The Journey From Transactional to Strategic Procurement
Last updated Sep 30, 2022 - 6 min read
- Table of Content
When a procurement organization's vision doesn't look beyond savings, the chances of getting stuck in a tactical shell increase. Sometimes, transactional issues might appear critical for operations, but in reality, they are short-term and with limited impact. To realize its full value potential, procurement must overcome its evolutionary tactical barrier and become a more strategic function.
The procurement industry, as we know it, is changing, and as per the unfolding trends, it's rapidly evolving into a more prominent function that guides the overall strategy within an organization.
This means that procurement is becoming increasingly important and organizations look at it as a way to achieve sustained growth and long-term value. Despite this maturity in the general outlook towards procurement, relationship with internal stakeholders is something that obstructs procurement's journey from tactical to strategic.
Besides, procurement must answer many other challenges to avail the strategic tag in the eye of stakeholders.
The Challenges Faced During Procurement Transformation Journey
Every journey brings with it numerous hurdles that tend to thwart zeal and efforts. But, for procurement to truly evolve, answering these challenges is essential.
Below are some of the challenges facing procurement today:
1. Stakeholder's Resistance to Change
The first step in this transformational journey is to engage key stakeholders in a conversation about their goals and expectations of procurement. Listening to your colleagues' distinct and often contrasting needs and expectations might tip you over the edge, but it's a critical step moving forward. Fulfilling the cost-cutting, sustainability, supplier diversity, quality and time constraints, and other expectations is an exhaustive catalog of needs, but your job at this point is just to listen. Listening to stakeholders' expectations is crucial because it helps you align your procurement strategies with the priorities to uphold your organization's vision and goals.
Understanding your supply base and the mechanisms you can apply to manage those relationships for the good of your organization allows you to create a new framework for the conversations.
The journey to strategically evolve procurement is a long and steep one. Hence, a strong foundation of trust is required at an early stage. Focus on low-hanging fruits first to get quick wins and secure stakeholder's confidence. Later, you can amplify the complexity and reach of your vision. Also, it's important to keep the process transparent and straightforward, with clear priorities and workflows.
2. Procurement Team Lacks Critical Skills
Leading procurement organizations are typically built upon a skilled and talented workforce with regularly refreshed and improved capabilities.
But in most procurement organizations, the current workforce doesn't have the skills to complement strategic processes and frameworks. That's the reason at times to keep working the traditional way and avoid adopting new practices and methods.
The solution to handle this disconnect must be a multifaceted one that artistically combines skills development, hiring, and centralized knowledge management.
3. High Number of Suppliers
Having too many suppliers means spending too much of your team's time and effort on managing those suppliers.
Did you know, organizations on average, manage more than ten vendor relationships for a single initiative?
Such a framework becomes exceedingly complex and time-intensive for purchases across numerous departments and their multiple requirements. Consolidating your vendors is an excellent way to manage this challenge. Consolidation doesn't mean cutting your vendor list to the lowest numeral possible. In fact, it refers to establishing stronger and strategic relationships with a short list of key suppliers to increase efficiency, optimize cost, and enduring business outcomes.
A common myth about vendor consolidation is that working with fewer vendors will affect an organization's ability to negotiate SLAs and pricing. But, surprisingly, the opposite of it's true. Rationalization helps companies take advantage of volume and/or preferential pricing and priority customer service.
Likewise, there are many other benefits of vendor consolidation like:
- Fewer suppliers mean fewer costs and hours spent on managing relationships.
- Increased discounts due to preferential or volume pricing. When a supplier sees that you're ready to spend more money, they will likely offer you better pricing.
- Consolidating your vendors means a lesser risk of contract noncompliance. When you have fewer contracts to focus upon, it becomes easier to comply with vendor agreements.
- Fewer suppliers also mean better supplier relationships where applying outcome-based performance measures and assessing performance and establishing a reward system for vendors is possible.
4. The Cost Factor
The cost of pretty much everything is on the rise, especially post COVID.
Naturally, this cost battle asks the procurement organizations to follow a more strategic approach to buying their resources.
This means focusing on lowering the total cost of ownership and finding new, innovative ways to reduce the lifetime cost of purchase and not just the upfront costs.
5. Maverick Spend
Maverick spending is a matter of grave concern for many companies worldwide. Every year, companies spend thousands of dollars to tackle it. According to Chartered Institute of Procurement & Supply (CIPS), maverick spend contributes to over 80% of a company's total spend.
As per the latest Hackett Group report on Maverick Spend, as much as 16% of negotiated savings are lost due to maverick spending. The report further emphasizes how the maverick spend problem goes beyond lost savings and affects the quality of the goods or services. This, in turn, holds the potential to impact customer satisfaction and expose a company to unnecessary risks.
Gaining control of your company's maverick spending is key to becoming a more transformative organization. By gaining visibility into every purchase made by the company, procurement comes up with the right strategies to save money and protect the organization. Organizations that wish to tackle the maverick spend problem should educate their stakeholders on its negative impacts and the use of technology.
6. Contract Compliance
Even top-performing procurement organizations need to enhance their contract compliance. Poor contract compliance causes savings leakage and legal and financial risks. That's the reason why contract management is also one of the hardest things for procurement to master. The way forward is to ensure your organization's spend is in line with the pricing and terms of the negotiated contract.
Contracts are essential to any business. However, complying with contract terms can be challenging for many companies due to the lack of visibility into its details.
Therefore, to help your organization move to the next level, you must manage your supplier contracts effectively.
Most top-performing organizations use cloud-based solutions that offer a "single source of truth" for their procurement data. These solutions provide an enterprise contract management system that feeds data from disparate sources into a central and frequently updated hub.
Taking a Holistic Approach Towards Procurement Transformation
Organizations must evolve and adapt to new transformative changes in these rapidly changing times to remain viable and competitive.
This means your procurement department needs to move to a more strategic approach to take more control of its spend. The right framework is what you need to allow your procurement department to learn and adapt to emerging technologies. No matter which industry you are in, having a centralized hub for procurement data is imperative for any business. The new era of procurement is driven by data and fuelled by digital technologies and advanced analytics that support the full range of your business objectives to gain momentum.
How does Ignite Procurement help companies through their transformation journey?
Ignite Procurement is a best-of-breed spend management platform that offers a holistic approach to bring the key areas of your strategic transformation together: spend transparency and analysis, contract management, and supplier relationship management to give your team a swift pathway to generate value, reduce risk and embrace innovation.
When procurement comes forward as a value driver, the leadership team also wants access and transparency into procurement's performance. This means answering the questions asked by leadership, delivering real-time insights into procurement's key performance indicators, and making data integral to your decision-making process.
A cloud-based spend management solution like Ignite Procurement encompasses all these aspects, present them in a user-friendly manner and elevate procurement's value with:
— Transparency. A single source of information to improve C-level's understanding of the value procurement is delivering.
— Higher savings. As more spend is under the strategic lens, procurement operates more efficiently and effectively. Improved contract compliance also translates into higher savings.
— More value. Collaborating with business stakeholders early in the process helps build innovation and create value.
Read our hands-on resource on Strategic Procurement to begin your procurement transformation journey!