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February 17, 2015

A New Metric for a New Perspective on Procurement

A New Metric for a New Perspective on Procurement

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.

Suggested resources:
This contract management webinar and associated Ardent white paper.

February 6, 2015

A visionary focused on helping procurement improve contract management

A visionary focused on helping procurement improve contract management

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.

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January 29, 2015

How contract management improves supplier relationships

How contract management improves supplier relationships

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.

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January 22, 2015

Enterprise Contract Lifecycle Management: The secret to managing key instruments of opportunity

Enterprise Contract Lifecycle Management: The secret to managing key instruments of opportunity

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.

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November 18, 2014

Wondering What Your Contracts are Worth?

Wondering What Your Contracts are Worth?

How much value is your business gaining from your contracts?

If a procurement executive asked you what a given contract was worth, you would likely give an answer based on estimated spend value as a result of projected volume, negotiated costs, and term. While this is accurate, it is also a limiting perspective that places more emphasis on the transactional footprint of the contract than what it means to the company’s operations.

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