6 SIGNS YOU NEED TO OPTIMIZE PROCUREMENT AND SOURCING
This question is particularly challenging for mid-market companies. They’re focused on growth and revenue, and haven’t given managing spending nearly as much consideration. Typically they’ve gotten several rounds of funding in order to grow. Investors understand they need to generate revenue and win market share. But, at some point, the focus shifts to achieving economies of scale.
In this two part series, I’ll look at how you can determine whether there’s an opportunity to help your organization scale through better spend management; discuss what factors you need to consider in deciding what tools and people to bring in, and illustrate with a case study of what one e-commerce company did.
Optimize vs. cut So, how do you know if better spend management could help your company achieve economies of scale? There are two ways to impact the bottom line—trimming headcount and managing spending. It’s tough to shrink headcount substantially when you’re still growing, but there’s usually a significant opportunity to get more value from your spending. A lot of mid-market companies have bare
ly touched anything on the spending side. In fact, the case study I’ll share in the next post concerns a company that made it to $1 billion in revenues with no procurement function at all, with finance tracking requisitions, POs, and invoices on spreadsheets. Surprisingly, that’s not uncommon.
More often though, there’s some procurement function in place, but it’s relatively immature in terms of category management and policy compliance. Maybe there are corporate compliance policies on paper, but they aren’t tracked and enforced effectively.
Sooner or later, you start to wonder how you could be doing better. Are you performing as well as other companies of similar size, or competitors in your vertical? What does a best in class procurement function look like at a company of the size you aspire to be? Here are six signs that your organization could benefit from improving spend management:
Your supplier base is mushrooming. You’ve begun to experience some growth and things are already beginning to crack. For instance, the CFO will say, “Wow, the number of suppliers that we have has increased by 10 percent in two months. What’s going on? Do we have a policy around new supplier additions, versus driving work toward preferred or established suppliers? Is there an exception process in place? What’s the governance model around new suppliers being added?” To scale effectively, these questions need answers.
The number of transactions is exploding. The old model of using your ERP as a faux P2P system just isn’t working. It’s not integrating with expense management and reporting systems. End users are in open revolt due to clunky systems. Category managers can’t get the intelligence they need to make decisions. What happens then? You can see a real problem looming.
You’re missing key metrics. The CFO may say, “Why didn’t I know that we are suddenly increasing the number of suppliers so significantly? We need a dashboard. We need something in place that says this is where we stand and this is how we’re trending month over month.”
Mergers and acquisitions have led to mish-mash of systems. You’ve got contracts that duplicate or contradict each other, and some that are significantly more favorable than others. How do you decide what systems and processes to shed, and which to continue and adopt across the whole new company? You need a scalable, repeatable framework.
New management. As companies approach enterprise level, there’s a natural tendency to bring in executive leaders with enterprise experience. These people are used to having procurement involved in contracts and supplier selection in some capacity. They may be quick to point out, “We’re not doing this, and at every other place I’ve been, we were. This is what big companies need to do.”
Proactive managers. Sometimes you have a very proactive person internally, usually someone in finance, who’s questioning everything and pushing the envelope. Do we have the right processes and policies in place? Do we have the right metrics? How do we compare in terms of our unit pricing versus companies in our vertical of similar size? How can we better restructure our contracts and supplier relationship management systems? These are all the right questions to ask in a growing company.
In some highly-regulated industries, such as biotechnology, companies put spend management systems and processes in place while they are still small, because they have to. However, it’s much more common for growth companies to focus on revenue and internal resources and less on optimizing external suppliers. As they move from small to mid-market, most companies hit a point in their trajectory where they start to experience one or more of these symptoms. They look at the road ahead and think, “We better do something.”
The challenge is to structure an organization that will provide a high quality of service without slowing down the speed of transactions. That could mean bringing in people and technology to enable procurement-related, transactional-type activities, but it could also mean enabling sourcing activities, like RFP execution and so forth. Of course, there is no one right answer for every company. In my next post, I’ll discuss some of the things you should consider, and show how we helped one company move their procurement organization to the next level.