In viewing the release of our newest sourcing platform during a demo, I tried to discern all the pieces that I saw as unique or compelling. Looking past core features in the sourcing platform, such as RFx, auction and award management capabilities, I saw aspects of the new platform that are clearly distinguishable. Things like a slick and simple UI, collaborative reporting, in-app messaging and other social media, including capabilities for networking, made me think of the evolution of enterprise technology and the parallels to how sourcing and procurement platforms have dramatically changed over the past 15 years.
The rise of procurement metrics.
In March of 2014, Matthew Eatough, CEO of Proxima Group, wrote an article for Harvard Business Review discussing what he called ‘corporate virtualization‘. The concept is based on research that found that, on average, “69.9% of corporate revenue is directed toward externalized, supplier-driven costs.” The fact that such a large percentage of corporate revenue is spent with external business partners is surprising enough, but the study also uncovered that the percentage increased by 4% from 2011 to 2014, marking a clear trend towards more reliance on suppliers rather than less.
These findings should have completely rocked the world of procurement, and opened the eyes of C-level executives hesitant to embrace the full value proposition of a strategic procurement function. And yet, they changed little for the vast majority of organizations. But why?
Reason #1: C-level Executives don’t know.
The CFOs of the companies participating in the study were asked to report what percentage of their revenues was spent with external parties. They were almost all wrong, and significantly underestimated (sometimes by double digits) how much their company spent with suppliers. If these executives, selected to participate in such research, did not have the answer to that question, it is unlikely that any given CFO has that information either.
Reason #2: Procurement hasn’t told them.
For the most part, procurement professionals continue to struggle with metrics that emphasize cost reduction rather than value creation. Finance thinks our numbers are all made up, and the CEO often forgets we exist. There is even a disconnect between our performance metrics and the way the rest of the organization sees commercial activity. The denominators we use in most of our calculations (think historical spend, or addressable spend) are usually modified enough that the resulting figures are only relevant to procurement’s own purposes.
Conversely, looking to capture and represent the idea of corporate virtualization brings a company-wide perspective to spend and supplier relationships. It divides total annual spend by gross revenue. Sure, this calculation includes spend that procurement considers unaddressable, but it demonstrates the need for many of our initiatives – supplier management, contract management, category management – whether the spend will be strategically sourced or not.
Over time, strategies such as vertical dis-integration have gradually moved headcount, operations, risk, and capital investment out of companies and onto their suppliers. The relative importance of those suppliers increased accordingly, albeit without anyone noticing. It is time for procurement to recalibrate corporate understanding of the role of suppliers – and step up and take on the additional responsibility that will likely lead to. The corporate virtualization average will never reach 100%, but it can certainly rise from the current 70% average. Even if it holds steady for the next couple of years, there is clearly plenty of catching up to do.
Do you think your CFO knows what percent of revenues are spent with suppliers? How do you think general knowledge of that figure would change procurement’s role in the organization? Have you taken any steps to investigate corporate virtualization yourself? Share your thoughts by commenting below or tweeting @BuyersMeetPoint, @Iasta & @Selectica_inc.
I had the opportunity to read “Strategic Sourcing: Lessons Learned” recently published by the Aberdeen Group. You can download it for free at the following link: http://www.aberdeen.com/research/9814/RR-strategic-sourcing-lessons.aspx/content.aspx
Just a couple of days ago, Gartner published its Magic Quadrant for Strategic Sourcing Suites, February 2015. We are proud to note that we have been recognized by Gartner as a visionary in the latest report moving from the leader’s quadrant into the top portion of the visionary quadrant, we take into account our adjustment from the previous report in July 2013. The elimination of many other vendors from the pool should also be noted.
According to Gallup, supplier relationships are among the most overlooked but most important connections a business can have. Being a “customer of choice” can help mitigate risk, lower costs, and spur innovation. Companies that are great customers benefit from a more reliable supply chain and receive “flexible, non-bureaucratic support” from suppliers during crisis situations. That means linking supplier management with contract management.
Recently I had the opportunity to sit down with Gartner Research Analyst Nigel Montgomery to discuss how Contract Lifecycle Management (CLM) has made a significant leap to Enterprise Contract Lifecycle Management (ECLM). Nigel is probably the industry’s most prolific author on topics pertaining to CLM or ECLM and has done a great deal of research over the years on the evolution of the technology. In fact, we had the opportunity to record the discussion, which can be viewed here.