SRM Learning: The Business Case for SRM

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1 Slide 1 The business case for SRM Welcome to this module on tools and processes that support building a business case for SRM. Slide 2 In this module Welcome to this module in which we will consider the business case for supplier relationship management and offer some guidance on how to make the business case within your organisation. At the end of this module you will be able to: Recognise the fundamentals to building a solid business case Understand some of the tools that you can employ to support business case creation Start to consider how to manage risk Slide 3 Business success Your business success rests in part on the successful delivery to you of your suppliers. However it is important to realise that your supplier s success is in part dependent upon your company s success. If you fail (or they fail to support you) then they will lose a part of their revenue stream, reducing their forecast able income and hence representation and attractiveness to the stock market, their shareholders and potential shareholders. The goal therefore of SRM is to identify which suppliers are most critical to the success of your organisation, namely those who have the largest influence over your business plans, strategy and priorities. Essentially you are determining who is critical to your operations. These suppliers will have inroads to many parts of your company and so you need to identify which employees in your company are part of the supplier s CRM program. In this way you can ensure that the communications and messages they are receiving are in harmony to those being delivered elsewhere. An interesting attachment worth reading at this point would be Research; SRM - does it have substance? in which the IACCM puts forward a research case for SRM and how it needs to interact with governance and performance frameworks if it is to deliver successful. Slide 4 The SRM business case Knowing the internal customers for each supplier allows you to understand the direction and developmental ideas of different areas of your business. You can then use that information to create and maintain leverage over your supplier. You may well also identify areas that your supplier has yet to touch and by introducing these to your supply base, you will further increase the leverage you have, and probably increase the commitment from your supplier; they will recognise that you are actively looking to drive revenue towards them. By doing these things you have started to level the playing field, it is likely that your supplier will have previously been in control of the relationship. As you are now moving towards having the same knowledge as they will need to focus on a different strategy, namely partnering with you rather than treating you merely as a revenue stream. BManagement 2014 Page 1

2 One notable point though is that you should focus more on those suppliers who have diverse relationships to your business. Where a business critical supplier only delivers to a specific area and a focussed relationship is already in existence, question the value of what would be achieved by centralising that relationship. Will you be wasting time and energy by pursuing it? Slide 5 What is a business case? The primary purpose of the business case is to justify the resources and capital investment necessary to instigate and deliver a change to business operations. They are often thought of in terms of projects, where there is a defined end outcome that needs to be worked towards. For SRM the same is true, there is an end focus which is to change the way in which the business operates with its suppliers. The business case in this instance is a means for capturing the reasons for the undertaking, which creates the ability to reference whether the program is achieving its aims. The business case is not just a financial document, it also allows the evaluation of why the investment has value and importance, whether the company has the capability to deliver the benefits and explains the outcomes expected if a particular course of action is considered. The objectives of a business case should normally be measurable, with all key outcomes quantifiable, allowing their benefits to be tracked, measured and realised. For most projects the outcome is specific, such as a new software installation or a new building and therefore success can be readily quantified. In SRM however, the outcomes are dependent upon the way relationships develop and change. Being able to apply objective metrics to relationships is not straightforward; rather, they are more suited towards subjective measures and therefore the business case needs to capture the requirements for transparency, accountability and commitment to benefits realisation. The attachment Article; Data gathering and analysis outlines some of the key considerations that you need to go through when considering the type of data you need and how to analyse this. It considers the idea of know where you are and where do you want to go and is a great outline of the basics that you should be aware of. Slide 6 Business case content A business case should inform the approval body of its value, its risk and its relative priority. The business case should enable the approval body to determine if the proposal will create benefit to the business and outline its achievability compared to the relative merits of alternative proposals. In other words, it should clearly explain why they should invest in this rather than something else. The generation of the business case should demonstrate that the issues have been thought through, the full benefits will be realized on time and that success will be tracked, measured and reported on. Therefore the content of the business case should include a report on the benefits that SRM will bring. There should also be commentary on the investment required. For SRM this investment will primarily be the costs of the resources, but there will also be tangible investment in commitment. Whilst this may not have a direct associated cost, it is necessary to ensure that SRM is invested with authority over the relationships and the way and manner in which they are conducted. In order to gain that authority there should be some analysis and mapping of the identifiable stakeholders, although these will grow and change through time. There is also a need to provide BManagement 2014 Page 2

3 commentary on risk since at the outset the suppliers chosen for inclusion within the program may not be willing to change their mode of operation, indeed some of the internal stakeholders may mirror that desire to not release control over their relationships. Slide 7 Organizational requirements to allow successful SRM So how will SRM fit into the organisation structure and be allowed to achieve and realise its benefits? The Supplier Relationship Manager must be granted the authority to guide the interactions between the suppliers and the internal customers. Each internal customer is probably only a part of the greater interaction between the supplier and your company, therefore each individual needs to appreciate that their approach is a part of a greater entity, and that the whole relationship and its success is greater than the success of the individual parts each person plays. As such, the SRM needs to be identified as the overarching driver of the relationship. Their responsibility is to monitor and understand who is working with who and provide guidance on what is happening elsewhere in the relationship to allow appropriate decisions to be made. This is not an easy task as it requires the individual stakeholders to relinquish some of their own immediate ambitions to allow successful delivery of the relationship. It is imperative to find a way to engage with these stakeholders through understanding what is important to them, what their success looks like, what their ambitions are, so that you can work harmoniously with them and sell the benefits of the process change to them. After all, these stakeholders may well be part of the group that signs off your business case. We would suggest that a relevant attachment to read at this point would be Research; Maximising value and stakeholder theory, in which Michael Jensen postulates that managers should make decisions so as to take account of the interests of all stakeholders in a firm (including not only financial claimants, but also employees, customers, communities and where relevant governmental officials Slide 8 McKinsey 7-S framework The McKinsey 7-S framework is a tool created in the early 1980s by Tom Peters and Robert Waterman, two McKinsey consultants. They aimed to understand and analyse how well positioned an organisation is to achieve an objective and then defined 7 characteristics that need to be aligned if that objective is to be met. The 7 characteristics fall into one of two types; hard elements which are straightforward to define and soft elements are less tangible and more subjective. A change in any one will have a consequence on the effectiveness of the others. Taking each in turn; Strategy is the plan and methods determined to create and maintain competitive advantage. Structure is the way the organization is structured, defining for example the reporting lines and departmental breakdown. Systems includes the processes which employees utilise in their daily activities to realise the company strategy. Shared Values encapsulate the core values, sometimes referred to as super-ordinate goals, of the company; namely the approach to creating a corporate culture and work ethic. BManagement 2014 Page 3

4 Style references the style of leadership adopted through the organisation. Staff covers off the employees and their general capabilities. Whereas Skills defines the actual skills and competencies of the employees working for the company. SRM can use the 7-S model to understand how the seven elements should interact and mutually reinforce the vision of the SRM program. The model can then be developed and utilised to further understand how the wider impact of a change made in one area (eg. stakeholders) affects the remaining elements. Using the McKinsey 7-S model to analyze your current situation and your proposed future situation allows you to identify the gaps and inconsistencies between them and therefore form part of the justification for any business case. For more information please see the attachment Article; McKinsey 7-S model. Slide 9 PESTLE analysis PESTLE analysis is a useful tool for determining how strategic factors can influence change, by understanding the whole environment within which an organisation operates. The outcome of PESTLE will complement the outcomes of the McKinsey 7S framework and begin to guide and direct strategic thought on how SRM will influence an organisation s potential in the current environment and deliver competitive advantage. The acronym PESTLE stands for Political, Economic, Social, Technological, Legal and Environmental. Whilst an organisation on its own cannot directly affect and manage all these external factors, by understanding their respective influence over the organisation, it is possible to maximise the opportunities and minimise the threats they bring. By conducting this strategic analysis you will uncover long term trends in the economic environment and how these affect the company. For SRM this may well lead to a clearer understanding of the attitude and direction of the procurement function. Alternatively, are the companies who provide the products and services to you operating within a strict political or legal framework which affects the way you interact with them? Are there other suppliers where these constraints are less stringent, so making them a viable alternative? Do you have environmental targets which your suppliers can help you meet, such as planned reductions in CO2 emissions? For example are you shipping products via air-freight at huge environmental cost, where actually, with some forward planning, a sea-freight option may not only be environmentally beneficial, but also cheaper? Is this something your supplier could offer as an alternative? Are there other global or market considerations, such as exchange rates that need to be understood? Is your current supply chain maximising the potential that your suppliers can bring you in these areas? Otherwise, what technological advancement can your suppliers (especially those in the IT field) bring to you that will enhance processes and affect the strategy of your company, such as a move to off shoring. If you are not having these conversations with your whole supply chain currently, or if they are unstructured and adhoc, then an effective SRM program should use PESTLE and highlight the business case for putting governance around these. BManagement 2014 Page 4

5 Slide 10 SMART criteria SMART criteria is a simple 5 step process to remove subjective measurement from objective desires. They are often applied to employee s objectives for their annual and half-yearly review to measure progress. In this SRM guise, whilst the nature of the relationships are naturally subjective, your business case should highlight the objective measurements that are going to be utilised to allow the benefits realisation of the programme to be measured, captured and understood. Your objectives should be; Specific; If the outcome is not clear, or could have multiple interpretations, then reconsider whether the objective is fit for purpose. The business case is seeking to align everyone towards a common goal. Therefore they must all understand, unequivocally, what that goal is. Measurable; Once you have a specific target, how will you measure success. Are there hard evidentiary facts that you can utilise, or will you implement a satisfaction metric? Ie can you define and create an objective metric to measure a subjective outcome? Achieveable and agreed; Once you have become specific and created a measurement process, ensure that the objectives are actually achievable and that they are agreed (this will need senior stakeholders sponsorship). Your objectives must be realistic. If you are looking to create one or two SRM positions to manage 800 suppliers, that probably is not realistic, but if you are looking to only manage a handful of the 15 most strategic suppliers, then the chance of success is much greater. Finally the objectives need to be bounded by time; What will have been achieved by when, what milestones are in place against which progress can be measured? If there is no time element, then the programme may meander and achieve its targets after they would have been effective. Slide 11 SWOT analysis SWOT Analysis is a strategic analysis tool that looks at a situation s Strengths, Weaknesses, Opportunities and Threats. It develops the understanding of the relative importance of the pros and cons for a project, or in this context, the SRM programme. It not only looks at what exists within the organisation but also external factors that may have an interplay into what you are trying to achieve and whether they are beneficial or detrimental to the desired outcomes. Strengths are the characteristics of the programme that will bring the competitive advantage desired over market competition. They define the benefits of creating an SRM function, the efficiencies it will bring, what processes will benefit and how an improved influence over the relationship supports your business drivers. Weaknesses will define the effects of an SRM programme that place the organisation at a disadvantage relative to others. It may be that certain stakeholders feel their position and influence is weakened if they have control wrested from them. This may initially lead to a slow take up of the programme. The opportunities quadrant allows understanding of what any external capabilities will bring to the organisation. This could be through having a better understanding of the supply chain, other initiatives that could benefit from a supplier interaction, or how multiple existing contracts with a single supplier can be bundled to reduce cost. The threats represent those external factors that may hinder the business. Is the supplier willing to be involved, or do they see SRM as an unwelcome imposition? Will your internal stakeholders BManagement 2014 Page 5

6 look for alternative supply routes or keep existing supply under the radar so that they can hopefully remain unaffected. The identification of these parameters is essential because they support business case development and help determine the steps required in the planning and implementation process of the selected SMART objectives, the outcomes of the McKinsey 7S framework and the results of the PESTLE analysis. Alternatively it may be that certain objectives are ruled out as they are unattainable, but they may be useful areas for future development in future phases of the programme. Slide 12 Identifying supplier needs One further area to consider is your supplier s needs. One thing is certain, if all you do is continually look to reduce the cost of your supply, eventually your supplier will decide that the relationship has no value and will cease. Therefore there has to be some harmony in how you expect to treat your suppliers within the new framework. They should not be treated as a disinterested party, they are far from it, and their success is directly related to yours. So have the conversation with your suppliers and define what would they expect from the change of course? If their wishes are not at least consulted and in some way factored into the programme outcomes, then the outcomes themselves may not live up to expectations. After all, if they are bought into the process before it is signed off, then they have a vested interest in making it work. So make sure that the suppliers, who you have identified as appropriate for inclusion within your programme, spend some time and take responsibility for identifying their requirements. Indeed do their expectations fall short of your vision, in which case it might be worth considering the value of the future relationship? Do their outcomes and objectives meet, and are supported by, analysis against the SMART criteria previously described? If not are you open to some form of compromise, indeed is compromise something that you want considering you are looking for a collaborative partner? Slide 13 Stakeholders Suppliers are not however the only group that you need to focus on. There are people within your organisation that need to be considered. These are your stakeholders, namely any individual, group or organisation that has a demonstrable interest in the outcome of your programme. If they are not identified and managed, then you increase the risk of failure for your programme and will throw up numerous conflicts. They may not wish to accept your role in a relationship that they have previously had unfettered control over. Stakeholders may not just be internal into your organisation. Your suppliers are your stakeholders as well, but there may be others, such as regulatory groups and external audit partners. So spend time identifying them and understanding their requirements. As a guide your stakeholders will almost certainly come from the following groups as a minimum. Sponsors. This is the individual who has the budget for the investment in resources and systems that you may use. What do they hope to achieve? After all they don t want to be seen to sponsor an initiative that is not worthwhile. Contractors. These may be the people who will implement any systems you. BManagement 2014 Page 6

7 Users. These will be the people employed as Supplier Relationship Managers. Are they knowledgeable and skilled in what they are being asked to take on (they may for example be existing procurement people where their primary motivator has been on negotiation of costs). Managers. Those in charge of the SRM team and their goals. Unions. Are you implementing a change to the organisation structure which is going to affect certain individuals roles? If so is there a requirement for union consultation and if so they will require clear and specific information about what the intention is, the desired outcomes and the rationale behind the change. After these there are then any other parties who have a vested interest in the project, organisation, or environment in which it runs. For more information and different tools for identifying stakeholders, please see the attachment Toolkit; Stakeholder identification example. Slide 14 Stakeholder mapping Once you have identified your stakeholders you need to determine how you are going to manage them; different stakeholders will require different information and differing frequencies of interaction. You need to create a stakeholder map based on their level of power over the chance of a successful outcome and also their level of interest. The more interested and more powerful they are the more you need to keep them informed and satisfied. In the low power - low interest sector minimal effort is required, but there are two specific types of individual or attitude to be aware of. The positive person should be kept satisfied, but not to the extent that they become bored. Conversely, for the negative individual understand their views and mitigate the risks that their negativity may pose; they are likely to spread demoralisation about your program. In the high power - low interest sector there is a need to maintain interest but recognise that this program is not a key motivator for them. Here there will be powerful individuals with a positive attitude. So by igniting their interest, you will gain influential support in helping you succeed. The opposite individual is the powerful stakeholder with low interest and a negative disposition. They need to be understood so they can be defused and not jeopardise your programme. In the high interest - low power quadrant the primary aim is to keep the stakeholders informed. They may not have much influence over your outcomes, but they may undermine your goals. Again the two individuals to be specifically aware of are firstly those individuals with a positive attitude. Then there are those who will exhibit a negative attitude and are the type of people that would misdirect the outcome you seek. Finally there are those stakeholders who are influential and interested, the key make or break individuals. Again there are two camps to manage; on your side will be those who you should keep fully engaged and do whatever is necessary to keep them on your side. Those with the opposite mentality will do their utmost to see you fail, so find their interests and engage them through these to neutralise the threat they pose. For further details on how to address each of these four quadrants, please see the attachment Toolkit; Stakeholder management methodology BManagement 2014 Page 7

8 Slide 15 Return on investment (ROI) Another approach to evaluating an investment s ability to generate value to the company is to calculate Return on investment, or ROI. ROI = the total benefits minus the total costs, divided by the costs over a defined period of time, usually the lifetime of the investment. Return on Investment calculations do not address corporate strategy. A company can pursue several projects meeting projected ROI requirements yet do nothing to advance the strategy. Companies run the risk of going after low-hanging fruit only to find that they are building capability that does not create long-term value or otherwise advance shareholder interests. ROI also does not consider budget, so a project with a projected high ROI may not get approval if the required investment exceed the amount budgeted. Approval will depend upon other elements in the business case. The primary problem with a purely financial calculation such as Return on Investment is that the true cost of the investment is rarely accurate. Few companies have comprehensive costing models, so it s hard to estimate costs beyond the amount of the contract. And, the anticipated benefits are usually more a matter of guesswork than solid forecasting. All this points to judicious use of ROI calculations as part of Cost Benefit Analysis. Slide 16 Mapping risk and response Having now identified your stakeholders, your supplier needs and using the tools such as PESTLE, SWOT and the McKinsey framework, you can map the risks posed and each risk s potential to create failure and the impact that such a failure will have on your business case. The greater the probability and impact of failure, the more effort you will need to expend in either merely recognising, mitigating or eliminating that risk. Focus your efforts first on the top right quadrant as the effort required in eliminating a threat is substantially greater than merely recognising it exists. Slide 17 Risks Risk can come in several different guises so this slide is intended to help you categorise those that you will uncover. Project risk is one that will undermine your programme rather than affect the business directly. A business risk is one where the nature of your business is threatened if the appropriate SRM programme is not instigated. This could be mitigating the effect of exchange rates, altered sales volumes, competition for margin within the unit prices you charge your customers for the services or products you create. Alternatively there may be impacts and risk in your material costs and labour costs from your suppliers if they are not adequately managed. Other risks include Health and safety, Legal or regulatory compliance. You may have a need to manage your environmental impact and a better supplier relationship can help to minimise or offset that. Operational and commercial risk may be impacted if your supplier does not understand the critical paths within your product creation chain and supply in time to minimise any downtime you may suffer. This may be especially true on production lines where equipment and materials are needed to allow the production line to flow. BManagement 2014 Page 8

9 Slide 18 Summary When it comes to defining when SRM may be an appropriate process, the primary aspect to consider is the need for change. This need for change could be realignment to a new business strategy, where old methods and processes require transformation and hence the relationship with and delivery of the suppliers needs to be realigned to meet that new strategy. There may have been recent business underperformance, so the consideration should be what caused that and has the attitudes and delivery of any particular supplier been an integral part of the underperformance? Alternatively has there been exceptional business growth and does the capability of an existing supplier matching the pace of change you are experiencing? If not do they realise that they are hindering the forward development of your company. Have key contracts underpinning the successful delivery to your customers been recently awarded but the management of them not clearly defined. Have there been mergers and acquisitions in your supply chain? In these instances the new set of management processes in these third party organisations needs to be recognised and understood for its strategic alignment to your goals. Do you wish to stay with this supplier or move elsewhere? Is dysfunctional or multi-tiered management of existing relationships causing confusion both internally and with your supplier. Is one part of your organisation demanding that A is prioritised, but another stating that B should be prioritised? If so the internal conflict needs to be resolved to allow your supplier to deliver effectively to you. All this is pointing at formalising governance which will be discussed in a later module, but for now, you need to work with your stakeholders and suppliers to understand how the lack of governance is affecting the relationship and how the relationship needs to change. This helps to inform and direct the structure of your business case. Please see the attachment Case Study; Improving business performance for an example that utilises many of the techniques discussed across this module. Slide 19 End This concludes our module. Please take the time to complete the module evaluation. Once you have completed the module evaluation, we recommend that you go to the attachment section to review the additional information. A module exam is available for you to take in order for you to gauge your understanding of the material or practice for the Certification exam. BManagement 2014 Page 9