Transforming procurement operations through advanced ... · from Genpact’s experience designing,...

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Transforming procurement operations through advanced operating modelsProcurement executives believe there is untapped potential for advanced operating models to address the biggest challenges facing enterprises

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About the researchIn 2014, Genpact commissioned a research project conducted by an independent research firm. The goal was to assess the potential for new operating models across a wide spectrum of industry sectors and functions. More than 900 senior-level executives completed the survey. Respondents were screened based on their ability to materially influence functional decisions. This analysis complements other research and insight derived from Genpact’s experience designing, transforming, and operating business processes and operations.

This document presents findings drawn from 121 senior procurement executives from across all industries. About 60% of the procurement executives surveyed are based in North America, predominantly with large companies with more than 10,000 employees (see Figure 1). Figure 1

n=912 from all industries*Company size defined by number of employees

Sample of more than 900 senior executives of whom 13% are from procurement

60% of procurement respondents from North America

88% of procurement, respondents are from larger companies

REGIONS SIZE* FUNCTIONS

84%

16%

5,001 - 10,000

10%25%

65% 84%

16%

10,000 +NAMER

APAC

EMEA

Risk

15%

Finance

17%

Marketing

15%

Operations

40%

13%

Procurement

32% of procurement respondents from manufacturing

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Abstract

Senior procurement executives have unique perspectives of enterprise challenges compared with peers in other functions

Large companies more likely to have mature sourcing and transactional procurement functions

Sourcing and category management are seen as addressing the biggest challenges

In conclusion

Significant differences across functions in maturity and preparedness to mature further

Many companies are penalized by procurement functions that lack maturity and preparedness, with significant impact on strategic challenges

Advanced organizational structures support many companies’ procurement transformation

Notwithstanding the versatility of advanced organizational structures, where applicable, radically improved use of technology is expected to generate the largest financial impact

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07

08

20

11

14

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CPOs and other senior executives are challenged to adapt to a rapidly changing business environment and to create greater business value. Transforming business processes to implement advanced operating models is a big part of the solution, but levels of process maturity and preparedness for transformation vary widely across business functions. The three levers of operating model transformation—technology, process reengineering, and advanced organizational structures (shared services, business process outsourcing, and hybrids)—create impact differently. Using commissioned research, Genpact has examined these trends to understand how institutions are driving transformation to achieve business impact.

Abstract

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Procurement executives cite reducing costs as a top challenge confronting their company much more frequently than counterparts in other functions

Senior procurement executives have unique perspectives of enterprise challenges compared with peers in other functionsProcurement executives from across all industries were asked to rate the most important challenges facing their companies. Reducing costs is by far the top response, cited by 65% of respondents as one of the three most important challenges. Regulatory compliance (46% of respondents) and customer satisfaction (41%) ranked far behind. These responses contrast with those of executives in other functions who are more likely to point to regulatory compliance or growth and scalability as their firms’ top challenges (see Figure 2).

Figure 2

% of respondents from various functions stating challenge as among the ‘top 3‘ for their company

n=912 from all industries

Ensure compliance to regulations

Increase customer satisfaction

Reduce capital and asset intensity

Manage risk

Increase growth and scalability

Enable company’s innovation

Enable agility and adaptability

Reduce costs

0 10 20 30 40 50 60 70

Overall

Finance

Procurement

Marketing

Operations

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Procurement executives vary widely in their perception of enterprise challenges across industries

Procurement executives’ perceptions of business challenges also vary substantially across industries. For example, those in the life sciences sector are significantly more likely to say their businesses are challenged by regulatory compliance, cost reduction, and risk management than counterparts in consumer packaged goods (CPG), manufacturing, or high tech. CPG is concerned about agility and adaptability. The high tech industry stands out for its concern about customer satisfaction, while procurement executives in the manufacturing industry place greater importance on innovation, growth, and scalability compared to other industries (see Figure 3).

Importance of the challenge % in specific industries stating that the challenge is among the ‘Top 3‘ for their company

Figure 3

n= 121 procurement executives

Enable company’s innovation

Ensure compliance to regulations

Reduce cost


Manage risk

Increase growth and scalability



Life Sciences CPG High Tech Manufacturing

0 10 20 30 40 50 60 70 80

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All procurement functions—and especially transactional procurement—are more frequently rated as very mature or mature by executives from larger firms

Although the survey covered mostly large companies, and thus, the sample of smaller compa-nies was small, interesting trends emerged when these two enterprise segments were compared. Procurement executives from large firms were much more likely to rate their firms’ procurement sub-functions as very mature or mature than counterparts from smaller firms. The difference was greatest for transactional procurement, which 74% of those from large firms rated as very mature or mature compared with 59% from smaller firms. There was a comparable gap for sourcing/category management, but firm-size differences were much smaller for master data management (MDM) and business intelligence and reporting (see Figure 4).

Figure 4

% of respondents stating that procurement function in their organization is either very mature or mature

n=121 procurement executives 15 from small companies with 5,001-10,000 employees and 106 from large companies with 10,000+ employees

0 10 20 30 40 50 60 70 80

Business intelligence and reporting

MDM

Supplier risk and performance management

Sourcing/category management

Transactional procurement

Overall procurement function

Large companies more likely to have mature sourcing and transactional procurement functions

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The majority of procurement executives said that sourcing/category management could have material impact on nearly every enterprise challenge

Figure 5

% of respondents stating function can have material impact on addressing challenge


Sourcing and category management are seen as addressing the biggest challengesTo help prioritize the best opportunities for process transformation, procurement executives were asked to assess the impact that different sub-functions can have on the companies’ biggest challenges. The largest proportion of respondents saw sourcing/category management had material impact on multiple, material challenges. In contrast, supplier risk and performance management were more frequently cited as impacting regulatory compliance and risk management (see Figure 5).

Overall procurement


MDM



Transactionalprocurement

Ensure complianceto regulations

Reduce costs


Manage risk

Magnitude of challenge% of respondents stating it is one of the top 3 challenges in their company

Increase growth & scalability

Magnitude of challenge

Enable company innovation


66 62 74

50 7036

63 28 59

75 52 83

43 56 72

50 4138

86 62 7061 71

54 2457 7441

59 4131 4822

53 5943 4839

89 7157 7065

29561159 26

31 22 1156 48 4248 42


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Sourcing/category management was seen as a solution for many of the most pressing enterprise challenges

“Impact indexes” were then calculated that weigh the impact of each function according to the importance of the business challenges the function addresses. This analysis found that sourcing/category management had the biggest overall impact with an index of 191, compared with 174 for supplier risk and performance management and 156 for business intelligence and reporting (see Figure 6).

Figure 6

n=121 procurement executives




MDM

Sourcing/category management 191

174

156

136

122 *Impact of a function on company's challenges is defined as f(xi) = ∑ n

j xijyj, where xij is the % of respondents who believe that improvement in the function xi will have a material impact on the challenge yj ; yj is the % of respondents citing the challenge as among the ‘Top 3’

Function impact index* combining stated importance of challenges and stated ability of a function to address them

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Executives in CPG, life sciences, high tech, and manufacturing rated their company’s procurement functions as more mature than peers in the financial sector

The ability to deliver potential improvements in each procurement sub-function depends on the existing level of maturity as well as the preparedness of companies to further evolve each function. Looking first at overall maturity, there are significant differences between industries with a physical supply chain (CPG, life sciences, high tech, and manufacturing) and the Banking, capital markets, and insurance sector. Executives in industries with a physical supply chain were much more likely to rate their procurement functions as very mature or mature. The difference was most pronounced for transactional procurement, which only 45% of banking, capital markets, and insurance executives rated as mature compared with 79% of those from other industries (see Figure 7).

Figure 7

% of respondents stating that procurement function in their organization is either very mature or mature


Business intelligenceand reporting

MDM




Overall procurement

0 10 20 30 40 50 60 70 80

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MDM and business intelligence as well as supplier risk and performance management are the least mature procurement functions

A closer look at the maturity of each sub-function revealed that transactional procurement was seen as mature by a larger proportion of executives than the other sub-functions, with 72% rating transactional procurement as very mature or mature. This compares with 67% for sourcing/category management, while business intelligence and reporting were ranked last, with only 29% (see Figure 8).

Figure 8

% Respondents stating the maturity of the functions in their organizations


MDM




Overall procurement


Very Mature Mature Somewhat mature/ Immature

4 25 71

9 27 65

17 27 57

31 36 33

35 37 28

22 42 36

Significant differences across functions in maturity and preparedness to mature further

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When the executives were asked if their organization was prepared to further evolve its procurement sub-functions, many executives in the CPG, life sciences, high tech, and manufacturing industries indicated that they were not ready. Sourcing/category management was rated as either fully prepared or prepared by a large proportion (76%) of executives, but only 61% rated transactional procurement and 56% for supplier risk and performance management as either fully prepared or prepared. Business intelligence and reporting ranked last with only 41% (see Figure 9).

MDM and business intelligence as well as supplier risk and performance management are also the least prepared to evolve

Figure 9

Overall procurement


MDM




Fully prepared Prepared Somewhat prepared/not prepared

8 33 59

13 30 57

12 44 44

23 38 39

30 46 24

21 50 29

% Respondents stating the preparedness of their organization to mature a procurement function


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Organizations with mature procurement functions are more prepared to evolve them further

Considering the maturity and preparedness of each function as a whole provides insights into their ability to achieve business impact, absent significant operating model changes. Procurement executives generally believed the most mature functions are also the best prepared to evolve further. For example, 94% of those who rated their sourcing/category management sub-function as very mature or mature also said it was fully prepared to evolve, compared with only 43% of those who said that function was not mature (see Figure 10).

Figure 10

MATURE

27 73

6337

23 77

43 58

44 56

MDM 74 26

Transactional procurement 76 24

Sourcing/category management 94 6

Overall procurement 85 15

Supplier risk andperformance management 1981

NOT MATURE

Fully prepared Somewhat prepared / not prepared

% of respondents stating the preparedness of their organization to mature a procurement function

( Some functions not represented due to sample size limitations )

n=121 procurement executives (77=mature; 44=not mature)

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When the impact of each procurement sub-function on the most important enterprise challenges is taken into account, sourcing/category management stands out for its potential to achieve business impact. In addition to being cited by executives as mature and prepared to evolve, sourcing/category management can also impact the most important challenges, particularly reducing costs. Many functions such as MDM, BI, and supplier risk and performance management have a strong impact on enterprise challenges but also display significant gaps in maturity and preparedness in many enterprises (see Figure 11).

MDM, BI, and supplier risk and performance management have a strong impact on enterprise challenges but also display significant gaps in maturity and preparedness

Many companies are penalized by procurement functions that lack maturity and preparedness, with significant impact on strategic challenges

Figure 11

Ensure complianceto regulations

Reduce costs


Manage risk

Increase growth & scalability

Overall procurement

Businessintelligence /

reporting

MDM

Supplier risk and performancemanagement

Sourcing / category management


Maturity of process

Preparedto mature

% OF RESPONDENTS ASSESSING MATURITY AND PREPAREDNESS

Som

ewha

t pre

pare

d/ n

ot p

repa

red

Fully

pre

pare

dor

pre

pare

d

Som

ewha

t mat

ure

or im

mat

ure

Ver

y m

atur

e or

mat

ure66 62 74

50 7036

63 28 59

75 52 83

43 56 72

50 4138

86 62

54 57

59 31

53 43

89 57

59 26

56 48 4248 42Magnitude of challenge

Magnitude of challenge% of respondents stating it is one of the top 3 challenges in their company

% of respondents stating that the function can have a material impact on addressing each challenge


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Figure 12

Managerisk

Reduce cost

Ensure compliance to

regulations





Size of the circle indicates importance of challenge and size of the slice shows the proportion of executives who say the function can have material impact on the challenge

Increase customer

satisfaction

Manage risk

Reducecost

Ensurecompliance to

regulations

Manage risk

Reduce cost

sa detats seinapmoc fo

% ot deraperp ro deraperp yrev

snoitcnuf deificeps ni erutam

% of companies stated as very mature or mature in the specified functions

SS

EN

DE

RA

PE

RP

M AT U R I T Y

MDM

Size of the bubble proportional to impact of function on many strategic challenges

20

30

40

50

60

70

80

90

20 30 40 50 60 70 80 90


The three least ready functions have material impact on regulations, risk, and cost

The transactional procurement sub-function is also well-positioned overall, while supplier risk and performance management have particular potential for improving regulatory compliance (see Figure 12).

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Most procurement executives rated advanced organizational structures—including business process outsourcing (BPO) and shared service centers (SSCs) as well as hybrid models that combine the two—as able to have material positive impact on the overall procurement function of many enterprises. About 64% of the procurement executives agreed that these structures can have material impact on the overall procurement function. This percentage was greater than for other operating model initiatives, including business process engineering (46%) and radically improved use of technology (42%). Advanced organizational structures were considered applicable for transactional procurement and sourcing/category management by the highest proportion of executives. The latter also had the largest impact index, indicating the ability to impact the most important business challenges (see Figure 13).

Advanced organizational structures most frequently applicable among operating model initiatives

Figure 13

BPRRadically improved use of technology

Overall procurement



MDM



BPO / SSC / HY

Impact Index*

Function Impact Index* combining stated importance of challenges and stated ability of a function to address them

BPR – Business Process ReengineeringBPO - Business Process Outsourcing, SSC - Shared ServicesHY - Hybrid

46

40

46

58

35

43

40

47

58

31

42

34 46

64

65

51

48

44

122

207

156

191

136

174

% of respondents stating the initiative can have a material impact on the function


Advanced organizational structures support many companies’ procurement transformation

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Significant differences exist between the progress made in implementing advanced operating models across the various functions

Significant differences exist between the progress made in implementing advanced operating models across the various functions. In the case of sourcing/category management, about 72% of the respondents said that they have initiatives in progress for business process reengineering (BPR), and nearly two-thirds of respondents said they have initiatives for radically improved technology and advanced organizational structures (BPO, SSCs, or hybrid). This progress is far more advanced than for the other procurement sub-functions, and in some cases, only around half have begun transformation initiatives (see Figure 14).

Figure 14

189

26

47

151514

5655

149

22

235

15

57

146

14

66

202

13

65

176

14

63

66

16

72

107

19

64

245

11

60

134

16

67

22

819

51

BUSINESS INTELLIGENCE AND REPORTING

SUPPLIER RISK AND PERFORMANCE MANAGEMENT

SOURCING/CATEGORY MANAGEMENT

TRANSACTIONAL PROCUREMENT

227

9

62

174

13

66

151216

57

MDM

Not Considered

Planned after 12 months

Planned in next 12 Months

Currently in Progress

% OF RESPONDENTS

Width of the column indicates the % of respondents stating that the operating model initiative will have a material impact on the function.

BPR – Business Process Reengineering

BPOBusiness Process Outsourcing,

SSCShared Services

BPO / SSC / HYBRIDBPRTech BPO /

SSC / HYBRIDBPRTech

BPO / SSC / HYBRIDBPRTech

BPO / SSC / HYBRIDBPRTech BPO /

SSC / HYBRIDBPRTech


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Genpact research has found that advanced organizational structures (SSCs, BPO, or hybrid) are regarded by a larger proportion of procurement executives as having material impact on key business challenges than other levers of operating model transformation. However, the research has shown that—where applicable—improved use of technology can provide the biggest financial impact. The expected impact, however, varies substantially depending on the maturity of the procurement function. Executives who rated their company’s procurement functions as immature expect larger financial impacts from advanced organizational structures and BPR (but not technology) than those who rated the procurement functions as mature (see Figure 15).

Advanced organizational structures are applicable more often, but when applicable technology and BPR achieve higher dollar impacts

Figure 9

OVERALL PROCUREMENT

1Annual $ impact is the impact of operating model initiatives in US$ per annum including reduction of cost, capital required, improvement of cash and revenue growth

AVERAGE $ IMPACT1

Column width proportional to % of respondents stating that the initiative will have a material impact

$107m

$126m

$106m

$65m$82m

$121m

$84m$ 99m

$120m

TECH - radically improved use of technologyBPR – Business Process ReengineeringBPO - Business Process Outsourcing, SSC - Shared Services

SSC/BPO/Hybrid

SSC/BPO/Hybrid

SSC/BPO/Hybrid

BPRTECH

MATURE

BPRTECH BPRTECH

IMMATURE

n=121 procurement executives (77=mature; 44=not mature)

Notwithstanding the versatility of advanced organizational structures, where applicable, radically improved use of technology is expected to generate the largest financial impact

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CPOs and other senior procurement executives are challenged to adapt to a rapidly changing business environment in an economy that remains unpredictable. They say that cost reduction and regulatory compliance are the most important enterprise challenges. This research examined how those challenges can be tackled by three levers of operating model transformation: technology, process reengineering, and advanced organizational structures.

The related transformation of operations is an untapped strategic lever for the CPO as well as the CEO. However, it is sometimes seen as a formidable undertaking. Few understand the “IT + analytics + process operations” nexus sufficiently. Technological excesses of the past (such as ERP or data warehouses) are well documented. Some technologies are unproven, and older technologies are rigid and expensive to evolve. Frequently, deep analytics remain difficult to scale throughout the enterprise.

Genpact’s experience of advanced operating models, accumulated over 15 years, clearly indicates that there are agile and practical ways to transform. The key is to design, transform, and run the processes that power advanced operating models so that they closely align with measurable business goals, thus avoiding unnecessary and often unmanageable complexity.

This approach focuses more rigorously on the sources of impact and deliberately disregards any practice that does not yield material outcomes. It also takes a more objective and holistic look at technology, analytics, and organizational practices. It leverages now-mature “system of engagement” technologies that complement “system of record” technologies. It treats analytics (the arc of data-to-insight-to-action) as a process and determines how to embed insight at scale into the fabric of other enterprise processes. It does not take the typical approach of viewing analytics as a task and a set of technologies.

Finally, it harnesses the process and organizational levers available from established disciplines, such as re-engineering, shared services, outsourcing, and global delivery. Genpact believes in a smarter way to transform operating models and address the most complex strategic challenges. This is a way for CPOs to make their enterprises more intelligent and generate material impact.

In conclusion

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About Genpact

Genpact (NYSE: G) stands for “generating business impact.” We are a global leader in digitally-powered business process management and services. Our Lean DigitalSM approach and patented Smart Enterprise ProcessesSM framework reimagine our clients’ operating models end-to-end, including the middle and back offices – to deliver growth, efficiency, and business agility. First as a part of GE and later as an independent company, we have been passionately serving strategic client relationships including approximately one-fifth of the Fortune Global 500, and have grown to over 70,000 people. The resulting domain expertise and experience running complex operations are unique and help us drive choices across technology, analytics, and organizational design.

For more information, contact, [email protected] and visit, www.genpact.com/home/solutions/direct-procurement, and www.genpact.com/home/solutions/indirect-source-to-pay

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© 2016 Copyright Genpact. All Rights Reserved.

Genpact Research InstituteThe Genpact Research Institute is a specialized think tank harnessing the collective intelligence of Genpact – as the leading business process service provider worldwide - its ecosystem of clients and partners, and thousands of process operations experts. Its mission is to advance the “art of the possible” in our clients’ journey of business transformation and adoption of advanced operating models.

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