Far from the predictions of many, category management is alive and well, but it is changing. Elaine Porteous explores how…
Contrary to some predictions in the last decade about the demise and imminent death of category management in procurement, it is alive and well, but evolving. In truth, it is becoming more complicated as third-party spend in the 21st century does not easily fit into historical categories. There is more overlap and intersection in I.T. services as it merges with telecommunications, marketing services now include internet and social media and packaging is concerned with sustainability.
Category management’s aim is to segment its spending on third-party goods and services into groups depending on function and end use. The difficulty in defining category groups has increased due to the overlap between commodities and the rapid innovation in technologies. Category managers handle more than strategic sourcing. Their role includes creating a category plan, handling supplier relationships and providing continual oversight in the category.
Specialise in your niche and own the category
It is generally understood that difficult and complex indirect categories pay more. Indirect spend refers to goods or services that are not directly incorporated into a product or service delivered to a customer, e.g. I.T., marketing, facilities and professional services. Experienced category managers can earn £75 000 per annum.
Why are some categories difficult? Partly because stakeholders in these categories resist procurement efforts to influence their spend and are protective of their incumbent suppliers. It can also be because procurement people may be seen to be lacking in the knowledge needed to lead the supplier selection and contracting process.
Professional services can be a bit of a minefield. Marketing, management consulting, legal and insurance are commodities that have unclear and convoluted pricing structures which take time to understand fully.
Managing indirect categories requires behavioural skills as well as deep technical knowledge of the category. Aspiring category managers need persuasive skills, empathy and the ability to listen as well as to be decisive when the need arises. They also need to act as change agents and diplomats.
Don’t try and change the supplier of food catering services without engaging with the users or there may be a riot.
Sourcing and contracting I.T services is different from any other category. Without extensive experience or formal training, this category is going to be an uphill struggle. The advancements in artificial intelligence (AI), SaaS and blockchain will require constant study and awareness of how to apply new types of applications. Where the I.T. function is mission critical to the company operations, e.g. in banks and insurance companies, procurement and sourcing professionals need to be totally immersed in the category and its commodities which can include: software licences, hardware, peripherals, servers, data and telephony, 3D printing, warranties and maintenance. Category managers are increasingly being hired from internal and external I.T. departments.
The organisational culture and landscape on the indirect side has many nuances that do not exist on the direct side. The procurement executive will therefore need to traverse the waters of indirect spend with unique strategies to ensure success.
This category requires focus, stamina and a long line in patience. The relationship between marketing and procurement works best when they meet to discuss and agree on sourcing and contracting strategy and when procurement takes over the pesky administrative details. Traditionally advertising agencies have been the major recipients of marketing spend, some providing a one-stop service, maybe with no contract or service level agreement (SLA). This is changing; the use of printed matter is diminishing, digital agencies are taking over so there is healthy competition for the overall spend.
Even though the legal services area is complex and services are expensive, it is possible to build credibility with the in-house legal team by finding out
- and understanding what their needs and issues are
- which areas have the potential for savings
- where better value can be achieved from external legal firms.
The low-end, routine or commoditized legal services are the easiest to address. By learning the language of solicitors and attorneys you can express your sourcing ideas in words they can understand. Managing supplier relationships with law firms need to be focused on minimising bad behaviours and rewarding and incentivising those who provide accurate, transparent pricing and deliver excellent service and good advice.
HR has a wide remit in many large organizations with the main focus being on people management. Most HR professionals would agree that they don’t have an in-depth understanding of their suppliers’ cost drivers such as profit, overheads, risk and how these impact on return on investment (ROI). They are beginning to realise the benefits of having their procurement counterparts with them around the negotiating table. Procurement’s selling proposition to HR is to demonstrate its ability to deliver value by being a source of market intelligence and a guide to best practice.
Depending on the industry sector you work in, some categories can take on greater or lesser importance. In fast-moving-consumer-goods, packaging, logistics and transport are vital to the success of all food, drink and healthcare companies. In insurance and banking, reliable technology is the key.
Tips to help you succeed in difficult categories
- Research the market by benchmarking the pricing of services to establish the competitiveness of current suppliers
- Develop a database for each type of service by evaluating current suppliers, their pricing structures and capabilities
- Re-negotiate and improve the contractual terms and conditions, pricing models and rates on current agreements and/or go to market with a well-thought outsourcing strategy.
- Establish what deliverables and technical skills are needed for each type of service so that you can determine which suppliers can provide them
- Identify incentives to improve relationships with your incumbent suppliers and aim to consolidate your base
There is a growing awareness of corporate social responsibility across most categories. Sustainability is becoming more than a consideration in categories that have the potential to have a detrimental impact on society and the environment. Job descriptions for category managers are already including responsibility for sustainability strategies.