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Supply Chain News: Annual Return on Supply Management Assets Again Finds Huge Differences in Procurement Value Creation

 


Leaders Get 12 Dollars Back for Every One Dollar Spent on Procurement, Laggards Break Even

 

Jan. 10, 2017
SCDigest Editorial Staff

In December, the consultants at AT Kearney along with the Institute for Supply Management (ISM) and Chartered Institute of Procurement & Supply (CIPS – basically the ISM of Europe) released their annual ROSMA report, or Return on Supply Management Assets, which among other areas looks at what kind of ROI different segments of companies are achieving from their investment in their procurement functions.

The report begins with an interesting anecdote relative to private equity firms, and the claim that today when they make an investment in a company, such investors "go to procurement first, have high expectations, and understand what good procurement looks like, and some have very specific action-oriented profiles for their CPO candidates."

Supply Chain Digest Says...

Leaders received 12.4 dollars for every dollar invested in procurement in 2016.

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The ROSMA research is a kind of continuous process, with new information added each year to the multi-year database. As usual, it finds major differences between leaders and laggards when it comes to the return companies achieve on their spend on purchasing staff and technology:

Top-quartile performers: This group delivers more than seven times their cost and investment base in procurement, with an average of 12 times the investment. Companies in this elite group delivered about $1.7 million in financial benefits per procurement employee in 2016. This group naturally has a low functional cost-to-serve and reports the highest levels of value creation from advanced sourcing methods.

Middle-tier performers: The middle two quartiles of companies generate value three to five times their cost and investment base.

Bottom-quartile performers: These laggard companies demonstrated some improvement over the prior periods, but the average procurement function in these companies barely drives enough savings to pay the investment in people and technology.

If companies can make the leap from one category to the next, the report says, they can generate substantial financial value. The report estimates a company moving just from the bottom quartile to average can increase its overall company earnings 15%, and a mid-tier performer that reaches the top-quartile average can see up to 21% in earnings improvement.

"There's a reason why procurement synergies are the main source of value in a merger," the report notes.

The report also notes that overall, procurement needs to do a better job with performance metrics, saying most companies "cannot measure well and the benefits cannot be found, adding that only 21% of stakeholders report that procurement has well-defined and respected performance metrics.

The study also found that 68% of stakeholders say procurement's reported results are sometimes, frequently, or widely questioned. And they believe that 78% of procurement organizations either realize less than 60% of the promised contracted savings or they don't know the amount of savings realized. Ouch!

Characteristics of a Weak Procurement Organization

The study says laggard procurement organizations share a common profile, characterized by most if not all of the following attributes:

• Procurement is a service function that is engaged when the business needs it for contracting, purchase orders, or assistance with negotiations, but is rarely involved early in the process.

• Procurement does not have a seat at the [executive] table.

• Performance metrics are either not well-defined or limited in scope.

• Finance evaluates procurement performance only about 35% of the time, and about one-third of stakeholders are unsure if performance is tracked at all.

• Reported results are challenged about 90 percent of the time, while 10% of stakeholders are unaware of routine or ongoing performance reporting.

• Stakeholders believe that only about 10% of reported savings are realized.

• Most stakeholders do not know what the industry benchmarks are (for example, return on investment) for either good or weak procurement performance levels.

• All stakeholders either know what world-class procurement looks like and acknowledge they do not have it, or are unsure what world-class procurement looks like and believe it is worthwhile to know.


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Conversely, the report offers these seven attributes of leading procurement organizations, saying that "this is what good looks like":

• Strong procurement teams are recognized by their stakeholders as integral business partners with a seat at the business leadership table; they consistently work together on most or all projects and are brought in early in the process.

• All stakeholders, from both business and finance, say that procurement leaders are accountable for results, stakeholder satisfaction, and team productivity.

• Procurement has well-defined and respected performance metrics that all stakeholders understand and support. What counts gets measured, and what's measured gets done.

• Finance and procurement jointly (or finance independently) routinely and thoroughly evaluate procurement performance; results are shared with stakeholders and are widely accepted and only occasionally challenged.

• Principal stakeholders (the C suite, finance, and the businesses) are aware of and understand procurement value drivers, including the concepts of coverage, velocity, yield, and compliance, and they know the desired performance ranges for each.

• Principal stakeholders have a rich understanding of how procurement creates and delivers hard value to the business's financial results and thus are considered effective in the spend-management process.

• Top-quartile performers deliver a minimum ROSMA score of 7 or higher and again reported an average score of 12. Despite this strong performance, if this quartile sustained 75th percentile performance across main results drivers, productivity would increase another 50%.

The core concept of the ROSMA analysis is illustrated in the graphic below from the 2016 report. It shows the return companies have received from a dollar of investment in procurement staff and technology across several years and the different strata of performance levels. So, leaders received 12.4 dollars for every dollar invested in procurement in 2016, while the average company received a return level of 5.4, and laggards basically just got their one dollar back.

 

The full 2016 ROSMA report can be found here: 2016 Return on Supply Management Assets (ROSMA) Report

Do you believe the differences in value creation through procurement are as dramatic as the ROSMA report suggests? Why or why not? Let us know your thoughts at the Feedback section below.

 

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