All posts by Scott Stewart

What Procurement Dangers Are Lurking In The Shadows?

Just as the organisation’s CIO has been struggling with “shadow IT” the CPO is now faced with similar challenges as company employees armed with a credit card and a browser can buy almost anything online.

For years the enterprise CIO has been struggling with Shadow IT which has been described as “IT systems or solutions used within an organisation without the approval, or even the knowledge, of corporate IT” . This is often referred to as the consumerisation of IT.

Various IT industry analysts reports state that Shadow IT is somewhere between 30-50 per cent of the total IT spend in large organisations and this is a large number considering that this is IT spend that has not gone through the sanctioned IT function.

Shadow IT has transitioned into Shadow Procurement thanks to the rise of digital cloud marketplaces

The ‘shadow’ problem is no longer confined to the CIO with
the CPO also facing a growing population of enterprise staff
that procure and subscribe to many services in the cloud that havent been through the sanctioned process and often they are not allocated to the correct budget codes.

Thanks to the public cloud there are many new digital marketplaces that have lowered the barrier to entry for the end user for procuring a range of products and services (e.g. Amazon, eBay, Alibaba, Google, Rackspace, Microsoft, even crowd sourcing).

Also of concern is that shadow procurement can also include the teams of people hired by the business to provide various services across the business (often these costs are hidden in project budgets or expense codes and not shown against the correct budget categories).

While the CPO aims for compliance the shadow procurement means a further loss of control

For the CIO the issue of Shadow IT often means they are excluded from the decisions of how the IT services are supported as well as assessing the risks of what is being purchased such as security.

Similalry for the CPO the issue of Shadow Procurement often means that they are excluded from important commercial decisions particulalry when the staff member blindly clicks the “accept terms and conditions” button when buying products and services online. These online terms will always favour the supplier and may not satisfy the commercial appetite or the target price point. Only when things come unstuck will these accepted terms and conditions see the light of day.

The rise of shadow procurement flies in the face of the respected analysis of CPO surveys over recent years that continue to place “Procurement Compliance” as one of the top three challenges that the CPO is focused on addressing*.

When Procurement is seen as beeing a blocker then Shadow Procurement is likely to be, or become, an increasing problem

While I have discussed that the rise of the easily accessible digital marketplace has contributed to the increase in shadow procurement there are likely to be a range of other factors that will also determine the size of the problem in your own organisation:

Business and Procurement mis-alignment

Where procurment is seen as a blocker and the process takes too long then the employees will find a way to work around Procurement to achieve business and project goals

Lack of clear roles and responsibilities and an inneffective governance structure

Where the roles are not clear and the governance is inneffective, or not well understood, then the employees may take this as a green light to hire a shadow team within their project or business unit. In some organisations it can become an unnofficially sanctioned fixture

Many organisations are decentralised and large programs/projects operate separately to the Business-as-usual functions such as Procurement

Because many companies are decentralised and indirect spend is spread across departments and projects, there is typically little input from procurement.

Little or no use of big data analytics to understand the indirect spend occuring as part of the Shadow Procurement problem

  • Indirect spend is often very difficult to understand as the shadow procurement buyers don’t use a formal process in purchasing goods and services for the indirect spend. indirect purchases are often made off contract.
  • Therefore spend data is not effectively leveraged or analysed, or spend data is typically incomplete and not coded by the commodity or category.
  • Instead, spend data is linked to accounting or expense codes, and purchase orders are either not created or if they are created they can be vague or created “after the fact.”

Procurement have not leveraged digital disruption putting themselves in front of employees like their “shadow suppliers” have done

  • If your employees rely on digital and mobility solutions to buy, then you have to have a procurement solution that is mobile-centric and digitally-enabled
  • Automation of a quicker quoting and approval process is just one key factor

The Bottom Line For The CPO

  • Partner with stakeholders to better understand their needs, supplier relationships and processes. Show them that you’re not just trying to find a lower price at the expense of their quality requirements, supplier relationships or the time they have available to move
  • Embed procurement staff into their project teams to bridge the misalignment gaps
  • Adopt an “agile procurement” approach to shorten the time it takes to complete the procurement cycle. An RFP is not always required and there are many opportunities to leverage flexible and agile thinking
  • Invest in big data analytics to understand the company’s indirect spend amount, categories and how many suppliers are currently being used in each category. Leverage consultants spend analysis tools or request data from suppliers to achieve better visibility into your spend data
  • Implement an eSourcing tool to better manage indirect categories supported by automated processes

Why It’s Time To Grow Beyond Strategic Sourcing

If the CPO wants to have a seat at the table, they must move beyond delivering cost reductions to deliver solid and sustainable business value where it really counts: top line growth and business
innovation.

I recently worked on a large-scale program of strategic sourcing transactions across multiple business and technology functions. The strategic sourcing team produced a considerable volume of contracts and notably delivered significant cost reductions along with contractual obligations for supplier-led innovation.

While the strategic sourcing effort followed a mature process and produced great results there was a gap in the process for ‘hand-over’ from the externally sourced strategic sourcing teams to transition the contract relationship

to the category management function. The hard-earned gains and concessions of the negotiations phases needed to be understood by the category manager and then further nurtured and managed through ongoing supplier relationships.

The gap in the process was understandable as the business was in a state of disruption after their acquisition and the brand-new procurement function was immature

and still finding its feet. Notably they
were starting to implement a strategy for category management, so no doubt the situation will quickly improve for them.

However, this first-hand experience of this gap did highlight for me the impact on the procurement organisation if they are unable to transition from strategic sourcing view to category management.

Category Management is a way of driving and delivering value, growth and innovation and yet most companies struggle with the transition from Strategic Sourcing to effective Category Management.

Category Management includes strategic sourcing but it is much broader than that. The Faculty defines Category management as: a rigorous, fact-based, end-to-end process for proactively collaborating with stakeholders to develop and implement strategies that generate significant value that stakeholders recognise, from an organisation’s external spend

It sits above and guides both the content and the sequencing of the lower level methodologies such as (not limited to): spend analysis, demand management, strategic sourcing, supplier relationship management and benchmarking

What is a category?

A category is a grouping of materials or services that have similar supply and usage characteristics to meet business objectives. Managing by categories is a strategic approach which organises procurement resources to focus on specific areas of spend categories.

This enables category managers to focus their time on the business requirements, conduct in- depth market analysis, supplier capability and performance analysis to fully leverage their procurement decisions on behalf of the whole organisation.

Many CPOs understand that implementing and sustaining an effective category management process can deliver great benefits, it usually leads to:

• Raising the profile and competency of the procurement function within the organisation

  • Significant savings typically 10-30 per cent
  • Reduced risk in the supply chain
  • Improved stakeholder relations
  • Improvements in service levels, quality, availability and value for money
  • The revelation of other sources of value and innovation from the supply base
  • Re-usable processes to leverage across other categoriesCategory management allows you to source more effectively and then to get even more value from constantly optimising the resulting contracts.

How to get started and maintain an effective Category Management function:

• Ensure that you have an effective and seamless transition process from strategic sourcing outcomes to the business-as- usual category management function

• Develop the logical categories for your business by bringing together products or services that have the same features and are bought from similar supply markets.

• Build an in-depth understanding of the organisation’s plans and business strategies and ensure that the categories are aligned to business goals

• Develop category benchmarks so that you can more easily identify additional improvement opportunities

• Use big data and business analytics to undertake continuous analysis of spend, (direct and indirect), market data and performance against benchmarks

• Undertake a program of constant price analysis on local and international markets and the monitoring of trends in the category

• Invest in a process of gathering supplier performance data for more quality and service improvements

• Monitor and track all the savings that have been achieved through substitutions, better compliance or contract negotiations

• Engage with your stakeholders! and have continuous discussions and reviews to ensure that all stakeholders are involved in decisions on the category

The bottom line for the CPO

Category management will be a continuous improvement process that should form the basis for all future successful strategic sourcing initiatives. It requires the right level of attention and a good training program Category management will deliver a range of benefits such as being able to work with suppliers to speed up the time between initial adoption and full implementation. At the same time, also providing a layer of continual strategy adjustment once a new supplier or contract has been initiated

Your category managers will be the ones responsible for all things related to a given project or managed service (gather requirements, collect bids and negotiate contracts) and their time will be freed up for engagement with the business to focus on their jobs and deliver better value.
Establishing the single points of contact means better co-ordination and this will streamline communication in a way that will vastly improve stakeholder and supplier relationships.