Sourcing Mission Critical Series of Whitepapers:Internal Alignment

Executive Summary

Enticed by the cost-saving opportunities of global and enterprise-wide sourcing initiatives, procurement executives continue to accelerate efforts to source across both international and organizational boundaries.

However, several internal challenges stand in the way of Procurement’s ability to deliver promised savings, including improving the “fit” between sourcing plans and business priorities, increasing business partner confidence in the ability of enterprise deals to support their needs, balancing enterprise process consistency with local objectives, and resolving business spend-leverage noncompliance.

Taken together, these challenges indicate that securing business partner commitment to sourcing strategy represents a key imperative for procurement organizations seeking to capture the considerable potential offered by effective global sourcing initiatives. As such, Procurement must focus on building new processes and capabilities to tackle these critical internal obstacles.

To provide support in this endeavor, the HCMWorks Advisory Practice has developed a targeted set of resources to help procurement organizations build the necessary business partner commitment to global and enterprise sourcing strategy. It provides effective advice and insight for two key areas of activity:

• Aligning Sourcing Strategy and Business Priorities

• Driving Compliance with Enterprise Sourcing Initiatives

Our Recommendations in 10 Conclusions

1. Beware Systemic Problems with Global Sourcing Savings Projections While traditional analytical models (and conventional wisdom) maintain that global sourcing initiatives almost invariably yield considerable savings, we have identified two critical sources of savings erosion which these models rarely consider:

1) internal obstacles—business partners’ resistance to participating in or complying with enterprise sourcing opportunities represents a sizable lost opportunity, and 2) sourcing process costs - companies underestimate the high level of resources required for effective supplier identification, qualification, and on-boarding in emerging markets.

These two often-overlooked challenges can rapidly diminish the returns from global sourcing initiatives if not well managed, potentially reducing savings by up to 75%.

2. Prevent (Substantial) Savings Erosion by Addressing Business Partner Nonparticipation and Noncompliance The scope of value erosion is the first challenge: internal obstacles that can erode the majority of global sourcing savings. Typical cost models focus solely on savings actually pursued in the market, failing to account for the share of spend that is held out of global sourcing initiatives due to business partner nonparticipation and noncompliance. That is why we have established a vendor Relationship Management offering – a framework designed to ensure preservation of value post contract. In fact, procurement organizations rarely maximize leverage in global sourcing initiatives, which reduces overall savings potential and places agreed-upon preferred pricing at risk due to diminished spend volume. The imperative for procurement organizations aiming to increase sourcing value contribution is to address business partner resistance by improving alignment of sourcing strategies and business priorities, while establishing credible (i.e., objective) methods of resolving incidents of noncompliance.

3. Replace Current Sourcing Strategy Evaluation Criteria with Business-Centric Measures While most Procurement organizations screen potential sourcing projects with the right criteria—business impact and ease of implementation—the measures underlying those criteria tend to be skewed heavily toward Procurement metrics and objectives. Gauging “business impact” based on spend volume and expected savings, or “ease of implementation” according to the level of difficulty Procurement will face during implementation fails to account for the priorities and constraints of the business partners. To better align procurement proposals with business strategy, we suggest to explicitly incorporates business-centric criteria in your project evaluation, including measures of “criticality to business operations” (impact on the business’s top operational priorities) and “maturity of implementation” (Procurement’s level of experience deploying similar strategies with other businesses).

4. Evaluate Alignment at the Portfolio Level to Inform Resource Allocation Trade-Offs

During sourcing project prioritization, individual assessments of project “fit” with business priorities are necessary but not sufficient, because they provide only a piecemeal view of the overall sourcing strategy. To understand the relative value of each potential project and the trade-offs involved, Procurement must present sourcing proposals as options within a larger portfolio of opportunities. WE suggest to evaluate the impact of each proposal relative to the entire set of proposals, then works with business partners to determine the mix of sourcing projects that best addresses business priorities and the resources needed to execute on them.

5. Promote Sourcing Strategy Development as a Business-Led Process Unfortunately, business partner reluctance to participate in enterprise sourcing initiatives is usually rooted in skepticism and mistrust: Procurement is viewed as lacking a detailed understanding of business unit sourcing needs and unable to fairly represent those needs if they come into conflict with enterprise-level sourcing objectives. European insurance provider suggest to consider an innovative approach to building business partner trust and commitment at the outset of enterprise sourcing initiatives by designing the sourcing strategy development process around the principle that business units should take the lead in creating and defining the strategy. While the Procurement group provides guidance along the way, business

units have the central responsibility of establishing and prioritizing the sourcing agenda based on their savings ideas and their performance objectives.

6. Remove Implementation Roadblocks by Involving Buyers in Sourcing Plan Approval and Definition Because resistance to enterprise sourcing initiatives frequently occurs at the implementation stage—procurement leaders are in full support but individual buyers oppose plans they believe are at odds with their individual sourcing requirements—Procurement must adopt targeted approaches to enfranchise skeptical buyers. Aviva’s sourcing strategy development does so at two stages. First, once business leaders have collectively proposed a set of potential sourcing projects, a mandatory two-week “cooling off” period enables business unit procurement leaders to stress-test proposals with key buyers and subject-matter experts before deciding whether to participate. Second, following project approval, Aviva designates business unit buyers to define the parameters of sourcing contracts (with the help of commodity and functional experts) to address buyer concerns about alignment with their specific sourcing requirements.

7. Develop Decision Rules to Identify the “Critical Few” Sourcing Protocols that Must be Globally Standardized All too often, procurement organizations seeking to reduce sourcing risk and supplier cost-to-serve establish overly prescriptive sourcing policies that unintentionally increase complexity and generate backlash from business partners. To balance the two competing demands—enterprise process consistency and local flexibility—we propose to institute a set of decision rules to objectively determine which activities and policies require global standardization and which can be decided at a local level. The “litmus test” strictly limits standardization to the few activities necessary for the well-being of the enterprise—where process variance cannot be tolerated—while giving business partners flexibility to customize the majority of their sourcing activities to meet local needs.

8. Limit Early-Stage Sourcing Process Variation to Permit Needed Flexibility During Implementation The level of activity standardization varies significantly depending on the stage in the sourcing process. One of our client’s approach requires greater standardization early in the sourcing process, as this is the time when Procurement must establish a solid foundation that will guide future supplier relationships. On the other hand, our client allows for greater customization of sourcing activities during the implementation stage—when activities vary the most from supplier to supplier, business to business—confident that early-stage process controls have already ”locked down” critical areas such as nondisclosures or quality standards.

9. Establish an Objective Framework to Eliminate the “Politics” from Noncompliance Resolution

In most organizations, efforts to resolve business unit noncompliance with enterprise spend initiatives rely more heavily on political gamesmanship than rigorous analysis of the facts; the result is either premature acquiescence to business partner objections (and significant lost leverage), or mandated compliance regardless of relative costs or benefits. Another of our client’s procurement organization is able to bypass the politics with an objective and transparent process which focuses on surfacing the root causes of noncompliance and reaching decisions based on both business unit and enterprise impacts. DuPont’s fact-based approach serves to instill confidence among business partners that their issues will receive a fair review.

10. Treat Exemptions from Spend Agreements as Temporary and Addressable Once a business unit is released from an enterprise sourcing initiative, the buyer typically moves on to the next project and ceases efforts to bring the exempted business unit “back into the fold.” At one client, however, approved exemptions come with a “sunset” provision—a commitment from the business to work with Procurement toward participation in the preferred contract at a defined point in the future. This commitment assumes the form of an action plan, which Procurement uses to close gaps in existing internal processes and supplier capabilities that prevent business unit participation and diminish overall savings.