MRO) spend.

Another looming innovation is the ability to more-rapidly refresh the spend dataset. Companies that use spend analysis to track savings and compliance generally need weekly (rather than monthly) visibility into new data. They may also want their commodity managers to make changes to commodity structures or to improve data accuracy by reclassifying transactions that weren’t appropriately categorized the first time around. Changes such as these need to be controlled with appropriate authorizations, approvals and rules and applied to the dataset in real- or near-real time. Conflicting rules must be arbitrated. Virtually none of these capabilities are present in current data-warehouse-type solutions, which rely on rigid schemas without means to submit corrections and changes.

A third pending advance is the ability to forecast spend for several upcoming years based on historical information. Traditionally, planning and forecasting functions have interacted with Operations and Sales organizations, but not with procurement. Tomorrow’s spend analysis technology will examine historical and predicted usage and connect forecasting/planning, operations, sales and marketing departments with procurement.

Syngenta is among the world’s top agribusinesses, with revenue exceeding US$9 billion and more than 21,000 employees in 90 countries. The company is also a leader in crop protection and is fully committed to sustainable agriculture through innovative research and technology. Syngenta was formed nearly eight years ago—a spin-off of Novartis’ and AstraZeneca’s agribusinesses. Innovative approaches to procurement and procurement technology have played a big role Syngenta’s meteoric rise.

Early on, Syngenta senior executives insisted that the company’s newly formed procurement group develop best-in-class sourcing principles supported by best-in-class technologies. Sourcing and spend analysis were deemed particularly critical.

Sourcing y . The Syngenta procurement team launched a highly successful low-cost-country sourcing program for chemical intermediates and active ingredients. E-sourcing became the focal point on the technology side. Syngenta now uses “e-RFX” across all categories of direct and indirect spend.

Spend Analysis. y As the sourcing function evolved, the procurement team recognized the need for highly accurate and consistent data with which to inform the company’s sourcing priorities and decisions. It first tried using a global data warehouse supported by a business intelligence tool. This proved ineffective. Its next recourse—an advanced spend-analysis solution—is now being used by more than 180 trained users across purchasing, finance and at the cost center level. According to Dr. Hans Elmsheuser, Syngenta’s head of global purchasing, “The solution allows us to analyze spend on up to 30 different dimensions or axes, including category, cost center, GL account, geography, time, payment terms, UNSPSC code and supplier diversity status. It also helps us aggregate data from more than 45 countries retrieved from more

The Next Big Thing(s) in Spend Analysis Technology

Recipe for Growth

than 15 different types of systems, including every major Enterprise Resource Planning (ERP) platform.”

Low-cost-country sourcing, e-sourcing and spend analysis have contributed significantly to the company’s attainment of all its merger-related sourcing goals. For example, the team used to only have visibility dating back a year or more. But it now knows exactly what the company is spending at any given time—past or present—and with what suppliers (Syngenta works with 45,000 suppliers on six continents). Looking more broadly, the company now is able to:

Take a global, holistic view of spend. y

Rapidly transform raw data into yactionable information.

Make that information “rich” and yeasy to find.

Readily understand the supply ymarkets and cost drivers within each category of spend.

Upcoming procurement projects for Syngenta will focus on enhancing supplier relationship management capabilities, contract management and supplier negotiation. The company thus will be embracing and engraining new tools and processes across the organization, segmenting and categorizing suppliers based on multiple attributes that define relationships, and ensuring proactive, best-in-class management of contractual relationships throughout their life cycle.

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Accenture’s research on procurement mastery reveals that significant rewards accrue to supplier-management leaders. Specifically, masters achieve 5 percent savings from both sourcing and post-contract activities against total procurement operating spend, versus 3 percent savings for the remaining survey respondents.

As noted earlier, masters achieve much of their edge by using supply-base segmentation strategies that align approaches and types of relationships with specific supply markets and supplier characteristics—including relevant strengths and weaknesses, product complexities and geographies. It is this proficiency that abets other capabilities, such as forging deeper relationships with key suppliers, establishing long-term

partnering agreements, and even developing joint operations based on knowledge sharing, seamless processes and mutually beneficial product improvements. Perhaps most revealing, Accenture research shows that procurement masters are three times more likely than low performers to have a formal program for managing their supply base. Figure 3 depicts other supplier-management advantages enjoyed by procurement masters.

Despite the advantages, few companies actually use specific supplier performance management technology. Some have patched together Excel-based systems to track performance but find this approach onerous. Others have invested in armies of assessors who systematically log the performance of key suppliers. However,

this approach is neither scalable nor cost efficient. Even at the master level, most supplier management programs are managed manually. Such programs also are likely to be reactive, with companies constantly putting out fires that result from undermanaged supplier performance.

Figure 3: Percentage of survey respondents (masters versus low performers) that engage in, or perform, specific supplier relationship management activities.

Segmenting the supply base

Partnering with key suppliers on arisk-reward sharing basic

Central logging and proactivelymanaging contracts

Automatically tracking/reportingsupplier performance

Master Low Performer

84%

1%

3%

46%

80%

8%

83%

1%

2. How Technology Improves Supplier Performance Management

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“Opportunity identification” is the most important contribution that advanced procurement technology brings to supplier performance management (SPM). Basically, technology automates the collection, analysis and dissemination of supplier performance metrics. Using a standardized approach to measuring supplier performance, it links the setting of metrics at the start of the supplier relationship with processes for monitoring and communicating actual supplier performance. Supplier scorecards also become part of the equation—ensuring that buyers can factor quantifiable supplier-performance levels into their purchase decisions (figure 4).

Leveraging SPM technology, supplier performance credentials (qualitative and quantitative) are consolidated in a supplier performance repository that is tightly integrated with spend analysis, sourcing and contract management processes. This makes it possible to determine on an ongoing basis the total cost of doing business with a supplier and to track more of the supply base without incurring additional overhead. Companies also can minimize leakage and discover hidden costs by determining which suppliers are not performing and, more importantly, why they are not performing. It thus becomes possible to work proactively with suppliers to develop fixes, curtail purchases from underperformers, develop new suppliers and/or ratchet up business with other (nonsuspect) vendors. Consider an organization with a total cost of ownership (TCO)-based SPM system. When a supplier delivers a part, a first inspection is performed. If the part is rejected, extra costs are automatically assigned to the relationship, not just the part. Costs are similarly associated with every aspect of the procurement process. In effect, SPM technology helps companies develop a holistic view of the hard and soft costs of doing business with suppliers, and

Figure 4: Supplier scorecards also become part of the equation—ensuring that buyers can factor quantifiable supplier-performance levels into their purchase decisions.

Technology Solutions for Supplier Performance Management

to make the right moves in response to the supplier information they’ve acquired. SPM technologies also are key to the successful application of best practices and improvement methodologies, such as Lean Enterprise and Six Sigma.

SupplierAssessment

SupplierQualifications

Supplier PerformanceMonitoring

On-goingcertificationsRoot cause analysisContinuousImprovement

Who?

Timeliness?Quality?Service?

Meet standards?

Risks?

On-

goin

g Before

During

Consider an organization with a total cost of ownership (TCO)-based SPM system. When a supplier delivers a part, a first inspection is performed. If the part is rejected, extra costs are automatically assigned to the relationship, not just the part."

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Tools for supplier performance management will soon become more valuable because they will “embrace diversity.” With additional weighting and analysis capabilities, technology enhancements will help companies incorporate regulations for working with small, minority-owned or female-run businesses into their supplier-management and supplier-assessment operations.

Those same capabilities will make it easier and more economical to meet government- or self-imposed standards for green operations and sustainability. “Green rules” embedded in technology streamline the quantification and comparison of a product or component’s lifetime environmental impact. It thus becomes simpler to identify and winnow out sourcing partners that sell environmentally unsound items or engage in antigreen

The Next Big Thing(s) in Supplier Performance Management Technology

practices. Green supplier management capabilities could even spearhead new component- and material-standardization programs that extend the life of various products, while making them more scalable, reusable or recyclable.

In a larger sense, you could say that increased compliance and (consequently) lower risk are the hallmarks of tomorrow’s supplier-management technology. Economically speaking, supplier relationships that seamlessly conform to internally and externally mandated rules and key performance indicators (KPIs) will provide a clear competitive edge. Monitoring and pursuing formal certification programs (for example, Lean Enterprise, Six Sigma, Supply Chain Operations Reference) become more automatic, which increases the value and decreases the cost of those programs.

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Among the more than 25 metrics that Accenture used to identify leading practices in sourcing and category management, the five described in Figure 5 are particularly noteworthy. For example, all companies classified as procurement masters have implemented a centrally guided category- management structure that cuts across organizational entities. And almost 90 percent of masters have a “leading practice” strategic sourcing process and structure in place—one that emphasizes:

Common processes across the ycompany.

Widespread use of cross-functional ysourcing teams for coordinating projects, formulating strategies, managing supplier selection and implementing contracts.

Activities that are formally tracked. y

A tight focus on total cost of yownership.

An end-to-end, supply chain- ywide orientation, with top-down administration from a procurement or category board. These boards typically include senior people from different technical and user departments, as well as the procurement organization and project leaders.

Figure 5: Percentage of survey respondents (masters versus low performers) that engage in, or perform, specific sourcing and category management capabilities.

Master Low performer

Centrally led categorymanagement structure

Leading practice strategicsourcing process & structure

Focused sourcing analyst pool

Maximum leverage of global sourcing

Value tracking & budget integration with full controlover non-compliance

100%

89%

80%

81%

76%

5%

5%

5%

5%

26%

3. How Technology Improves Sourcing

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Technology Solutions for Sourcing

But what about technology? What exactly is sourcing technology and what does it seek to accomplish? How much further could it take companies along the road to high performance? To answer these questions, consider four of the most prevalent/pressing problems encountered by many companies’ sourcing organizations.

Low levels of credibility and recognition. Sourcing and procurement organizations often find it difficult to quantify the value they bring to the company’s bottom line. As a result, recognition from the executive ranks is hard to secure—as is approval for improvement initiatives or new technology implementations. This is one reason why reporting capabilities are so important. Executive summary reports developed by leading-edge sourcing solutions provide both program and project-level metrics (for example, number of programs run, number of events run, total and per-item spend, total and per-item savings). These solutions can also help identify contents of the sourcing pipeline, document-sourcing opportunities on an annual or quarterly basis, and track savings by providing projected, forecasted and actual spend figures based on the events already run. In net, the impact and value of the sourcing organization become more quantifiable.

Loss of knowledge due to talent turnover. When sourcing professionals leave the organization, processes and category expertise often go with them. New and remaining employees are consequently left with more responsibility but fewer sourcing insights. They may have no choice but to spend less time on each category and thus are more apt to pursue/renew contracts at noncompetitive prices or to engage less-qualified suppliers.

Sourcing and category management technology addresses this problem because it is built around a central repository of best practices. Information is stable, cumulative and

constantly refined. It remains intact regardless of turnover and can be shared across the enterprise. An audit trail of what has and hasn’t worked is also kept. The net effect is that, as buyers shift from one category to another or new buyers join the organization, they can contribute immediately and meaningfully by leveraging embedded best practices. Even relative novices can quickly grasp a category’s sourcing dynamics—for example, relevant suppliers and corresponding KPI scores, cost components/attributes and attachments.

Inability to see beyond cost. Manual (spreadsheet) systems, and even some of the more-advanced solutions, don’t provide the deep analytical information that sourcing professionals really need. As a result, item cost continues to be the sole basis upon which too many of their sourcing decisions are made. It’s not unusual, for example, for a supplier’s quoted unit price to be prohibitively high due to difficulties procuring a particular raw material. However, that same supplier might be extremely effective at processing the raw material. For this reason, it could be considered a worthy supply candidate if the buyer can purchase the raw material elsewhere and then leverage that supplier’s production efficiency and lower manufacturing cost. Of course, without advanced sourcing analyses, none of this will happen. Unable to quantify non-direct costs and requirements, our hypothetical buyer will have little choice but to pay less (in the short term) but get substantially less in the long term.

Sourcing it is not just about finding the best price. It is about finding the optimal mix of suppliers to meet all of the buyers needs based on price, performance, purchasing policies and supplier relationships, all in a highly dynamic environment (figure 6). Sourcing technology makes it possible to run hundreds of “best-fit” scenarios—objective pictures with far more detail than just acquisition

Summary reports developed by leading-edge sourcing solutions provide both program and project-level metrics (e.g., number of programs run; number of events run; total and per-item spend; total and per-item savings)."

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cost. Basically, buyers define their specifications, business needs and preferred options. Suppliers respond with their unique advantages, competencies, prices and even alternative approaches (for example, “bundle bidding”). New acquisition avenues open up for the buyer, who is also capturing more information in the process. Leveraging the technology, he or she scrutinizes hundreds of complex “what-if” analyses in a matter of minutes and consequently makes far more holistic buying decisions. Longer term, the buyer has identified a sourcing allocation plan that balances price components with qualitative factors (for example, supplier scores by KPI) or location-specific constraints (for example, 35 percent domestic content for an international plant). In addition, suppliers appreciate the collaborative process and are more inclined to work with the buyer’s firm in the future.

Lack of key performance indicators. Advanced analyses are essential. Without them, buyers have little choice but to overemphasize basic acquisition costs. However, advanced sourcing tools actually do more than gather and track purchase considerations. They also help buyers aggregate, organize and prioritize those considerations. Basically, key performance indicators (KPIs) are developed. Buyers use these KPIs to assess and quantify the relative value of hard and soft costs, such as:

Expedite fees resulting from a ysupplier’s inability to deliver in a timely manner.

Risk to reputation resulting from a ysupplier’s poor product quality and the impact on finished product.

Poor procurement decisions resulting yfrom a dearth of buyers available to scrutinize and make purchases.

Consider the many actions involved in analyzing supplier responses to requests for information (RFIs). Armed with the ability to capture and weigh quantitative and qualitative (business constraint and supplier performance)

data, buyers can easily create category-specific sourcing models that are as simple or as detailed as necessary. For example, a particular category model might show 20 pieces of item information and 10 elements of total-cost-of ownership information for a particular strategic category. However, it might capture only one data-point (most likely, price) for an indirect category.

Unlimited numbers of unique, template-driven category structures can then be stored in a “smart data library.” This makes it possible for companies to make more and better decisions about a wider range of contracts and purchases. They’re also better equipped to take a more commodity-driven approach to procurement in general, and to slice and dice data as needed to make better risk assessments, develop “what-if” scenarios and negotiate more effectively.

Figure 6: Sourcing it is not just about finding the best price. It is about finding the optimal mix of suppliers to meet all of the buyers needs based on price, performance, purchasing policies and supplier relationships, all in a highly dynamic environment.

Lowest TotalCost of

Ownership

BundlingMultiple Price BreaksRebatesSubstitutionsQuality and Quantity Ranges

Flexible Supplier Bidding

Scenario Modeling

Budget LimitsAward SplitsSwitching CostsContractual ObligationPreferred Suppliers

Supplier PerformanceRating

Supplier category and item levelQualificationQualityOn-time deliveryItem attributes (i.e. tolerance)

Flexible Total CostModeling

ItemSpecQuantityDue DateProprietary Attributes

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The Next Big Thing(s) in Sourcing Technology

Green is red hot. Customers and consumers support it. Governments and regulatory bodies increasingly insist upon it. And, by identifying, logging, assessing and comparing suppliers, sourcing technologies can help companies cash in on it. It won’t be long, in fact, before green is an entrenched part of how procurement organizations do business—a basic criterion for evaluating suppliers, products and business processes. As that happens, systems that can fully quantify green tradeoffs—for example, justifying the plant-wide replacement of incandescent bulbs with (initially higher cost) compact fluorescents light (CFL) bulbs to reduce energy consumption (including cooling costs associated with bulb-generated heat)—will be essential. It’s a largely new aspect of cost/benefit analysis that will inevitably apply to scores of categories, including transportation services, office equipment, business materials and utilities. Imagine, for example, if large retailers were forced to contribute to the “green costs” of stocking bottled water. Even ignoring the fact that a lot of bottled water is from public water sources (i.e., tap water) yet costs about 100 times as much, there are still extensive environmental penalties, particularly 1) pollution caused by trucks shipping thousands of tons of product each year, 2) huge amounts of plastic waste and 3) increased crude oil requirements resulting from production of plastic bottles.

Another up-and-coming practice is tighter control of prices and pricing opportunities during the sourcing and supplier-negotiation processes. Consider that most allocation decisions are made shortly after the conclusion of a sourcing event. But because price is executed at purchase time, a buyer’s actual cost may change due to fluctuations in commodity prices. In fact, the actual allocation often changes as market factor values change. Sourcing professionals soon will be able to use technology to specify a range for a particular market value, thereby obtaining allocations that align closely with best price. For example, as resin prices rise or fall, the best allocations across suppliers (Supplier A: 60 percent; Supplier B: 40 percent) should also change. New sourcing algorithms will make this possible, along with the ability to identify which factors/items/suppliers most dramatically affect allocations and costs.

Superior SourcingWolters Kluwer, a leading provider of business-information services, grew rapidly in the 1990s through several acquisitions. It subsequently moved from a holding company model to a multidivision company, with divisions acting autonomously. This change prompted a need for more formal, company-wide procurement processes that could scale with the business and reduce the cost of Wolters Kluwer’s US$1billion annual spend.

Toward these ends, Wolters Kluwer created a shared-services strategic sourcing department and acquired additional technology capabilities in sourcing and contract management. The company also expanded its technology scope with advanced supplier-selection capabilities.

These innovations made it possible for the company to develop more standardized, collaboration-intensive sourcing processes and templates, while reducing the effort needed to draft, review, approve and file contracts. The result is continuous improvements across the contract management and sourcing spectrum:

A more efficient contract- ymanagement process.

Fewer inadvertent contract lapses or yautomatic renewals.

Improved contract compliance. yFaster, more precise spend baselining y

and supplier consolidation.Improved control of the contracting y

process.More thorough contract reviews, y

resulting in more favorable terms and less risk.

Reduced administrative overhead. yNew opportunities to leverage best y

practice templates.Better visibility into events in y

progress.Collaboration in parallel, rather than y

in serial.

4. How Technology Improves Contract Management

17

approach: the contract is literally placed in a file cabinet, along with any amendments, and forgotten about until a problem arises. Inefficiency reigns.

It also is common for companies’ contract-documentation mechanisms to not connect with their Enterprise Resource Planning (ERP) systems. As a result, business entities are unable to track all contract terms and conditions (pricing, service level agreements, performance and delivery guidelines) or to monitor compliance with internal and external (regulatory) mandates. This is crucial step—making sure that final purchases are compliant with prices and terms negotiated in the contract. Failure to do so makes it doubly hard to enforce compliance to contract terms.

Sourcing skills, experience and leading practices make procurement opportunities clear. But contract management makes those opportunities real. And leading-edge technology is key to effective (cost-efficient, accurate, timely, insightful) contract management.

Sourcing bids are not legally binding without a contract in place. However, roughly 80 percent of companies still depend on a manual contract management process, which nearly always results in contract delays. Collaboration across departments (for example, procurement, purchasing, legal, IT) also is compromised. And compared to procurement masters (who nearly always log and manage contracts centrally), manual users lack visibility into, control over and compliance with the sourcing awards. They simply have less understanding (and thus less control over) contract terms and conditions, service level agreements and amendments. Most simply follow a file-and-forget

18

Technology Solutions for Contract ManagementComing to the rescue, procurement technology is all (and always) about visibility. With an automated enterprise contract management (ECM) system, companies have a single, easily searchable repository for all contracts. That repository is end-to-end and cradle-to-grave—a living, accessible home for contract-related information. ERP systems are not the place to keep this information. Nor are file servers or document management systems. Only ECMs are designed to accept contract data; manage contract workflows (contract creation, approval, review, negotiation); compare products and performance to compliance-related conditions; and track, monitor and enforce legally binding terms and conditions.

The Next Big Thing(s) in Contract Management TechnologyContract management will become increasingly central to the sourcing process. More contract negotiations will happen in parallel with sourcing events. Exceptional visibility into a supplier’s (and their own) performance against contract will move users of advanced contract management technology ahead of the competition. For them, contract management will be the basis of compliance.

Contract management and supplier governance systems also will mature to include contract rating and scoring models. Buyers and legal departments thus will be able to set up standards for judging and measuring contract risk. Those standards could include component quality, delivery accuracy, previous on-contract performance and so forth. Currently, there is no objective way to determine the quality/viability of a contract. The ability to measure contract risk will also extend to sales contracts, covering areas where revenue recognition could be affected.

A third contract management breakthrough focuses on easier management of multiple contract layers. A business relationship is rarely represented in a single document. More likely, these relationships are represented by multiple contracts, which change over time and can involve master/subordinate hierarchies. In addition, contracts frequently involve relationships across multiple partners. Managing all this requires technology that provides immediate and efficient management and visibility of the complete business relationship.

Efficiency and control also come together in one technologically advanced system. Imagine that the procurement organization needs its legal department to approve changes made to a contract. However, procurement only wants Legal to approve changes that deviate from approved company language. Procurement masters can make this happen quickly and accurately by using a template-based library of preapproved clauses within its contract management system. Without this capability, the wheel must be recreated each time there is a contract clause change. It also becomes less likely that compliance statutes will be adhered to.

Improved supplier performance management is another byproduct. When a company and supplier forge a contract, both must approve its requirements and expectations. For example, is the buyer expecting the supplier to respond within 30 minutes of the first call? To make sure, the tech-savvy buyer can load average response times (by supplier or by category) into its contract management system, and thus have an increasingly vast and reliable library of key performance indicators. Per the above example, the buyer can set a baseline measurement to the contract value of, say, 30 minutes. If the supplier fails to meet that requirement, it receives an alert stating that the contract has been violated.

In net, contract management is the final piece in the procurement-integration equation: seamless, enterprise-wide data flows that encompass the process and the relationship. Companies can drill down into spend to see how much is on and off contract. They are managing the entire process and ensuring the quality of the entire relationship.

Procurement technology is all (and always) about visibility. With an automated enterprise content management (ECM) system—fully integrated with ERP—companies have a single, easily searchable repository for all contracts."

"

19

Research into achieving high performance through procurement confirms that huge disparities exist in the degree to which companies leverage technology. As shown in Figure 7, the six technology-enabled behaviors presented to survey recipients are deployed by an average of 70 percent of masters, but less than 5 percent of low performers.

From the data presented in this Point of View, two broad conclusions are inescapable. The first is that high performance—the characteristics exhibited by companies that consistently outperform their peers—is more likely to be attained by organizations that excel in procurement. The second is that procurement mastery is largely synonymous with the ability to leverage technology. Process excellence is certainly key. An aligned, committed workforce is vital. Senior-level buy-in is essential. And the importance of collaborative, win-win relationships with suppliers and other business partners is undeniable. However, technology proficiency is what spans the entire procure-to-pay cycle. No company can be a Supplier Relationship Management (SRM) leader or a procurement strategy leader or a sourcing leader without the tools to maximize each part’s contribution and ensure enterprise-wide synergy.

Despite these “conditions,” there is a clear upside: compared to many systems, implementing leading-edge procurement technology is not unusually difficult nor does it take long to build out the infrastructure. In addition, value may be captured more quickly than with other technology

investments. One reason for this is the many forms that procurement technology value can take, including:

Capture savings year-after-year. y

Bring more spend under ymanagement.

Optimize supply base in order to ybalance cost, performance and risk

Reduce maverick spending and drive ydown contract risk.

Maintain auditable supply and ycontract management processes.

Identify procure-to-pay process yviolations.

Improve deal quality and optimize yrenewals.

Reduce sales cycle time. y

Stimulate new product development ywith supplier innovations.

This is not to say that implementing leading-edge procurement technology is a “walk in the park” or that any company investing in procurement technology will become a procurement master or high performance business overnight. However, it’s reasonably certain that, without a firm handle on today’s and tomorrow’s procurement technologies, procurement mastery and high performance will remain little more than aspirations.

Figure 7: Percentage of survey respondents (masters versus low performers) that leverage various technology-based capabilities.

Master Low performer

Technology support

Common and automatedR2P platform

Self-service e-invoicing

Supplier integration technology

Procurement master dataharmonization

Reporting excellence

82%

8%

79%

3%

46%

5%

65%

5%

76%

1%

71%

5%

High Performance and Procurement Technology

Copyright © 2008 Accenture All rights reserved.

Accenture, its logo, and High Performance Delivered are trademarks of Accenture.

About Accenture Supply Chain Management

About the Authors About Emptoris

About Accenture

The Accenture Supply Chain Management service line works with clients across a broad range of industries to develop and execute operational strategies that enable profitable growth in new and existing markets. Committed to helping clients achieve high performance through supply chain mastery, we combine global industry expertise and skills in supply chain strategy, sourcing and procurement, supply chain planning, manufacturing and design, fulfillment, and service management to help organizations transform their supply chain capabilities.

Rob Woodstock is a partner in the Accenture Supply Chain Management service line. Rob has expertise with helping clients across industries to improve the performance of their procurement operations through process improvement, organization development and system implementation initiatives. Based in London, he can be reached at rob.woodstock@accenture.com.

Emptoris is a world leader in innovative supply and contract management software solutions that empower enterprises to realize best value and accelerate profitable growth. Emptoris solutions are used by successful Global 2000 companies in every industry. Customers include American Express, Boeing, ConocoPhillips, GlaxoSmithKline, Kraft, Motorola, Owens Corning, Syngenta, and Vodafone.

Kevin Potts is the Vice President of Marketing at Emptoris. Kevin works closely with customers, industry leaders, and the business and technology press to share the company's vision for how its innovation can accelerate profitable growth. Kevin has over 9 years of enterprise software marketing experience, including 7 years directly in the supply and contract management arena.

Accenture is a global management consulting, technology services and outsourcing company. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. With 178,000 people in 49 countries, the company generated net revenues of US$19.70 billion for the fiscal year ended Aug. 31, 2007. Its home page is www.accenture.com.

We collaborate with clients to implement innovative consulting and outsourcing solutions that align operating models to support business strategies, optimize global operations, enable profitable product launches, and enhance the skills and capabilities of the supply chain workforce. For more information, visit www.accenture.com/supplychain.