Building Your Procurement and Sourcing Function for Scale
So you’ve decided you need to up your procurement and strategic sourcing game in order to improve the bottom line at your mid-market company. Usually, that’s a decision that’s heavily driven by a need to achieve economies of scale as you grow, so a prime consideration in starting the function, or improving the one you have, is that it be able to scale along with your company’s growth.
In part one of this two part series I discussed some of the growing pains midmarket companies experience that indicate a need to focus more resources on procurement and sourcing. So, how should you resource the function to solve for those? What people do you bring in? Should your team be in-house, or external? What impact does the ever-improving suite of P2P, sourcing and spend management tools have on your decisions?
The factors that need to be considered are numerous and I hate to say “it depends” when asked how much each may factor into your decisions . . . but it depends. Here are eight things you need to consider as you follow strategic sourcing best practices:
- Current and projected company organic growth rate
- Current spend with external suppliers
- Number of categories with the spend amount worth managing
- Number of brands and/or business units requiring support
- Number of geographic markets
- Number of purchase transactions
- Number of projected acquisitions or mergers in the next 3 years
- Tail spend
Let’s model a real company situation to show one example of how to apply the factors above. The company is an eCommerce company that was just starting its procurement function. The business had a budget, but otherwise was left to its own devices to make all decisions. There were no controls and purchase requisitions, POs and invoices were managed via spreadsheet.
Here is the data as laid out per the decision factors above (rounded numbers used):
- Organic growth rate = 25%
- Current spend with external suppliers = $500MM
- Addressable categories, in this case defined as those accounting for over 80% percent of total supplier spend = 8
- Number brands/business units to support = 3 (2 external facing, 1 internal)
- Geographic markets, in this case defined as those with > 5 percent of total revenue) = 9
- Number of invoices > 9,000
- Projected M&A activity = 1-2 international (ex-USA) per year of ~$100MM each
- Tail spend = 80 percent of suppliers accounting for 50 percent of total spend
Our recommendation given the above situation was as follows:
- Strategy: Significantly more oversight was required immediately and on an ongoing basis. With no controls, the business was not following supplier management best practices, as exemplified by 80 percent of suppliers accounting for 50 percent of spend. The general rule of thumb is to consolidate suppliers such that roughly 20 percent of your suppliers account for 80 percent of your spending. This is a moving target, because as you consolidate and change your spending habits the Pareto will change, but that is what you should aim for.
- Policy: All new requests for spend over $20K to be approved by the CFO.
- Organization: We began the search for a VP of Procurement and assisted in her selection, but we also immediately sourced the eight categories mentioned above and then directed all new requests to the preferred suppliers we had selected. More on the longer-term solution is provided below.
- Systems: You do want to put in checks and balances, but not such that you make everything slow and over-governed. Our belief is that it will become increasingly impossible to attract strong resources if you do not have a robust spend management platform. The days of paper trails and trying to cobble together spend reports are nearly gone. Today’s platforms enable much greater efficiency and effectiveness in P2P, spend analytics and sourcing. It is challenging to attract and retain high-caliber talent without this kind of automation, since this would be like going back in time 10-15 years. That being the case, a sourcing event was initiated to put in place a system with P2P, invoicing and sourcing functionality to enable more efficient processes, policy enforcement and sourcing.
Outsourced or in-house?
With those foundations laid, the next step is lay out the options for building and managing the spend management function.
There are two basic ways to go about it: Outsourced, or in house. Enterprise-sized companies sometimes completely outsource the function, but more often fully staff it internally, bringing in outsourced support to manage one-time events, such as post-merger integrations, major sourcing events, transformation initiatives and benchmarking studies.
Outsourcing is a good choice when the cost and/or skills required to manage the function are out of balance. But, when spend management is a core function that adds significant value to the bottom line, as it is in many mid-market companies, you can eventually support a good-sized team in house, because there is greater spend to leverage and a larger internal customer/stakeholder base to serve.
On a continuum from 100 percent insourced resourcing models to 95 percent outsourced models (five percent is typically reserved for managing the outsourced partner), there are many points in between to consider. Some small and mid-sized companies will use contractors in a staff augmentation model, while others use consultants for category management and internal staff for all other processes--or vice versa.
The Flex Model
We have found that a hybrid solution provides a unique way to optimize insourced resources to equally benefit from the insourcing and outsourcing consulting models. Acquis provides what we call the “Flex Model” because it provides access to flexible, specialized resources that the company can use for as little as a week, or for many months, with the option to hire at the end of the contract period.
I have seen some companies use the Flex Model to outsource for certain geographies, for well-defined processes such as spot buys, or for specific categories or business units, while using internal resources for others on a long-term basis. In other cases, outside resources are dialed in to high-demand projects to take advantage of specific skillsets or simply to provide the manpower to see an initiative through to completion. It’s a very effective model that can scale up or down as needed.
There is more than one way to build and scale your spend management function. Each company needs to start by assessing where they are, and where they think they are going in the next two or three years. Then they need to start filling in the gaps, starting with what’s most critical, and building from there.
The biggest challenge in a mid-market company is to do that in a way that keeps people on the rails, without slowing down the fast-moving train. Regardless of which model used, a robust spend management platform is required. Your team, however you build it, can’t be efficient or competitive without it.