Transforming procurement operations through advanced operating models

Transcription

1 Transforming procurement operations through advanced operating models Procurement executives believe there is untapped potential for advanced operating models to address the biggest challenges facing enterprises 1

2 About the research In 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. Sample of more than 900 senior executives of whom 13% are from procurement This document presents findings drawn from NAMER 121 senior procurement executives from across 60% of procurement respondents from North America all industries. About 60% of the procurement executives surveyed are based in North America, *Company size defined by number of employees predominantly with large companies with more than 10,000 employees (see Figure 1). Figure 1 EMEA REGIONS SIZE* FUNCTIONS 25% 10% APAC 84% 65% 84% 10, % 16% 88% of procurement, respondents are from larger companies 5,001-10,000 Marketing Finance 15% 17% 13% Operations 40% Procurement 15% 32% of procurement respondents from manufacturing Risk n=912 from all industries 2

3 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 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 In conclusion

4 Abstract 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. 4

5 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 functions Procurement 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). % of respondents from various functions stating challenge as among the top 3 for their company Ensure compliance to regulations Increase growth and scalability Increase customer satisfaction Enable company s innovation Reduce capital and asset intensity Enable agility and adaptability Manage risk Reduce costs Overall Finance Procurement Marketing Operations n=912 from all industries Figure 2 5

6 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 Life Sciences CPG High Tech Manufacturing Ensure compliance to regulations Reduce cost Enable company s innovation Increase customer satisfaction Manage risk Increase growth and scalability Reduce capital and asset intensity Enable agility and adaptability n= 121 procurement executives Figure 3 6

7 All procurement functions and especially transactional procurement are more frequently rated as very mature or mature by executives from larger firms Large companies more likely to have mature sourcing and transactional procurement functions Although the survey covered mostly large companies, and thus, the sample of smaller companies 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). % of respondents stating that procurement function in their organization is either very mature or mature Overall procurement function Transactional procurement Sourcing/category management Supplier risk and performance management MDM n=121 procurement executives 15 from small companies with 5,001-10,000 employees and 106 from large companies with 10,000+ employees Business intelligence and reporting Figure 4 7

8 The majority of procurement executives said that sourcing/category management could have material impact on nearly every enterprise challenge Sourcing and category management are seen as addressing the biggest challenges To 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). % of respondents stating function can have material impact on addressing challenge Ensure compliance to regulations Reduce costs Increase customer satisfaction Increase growth & scalability Manage risk Enable company innovation Enable agility and adaptability Reduce capital and asset intensity Magnitude of challenge Overall procurement Business intelligence and reporting MDM Supplier risk and performance management Sourcing/category management Transactional procurement Magnitude of challenge % of respondents stating it is one of the top 3 challenges in their company n= 121 procurement executives Figure 5 8

9 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). Function impact index* combining stated importance of challenges and stated ability of a function to address them Sourcing/category management 191 Supplier risk and performance management 174 Business intelligence and reporting 156 MDM Transactional procurement * Impact of a function on company's challenges is defined as f(x i ) = n j x ij y j, where x ij is the % of respondents who believe that improvement in the function x i will have a material impact on the challenge y j ; y j is the % of respondents citing the challenge as among the Top 3 n=121 procurement executives Figure 6 9

10 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). % of respondents stating that procurement function in their organization is either very mature or mature Overall procurement Transactional procurement Sourcing/category management Supplier risk and performance management MDM Business intelligence and reporting n=121 procurement executives Figure 7 10

11 MDM and business intelligence as well as supplier risk and performance management are the least mature procurement functions Significant differences across functions in maturity and preparedness to mature further 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). % Respondents stating the maturity of the functions in their organizations Very Mature Mature Somewhat mature/ Immature Overall procurement Transactional procurement Sourcing/category management Supplier risk and performance management MDM Business intelligence and reporting n= 121 procurement executives Figure 8 11

12 MDM and business intelligence as well as supplier risk and performance management are also the least prepared to evolve 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). % Respondents stating the preparedness of their organization to mature a procurement function Fully prepared Prepared Somewhat prepared/not prepared Overall procurement Sourcing/category management Transactional procurement Supplier risk and performance management MDM Business intelligence and reporting n= 121 procurement executives Figure 9 12

13 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). % of respondents stating the preparedness of their organization to mature a procurement function Fully prepared MATURE Somewhat prepared / not prepared NOT MATURE Overall procurement Sourcing/category management Supplier risk and performance management Transactional procurement MDM ( Some functions not represented due to sample size limitations ) n=121 procurement executives (77=mature; 44=not mature) Figure 10 13

14 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 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). % of respondents stating that the function can have a material impact on addressing each challenge Magnitude of challenge Ensure compliance to regulations Reduce costs Increase customer satisfaction Increase growth & scalability Manage risk % OF RESPONDENTS ASSESSING MATURITY AND PREPAREDNESS Maturity of process Prepared to mature Overall procurement Business intelligence / reporting MDM Supplier risk and performance management Sourcing / category management Transactional procurement Somewhat mature or immature Very mature or mature Somewhat prepared / not prepared Fully prepared or prepared Magnitude of challenge % of respondents stating it is one of the top 3 challenges in their company n= 121 procurement executives Figure 11 14

15 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). % of companies stated as very prepared or prepared to mature in specified functions Size of the bubble proportional to impact of function on many strategic challenges Supplier risk and performance management Sourcing/category management 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 Reduce cost Manage risk Increase customer satisfaction P R E PA R E D N E S S MDM Transactional procurement 30 Business intelligence and reporting Ensure compliance to regulations Manage risk Reduce cost M AT URI T Y % of companies stated as very mature or mature in the specified functions Manage risk Ensure compliance to regulations Reduce cost n= 121 procurement executives Figure 12 15

16 Advanced organizational structures most frequently applicable among operating model initiatives Advanced organizational structures support many companies procurement transformation 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). % of respondents stating the initiative can have a material impact on the function Radically improved use of technology BPR BPO / SSC / HY Impact Index* Overall procurement Sourcing/category management Supplier risk and performance management Business intelligence and reporting MDM Transactional procurement BPR Business Process Reengineering BPO - Business Process Outsourcing, SSC - Shared Services HY - Hybrid Function Impact Index* combining stated importance of challenges and stated ability of a function to address them n= 121 procurement executives Figure 13 16

17 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). % OF RESPONDENTS Currently in Progress Planned in next 12 Months Planned after 12 months Not Considered BUSINESS INTELLIGENCE AND REPORTING MDM Width of the column indicates the % of respondents stating that the operating model initiative will have a material impact on the function. SUPPLIER RISK AND PERFORMANCE MANAGEMENT Tech BPR BPO / SSC / HYBRID SOURCING/CATEGORY MANAGEMENT Tech BPR Tech BPR BPO / SSC / HYBRID BPO / SSC / HYBRID Tech TRANSACTIONAL PROCUREMENT BPR Tech BPO / SSC / HYBRID BPR BPO / SSC / HYBRID BPR Business Process Reengineering BPO Business Process Outsourcing, SSC Shared Services n=121 procurement executives Figure 14 17

18 Advanced organizational structures are applicable more often, but when applicable technology and BPR achieve higher dollar impacts Notwithstanding the versatility of advanced organizational structures, where applicable, radically improved use of technology is expected to generate the largest financial impact 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). AVERAGE $ IMPACT 1 Column width proportional to % of respondents stating that the initiative will have a material impact 1 Annual $ impact is the impact of operating model initiatives in US$ per annum including reduction of cost, capital required, improvement of cash and revenue growth OVERALL PROCUREMENT MATURE IMMATURE $120m $ 99m $84m $121m $82m $106m $126m $107m $65m TECH BPR SSC/BPO/ Hybrid TECH BPR SSC/BPO/ Hybrid TECH BPR SSC/BPO/ Hybrid n=121 procurement executives (77=mature; 44=not mature) TECH - radically improved use of technology BPR Business Process Reengineering BPO - Business Process Outsourcing, SSC - Shared Services Figure 9 18

19 In conclusion 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-toaction) 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. 19

20 Genpact Research Institute The 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. 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 Digital SM approach and patented Smart Enterprise Processes SM 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, procurement.services@genpact.com and visit, and Follow us on Twitter, Facebook, LinkedIn, and YouTube Copyright Genpact. All Rights Reserved. 20