Global Chief Procurement Officer Survey 2009

the way we see it

Global Chief ProcurementOfficer Survey 2009

Responding to the Challenges of

Economic Meltdown

Foreword 1

Participating Companies and Organizations 3

Executive Summary 5

Impact of Global Economic Downturn on Surveyed Organizations 7

Key Survey Findings 11

eProcurement - Use and Penetration 11

Procurement Organizational Development - Evolving Models 13

Spend Visibility - Improving the Line of Sight 15

Effective Supplier Management - Managing Risk in the Supply Base 17

The Talent Gap - Continued Issue of Appropriate Competence and Capability 18

Supporting Articles 20

Managing Commodity Price Fluctuations and Volatility 20

Using Procurement Intelligence to Improve Procurement’s Success 23

Procurement Master Data - The Bedrock of Success 27

Innovation-Driven Procurement - Innovation and the Role of Procurement 33

Complex Indirect Category Sourcing - A Missed Value Opportunity 38

Contents

Prepared by:

James Abery

Sanjeev Itagi

Ton van Dolder

Hamish McKechnie-Sharma

Contributors:

Charlotte Baratti

Dan Zoltowski

Randy Smith

Dobson Schofield

Stefan Becker

Robbert den BraberColin Hartog

Susan Stuart

Date:

July 2009

Supplier Risk Management - How to Manage Within the Current Crisis

and Learn for the Future 41

Global Chief Procurement Officer Survey 2009 I Forward 1

Foreword

Capgemini Consulting the way we see it

James AberyCapgemini ConsultingVice PresidentGlobal Procurement Practice Lead

Roy LendersCapgemini ConsultingVice PresidentGlobal Supply Chain Practice Lead

The third Global Chief Procurement Officer (CPO) Survey marks Capgemini’scontinued commitment to understanding the trends and issues affecting theprocurement executive. Given the seismic upheavals in the financial markets andtheir inevitable impact on commerce, it has never been so important to assess andunderstand what this means for procurement within organizations.

The intent of the Global CPO Survey is to provide executives with insight intoboth macro issues and focus areas so they may be better informed concerning thechallenges they face and the decisions they make.

The Global CPO Survey is based around responses from more than 150organizations spanning Europe, North America and Asia Pacific, mainlyrepresented by senior procurement executives. This Survey provides atemperature check on the world of buying in 2009 and gives a comparison offindings from previous Surveys conducted in 2007 and 2008.

The Survey also represents a diversity of industries ranging from Energy toPharmaceuticals and Manufacturing to the Public Sector. What is common to allrespondent organizations is the continuing theme of having to manage and drivevalue out of third party expenditure.

As we indicated in last year’s Survey, the pressure on the procurement functioncontinues to grow exponentially. If anything the global financial crisis has onlyaccelerated this focus as cost reduction becomes key to sustained profitability andin many cases long-term survival.

Paramount to this is reacting in the right way. Winners in the current climate willbe those procurement professionals who are able to focus on the real issues anddemonstrate an agile approach to adjusting rapidly to the unprecedentedchallenges facing them.

The Survey has been conducted in the main through one-to-one interviews withsenior procurement executives from around the world.

Capgemini would like to take this opportunity to thank each participant for theirtime, contribution, openness and candor regarding their issues, areas of focus andfuture plans. Without their cooperation and investment, research of this naturewould not be possible.

Capgemini Consulting is the strategy and transformation consulting brand of Capgemini Group

Capgemini Consulting wouldlike to extend its thanks to thesenior procurementprofessionals who made time tobe interviewed for this globalsurvey. Besides theorganizations listed here, afurther 64 companiesparticipated in the survey butrequested that they remainanonymous.

A note of thanks

AEGAEGON Nederland N.V.

Alliander

AREVA T&D Canada

Astellas US LLC

Astra Zeneca Plc

Atlas Copco Compressor Technique ServiceDivision

Ballast Nedam

Bank Austria

Barilla G. e R. Fratelli

Bayer CropScience

BD

Boral Ltd

BP Plc

BSH Bosch u. Siemens Hausgeräte GmbH

BT

CABOT Corporation Europe

Caltex

Capgemini NL

Carphone Warehouse

Chemion Logistik GmbH

Claas KG

Cognis GmbH

Consip – Government Agency forPurchasing in PA

Dell APAC and Japan

Department for Children Schools andFamilies

Deutsche Bank

Deutsche Post World Net

Downer EDI Rail

DSM

Elders Rural Services Limited

Essent

Faurecia Autositze GmbH & Co. KG

G4S

GASAG Berliner Gaswerke

GEA Air Treatment Service GmbH

Gebr. Becker GmbH

Goodrich Corporation

Heijmans

Her Majesty's Revenue and Customs

Hewlett-Packard

Houghton Mifflin Harcourt

HydroOne

Inalfa Roof Systems

Invitel Távközlési Zrt

Jarden Corp

Karl Otto Braun GmbH & Co. KG

Koninklijke BAM Groep nv

Landesbank Hessen-Thüringen Girozentrale

Lantmäteriet

Lekkerland

Libro

LloydsTSB

MAG Powertrain Europe

Manutencoop Facilities Management

Mattsson Metal

Mercury Marine / Brunswick Corp

Metropolitan Police Services

Microsoft Deutschland GmbH

MTU Friedrichshafen

MVV Energie AG

News Corporation

North Lanarkshire Council

NS

NSW Department of Education & Training

Oesterreichische Post AG

OMV AG

Optus

Prysmian

PSPI

Raiffeisen International Bank-Holding AG

Global Chief Procurement Officer Survey 2009 I Participating Companies and Organizations 3

Participating Companiesand Organizations


4

Rexel

Road and Traffic Authority

RWE Services

SABIC Europe

Saint-Gobain Deutsche Glas GmbH

Saipem

Sandoz

Schindler Management AG

Schweizerische Post

SGL Carbon

Siemens Healthcare

Snam Rete Gas

Spherion Corp.

s-Proserv

Stielfelkönig

Swedish Tax Authority

Syngenta

Takeda Pharmaceuticals North America, Inc.

Tata-Corus Steel Group

Tessenderlo Chemie, Business GroupChemicals

TETRA Technologies

The Scotts Company

The University of Sydney

Toyota Motor Europe

TRW Automotive

Valentino Fashion Group

Value Wales

Van Gansewinkel Groep

Vattenfall Europe Transmission

Versicherungskammer Bayern

WestLB AG

Whisson

Global Chief Procurement Officer Survey 2009 I Executive Summary 5


This year’s Survey provides insight intothe impact of the global recession onprocurement executives, with nearly 7in 10 participants acknowledging thatthe current economic recession washaving a significant impact on them:increasing targets, altering focus areasand shortening planning timehorizons. For many, savings targetshave doubled from those that prevailedwhen we last conducted the GlobalCPO Survey, and in some cases are aclear requirement for survival.

Clearly as revenue performancediminishes companies are seeking toreduce operating costs to support thebalance sheet, and as a major lever ofcost control procurement is clearly inthe spotlight. The response to thisfocus appears to comprise short-termobjectives in the main: top of the list ofcurrent initiatives for procurement isthe tactical re-negotiation of existingcontracts in an attempt to slash spendand reflect reduced demand. The othermain activities being pursued targetenhanced supplier management andraising the profile of procurementacross the organization. Even these canbe tracked directly to short-term goalsas opposed to more strategic, longer-term objectives.

One of the concerns we regularlyencounter from company to companyis that of unforeseen bankruptcieswithin the supply base. The fear is theunquantified effect this would have ondownstream product and serviceprovision. The response aroundsupplier management therefore is farmore attuned to risk mitigation asopposed to the more traditional aimsof development and innovation.

Equally the desire to raiseprocurement’s profile can be tracedback to a need to work better withstakeholders, internal customers,suppliers and end user groups to drivelower cost fit-for-purposespecifications.

We would conjecture that part of thisis to move procurement behaviors frombuying what is wanted to buying whatis needed.

All of these characteristics areconsistent with the harsh environmentprocurement and organizations alikeare currently operating in. Theseresults are consistent regardless ofindustry sector or geography and showthe true nature and impact of theglobal economy.

When turning our attention to areas ofinvestment and improvement beingpursued by CPOs, we see significantconsistency with the themes from lastyear. The key findings beingrepresented by:

� Organizations continuing to struggleto unlock the intrinsic value withinIT solutions. More than 60% ofrespondents acknowledged that lessthan 20% of spend utilizedeProcurement tools despite significantinvestment made in technology.

� Perhaps connected to this, spendvisibility remains a key problem andfor the second year running is the topissue facing CPOs.

� The issue of talent continues to be afront of mind issue and, along withthe pressure for economic results, hasbecome more acute for procurementfunctions struggling to executeeffective strategies.

Executive Summary

As a major lever of cost control,procurement is clearly in thespotlight

Top of the list of currentinitiatives for procurement is thetactical re-negotiation ofexisting contracts in an attemptto slash spend and reflectreduced demand

Characteristics are consistentwith the harsh environment inwhich procurement andorganizations are currentlyhaving to operate

6

� Supplier management has come intofocus as organizations recognize therisk of vendor failures within thesupply chain.

� Organizational design continues toadapt to circumstance as respondentsseek to balance end user intimacywith the needs for control andconsistency.

What is striking about the issues raisedby senior procurement executives isthe consistency with findings fromprevious years.

It seems that while the problems arenow well recognized, progress withresolving them is occurring at a slowpace.

One possible explanation for this is acommon failure to see the integratednature of such problems. Ratheractivities are focused on solving whatare seen as discrete issues leading tounsustainable solutions.

In the current climate of short-termgoals and targets driven by what many

market watchers see as the worsteconomic slump in living memory, thequestion of how much capacityorganizations have to affect change hasto be raised.

Lasting solutions seem to be evadingcompanies in the main. While thiscontinues it will serve only to denudeorganizations of the effectivedeployment of tools, capabilities andoperating models to address the long-term strategic agenda. For those whocan break out of this detrimental cyclethere is a clear opportunity to drivecompetitive advantage for theirrespective organizations.

In no small measure these businesseswill help define the winners and losersthat emerge from the current economiccycle.

Given the significant turbulenceaffecting the world economy, part ofthe Survey for 2009 was focused onbetter understanding how this wasimpacting procurement activities acrossorganizations.

Perhaps unsurprisingly, some 67% ofrespondents rated the impact of thecurrent economic challenges as havingeither an acute (very high) orsignificant (high) impact on theircurrent activities and focus. A mere 4%of surveyed organizations saw noimpact at all.

When asked how the economicdownturn was affecting the planninghorizon for procurement activities andstrategy, the majority of organizationshighlighted it as a challenge to lookbeyond the short to medium term.

Given the uncertainties faced, thiswould seem an understandablereaction. However the naturalconclusion is to re-focus the behaviorsand mindset on more tactical activitiesat the expense of longer-term strategicinitiatives which, by their nature, taketime to implement and deliver.

What was prevalent in discussions wasan overall shortening of the planningtime horizon compared with the stableperiod of growth preceding the currenteconomic slowdown.

To better understand what this shift inthe time horizon meant, we askedorganizations to highlight the activitiesthey were pursuing.

Global Chief Procurement Officer Survey 2009 I Impact of Global Economic Downturn on Surveyed Organizations 7


Figure 1: To what extent are the current economic conditions affectingProcurement’s goals and objectives

Not at all – 4%

Minor – 12%

Moderate – 17%

Significant – 39%

Acute – 28%

25% 50% 75% 100%

% of Respondents

Impact of GlobalEconomic Downturn onSurveyed Organizations

8

Top of the responses was a focus on re-negotiating existing contracts withvendors, which was being pursued by1 in 5 of the surveyed businesses. Thesecond dominant activity wasimproving the management of vendorsas a counter to potential supplydisruption caused by bankruptcieswithin the supplier community. Thethird major area of attention was fixedon raising the profile of procurementacross the organization and the value itcould bring to fiscal performance.

It was also interesting to note that lessthan 4% of the Survey respondentsperceived redundancies within theprocurement function as a likelyresponse to the ‘credit crunch’ andneed for cost savings.

Indeed a number of organizationscommented that far from beingpressured to reduce headcount theywere actively being encouraged torecruit more buyers and high caliberpersonnel.

We take this to be an encouraging signthat procurement’s position as a majorlever to cost control is beingrecognized within organizations asrevenues tighten.

Finally we were interested to seewhether these developments werefiltering into the savings expectationson procurement. In last year’s Surveymore than 70% of organizationshighlighted a savings target of 5% orless. This year the number oforganizations targeting that figure hasreduced to 47%. Those tasked withsaving from 6-10% doubled from 19%to 39% of the respondent organizationsbetween 2008 and 2009, while thosechasing double digit reductions alsodoubled from 7% of respondents to14%.

Clearly many organizations are chasingshort-term gains from third partyspend to help support the balancesheet. While investment seems steady,with little sign of reductions inresource capacity, the reducingplanning horizons and rising targetsappear to be at the fore of theprocurement executive’s consciousnessand may help to explain why so manysee the impact of the slowdown asbeing significant or acute.

Figure 2: Time Horizon

Long term - Business as usual

Medium term - Security

Short term - Survival

Further evidence to support this comesfrom the respondents’ perception ofhow long the difficult times will last.Almost 40% believe that the currenteconomic downturn will be with us forbetween one and a half and two yearsand 75% for a year or more. Only onein four believed that we would see anupturn within the next year.

To counter this, however, there was asimilar profile for major input prices.Some 75% did not expect to see risingprices for major raw materialcommodities (e.g. steel), energy or oilover the next year and nearly one inthree did not anticipate a recovery inthe mid term (the next one and a halfyears).

It is clear from the Survey thatsentiment is reasonably gloomy for thenext year or more in terms of revenuerecovery. The focus is thereforeevidently on cost control whereprocurement is a major contributor.The current downturn has clearlyplaced greater expectations onprocurement performance and thechallenge has been set. Theperformance of the function and howit responds will contribute significantlytowards the continuing rise in theperceived importance of procurementby organizations.

In short, the economic slowdown haspresented procurement with theopportunity to show its worth.

Global Chief Procurement Officer Survey 2009 I Impact of Global Economic Downturn on Surveyed Organizations 9


eProcurement – Use andPenetrationGiven that electronic enablers forprocurement have now reached areasonable state of maturity, wewere interested to understand howeffectively these were beingemployed by organizations.

The technologies we refer to are thosewhich support source to contractactivities such as eRFI, eRFQ andAuctioning together with transactionaleProcurement platforms coveringcatalogs and workflow approvals.

Given these have been about for morethan ten years, we expected to find ahealthy amount of use of – particularlyin the large organizations ($1bn plusrevenues) which made up the majorityof respondents. What we found wasquite the opposite.

More than 60% of organizations statedthat less than 20% of their spend waschanneled through applications of thisnature. Conversely, those declaring asignificant use of such applications(with 80% or more of their spendsubject to them) represented a mere 7%.

Some 80% of those organizationssurveyed put less than half of theirspend through such applications. Whatis interesting is that while the majorityof organizations possessed some formof eProcurement applications, the useand application to ensure third partyexpenditure coverage is sub-optimal inthe current climate.

Only one of two conclusions can bedrawn from the findings. Either thatthe applications do not best serve theneeds of procurement functions or,more likely, that organizations are

Global Chief Procurement Officer Survey 2009 I Key Survey Findings 11


Figure 3: How much of your spend utilizes eProcurement technologies?

25% 50% 75% 100%

% of Respondents

Greater than 80% of spend – 7%

60% to 80% of spend – 7%

50% to 60% of spend – 4%

40% to 50% of spend – 4%

30% to 40% of spend – 7%

20% to 30% of spend – 10%

Less than 20% of spend – 61%

Key Survey Findings

12

struggling in terms of how best toapply them.

In trying to unravel this conundrum, itis best to consider the transactionaland sourcing applicationsindependently. The issue for thetransactional applications primarilyfocuses on penetration. In ourexperience once obvious areas ofindirect spend are enabled, such asstationery, IT hardware, promotionalgoods and IT consumables,organizations start to struggle. As onerespondent commented, “myeProcurement platform is no betterthan a stationery ordering system.”

The reality is that most indirect spendrelates to services that do not easilylend themselves to a structured catalogformat. Instead these areas of spendrely on form-based functionality whichcan be highly effective and user-friendly in capturing demandrequirements, but is often overlookedas too hard when configuring thesolution in many organizations.

In parallel, these applications oftensuffer from issues of complianceamongst employees.

Building a solution is one challengebut getting people to use it is another.Too often people find ways to bypassthe system and revert to traditionalways of transacting; for exampleemploying the phone as an easiermedium. Unless a robust compliancestrategy is in place, the amount ofspend directed through a system islikely to remain low. The knock-onimpact can be that the significantinvestment in these applicationsactually hinders the ability to manage,monitor and control complianceeffectively.

Finally, a contributing factor to the lowuptake of transactional eProcurementsystems may relate to how they ‘fit’into the overall landscape of enterpriseapplications. Too often the self serviceeProcurement platforms are boughtand implemented with a perceptionthat they will provide the ‘one stopshop’ for all spend. In truth some areas

of spend are simply not suited to thistype of application and are betterserved through the use of otherchannels such as standard ERPfunctionality or purchasing cards. Asimple example would be utilitieswhere the transaction count is very lowand payment tends to be madethrough call off and then crosscharging to business units.

To be effective the eProcurementapplication needs to be positionedappropriately as one of the channelsfor transactional management withinan overall spend management solution.The key to robust use of such asolution is to have it focused on thehigh transaction non stock areas ofspend and integrate it into the widersuite of applications used to managespend.

While this might seem obvious it isclear from observation that this tendsto be omitted by many organizationsleading to confusion of the exact remitof such eProcurement solutions.

Turning our attention to the moredynamic commerce applications ofeProcurement such as eRFX andauctioning, it appears that a similarlack of focus prevails. One respondentcommented that they found it difficultto understand how to apply the toolsavailable to areas outside low value,non strategic spend aspects.

From discussions during the Survey wepinpointed several issues impactingbroad scale adoption of theseapplications. Firstly, integrating thetools into the sourcing process andmigrating them to a business as usualstanding rather than applying them ona case by case basis. In effect changingthe buyer’s mindset from one of ‘whento apply’ to one of ‘when not to’. Toooften the eProcurement applicationsavailable to the procurementprofessional do not seem to beemployed in the situations where theywould provide the most benefit, suchas complex types of procurement, or asa tool to gather more significantinformation to help enhance informeddecision making.

Last year we raised the talent challengeas a consistent issue facingprocurement. We found that themajority of procurement functionswere faced with an issue of finding theright caliber of resource to helpexecute strategies and sourcingactivities. It is possible that part of theproblem with applying eProcurementapplications for optimal benefit is thelevel of procurement capability of somemembers of the procurementcommunity - and their ability tounderstand how and when to useeProcurement. This seemed to beborne out by some of the commentswe picked up during discussions withrespondents who highlighted this as acontributing factor.

To overcome these twin issues wewould recommend that organizationsintegrate such applications into theDNA of day-to-day activities, while atthe same time launching appropriateclassroom and on-the-job training forbuyers to help familiarize them withthe tools at their disposal and improvethe understanding of the value-addthat can be achieved.

In an era where time-to-savings isparamount, we feel it essential that

organizations seize the opportunitypresented by such tools to improveresults and productivity.

Procurement OrganizationalDevelopment – Evolving ModelsLast year one of the major trends weassessed was the organizationalmodels that procurement employed.In this year’s Survey we checked onthe associated developments in thisspace.

The findings revealed a significant shifttowards a hybrid model from morecentralized vehicles.

In the 2008 Survey we found 63% oforganizations favored a centralizedmodel. In this year’s Survey thatnumber fell by over a third to just 36%of organizations. We found that theuse of hybrid models rose significantlyfrom 22% in 2008 to 41% this year.Those choosing to employ a federatedmodel remain reasonably constant at12% dropping only 3 percentagepoints from the previous year. Furtherinterpretation of these findings drawsout some interesting trends.

We found last year that the drivetowards more centralized models was



Figure 4: Organizational models in Use by respondents

10

20

30

40

50

60

70

80

90

100

% o

f R

esp

on

den

ts

Centralised Hybrid Federated Shared Service

Outsourced

2008

2009

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being fuelled by a need to gain controlover direction and priorities. This is anatural reaction to the evolution fromfederated models where decisions tendto be taken locally and therefore cancreate challenges in coordination.

However the primary shortcoming of acentralized model is the difficulty ofinterfacing with end users to helpshape requirements and controldemand. It is perhaps unsurprisingthat there has been a shift towards ahybrid model that helps address thisissue while maintaining coordinationand direction.

A hybrid model combines the featuresof central direction with distributedservice provision for procurement.Given the pressures to drive benefits,the need to ensure close proximity toend user communities rises inimportance.

It was also interesting this year to notethe emergence of new organizationalmodels, notably shared services andoutsourced operations, whichaccounted for 1 in 10 of surveyedorganizations. The specificorganizational drivers behind each ofthese models are different but wewould conjecture that they include aneed to deliver economic benefit aswell as provide a more efficient andeffective self-service options to allprocurement end users.

The shared services model is driven bythe need to secure greater efficienciesin procurement operations byremoving duplication and thus drivingdown the overall cost of operations. Itis particularly effective for the moretransactional elements of procurementactivity and helps to amortize the costof operations. Where organizations areseeking to find cost efficiencies themove to utilize shared service conceptsis understandable. However, it remainsto be seen how well this sharedservices model will fare in integratinginto local business units as the modelunfolds.

By contrast outsourcing has itsimperative in a different direction.With the ‘dash for cash’ pressure onbusinesses, many are now turning toservice providers who offer theopportunity to accelerate benefitsthrough established deals and efficienttransactional processes. In effect, ratherthan trying to build your own solutionthe outsourced provider extends theopportunity to buy into a ready-madesolution in exchange for some of thepotential buying benefits inherentwithin an organization. We have foundthis to be of particular appeal in non-strategic areas – particularly in indirectspend categories. Our experience ofthe market also shows momentum toapply such models in the transactionalpurchase-to-pay (P2P) space leveragingoffshore low cost solutions backed byon-demand technology platforms.

The issues with outsourcing, however,are how to effectively integrate theservice into an overall procurementstrategy and organizational structure,while still creating a sizeable servicepackage that will attract providers.

For those contemplating using a formof outsourced vehicle as part of serviceprovision, the question is therefore not‘whether to’ but ‘what to’; in short,trying to identify those areas of spendor process that would benefit fromaccelerated speed to benefit.Identifying ‘non-strategic’ activities thatare more easily outsourced can besubjective; the optimal approach is tobuild a fact-based analysis of whatspend areas and processes are to beoutsourced, and why.

Also, in talking to outsourcedproviders we have found that theattraction of an arrangement is verymuch governed by size and economyof scale. Taking on a small number ofcategories or a discrete process oftenfrustrates the ability to leverageeconomies of scale and holds littleattraction because the difference to theoverall bottom line is minimal. In thissituation neither the service providernor the customer gains real benefit.

Despite the challenges, we expect tosee a significant increase in marketactivity with respect to the use ofoutsourcing over the coming cycle. Asthe global downturn continues to bite,this growth will be fuelled by anagenda driven not only by cost cuttingbut in equal measure the speed todeliver tangible benefit.

Spend Visibility – Improving theLine of SightIt seems from this year’s findingsthat poor visibility of expenditureand performance continues to dogthe procurement professional.

The top area of focus for investment bysurveyed organizations this year is onimproving the quality of spendinformation and its availability. Thisremains consistent from the findings ofthe 2008 Survey where it also rankedas the top priority.

It would seem that despite thespotlight on this over the past twelvemonths, the availability of qualitymanagement information remains anAchilles heel for the procurementprofessional.

The focus is understandable.Procurement is expected to deliversignificant, tangible and rapid costreductions in third party spend. Inorder to deliver on this theprocurement professional must be wellinformed. What is spend? Who do Ispend it with? And what are thefundamental starting points that manystruggle with?

Having detailed reliable data is thebedrock of effective procurement. Itfuels the ability to construct innovativestrategies to secure optimum value formoney in the market, to trackanticipated savings to the bottom lineand to provide the means to monitorsupplier performance. Without thisdata these areas become too reliant onguesswork and gut feel.

The all too common problem is thatwhat information is available is poor,too high level and poorly aligned tomeeting these needs.

This continues to cause concern giventhe amount of IT investment thatprocurement has enjoyed. As wementioned in last year’s report there isno shortage of systems to manage datawithin most businesses. Yet despite theinvestment in ERP applications and‘best of breed’ procurement solutions,poor information remains a perennialproblem. The only question thatshould be posed therefore is ‘why?’

Poor information is invariably theresult of broken master data. Theissues with master data management(MDM) include:

� Fragmented governance to driveconsistent data entry with blurredaccountabilities and ownership.

� Incomplete descriptions andclassifications.

� Misclassifications of spend types.

� Lack of consistent schemas and datahierarchies.

� Inconsistent taxonomy and partnumbering between locations.

� Classifications and descriptionscaptured at too high a levelfrustrating the ability to understandspend at a grass roots level.

� Disparate procurement platformsemploying differing data structures ina non integrated way.

These problems are particularly acutein non stock areas of spend and forservices. As one CPO mentionedduring the Survey, “I am not surewhether my indirect spend is €1bn or€3bn as the reports are soinconclusive.”

It is difficult to see how procurementcan raise the agenda beyond a tacticalcost saving focus when it is starved ofinformation. Such information holdsthe key to a range of significant benefitareas such as driving higher degrees ofstandardization, aggregating acrossbusiness units and geographies andhelping to drive cost of capitalreductions through better managementof stock holdings.



16

From our discussions during theSurvey and our work withorganizations, it is clear that theproblem of MDM is systemic across allsectors and regions.

In last year’s Survey we foundimproving information a dominanttheme. The results this yeardemonstrate that this focus isintensifying. In 2008 67% of surveyedorganizations declared improvedinformation to be a clear area ofintended action or a top 5 issue forthem. In the most recent Survey thishad increased to 81% - an increase ofalmost 42% in the surveyedpopulation.

While the focus on resolving thisproblem is increasing it also appearsthat previous efforts have not yetdelivered successful results.

Given that this has ranked as a keyissue for the past three years we mustask why so little progress appears tohave been made.

Our first hypothesis is thatorganizations continue to treatsymptoms rather than the root causesof poor MDM. In effect, responses tothe inherent problems have revolved

around new or incremental ITsolutions or indeed manualintervention. Such an approach fails toaddress the underlying issues.

Our second hypothesis is that there isa distinct failure to recognize the inter-related issues which cause suchbreakdown in information. Rather thanadopting holistic organization-widesolutions businesses have defaulted topoint solutions that address only partof the problem and are not sustainable.This is neither tied into the overallenterprise of procurement integrationnor will it address the end gamethrough effective compliancemonitoring and management.

Finally the issue of data integrity is notexclusive to procurement. Managementof data, data input, systems and ITplatforms, bills of materials andclassifications regularly sit outside ofprocurement with other functionalareas. In effect, procurement is acustomer of information, not an owner.If solutions are to be effective thenorganizations must recognize that anintegrated pan-organizational responseis required.

Figure 5: How important is information and availability - 2007 to 2009 results

A top 5 issue

Clear intention of planned activity

Some planned activity possible

Not an area of focus

Clear intent for no action

25% 50% 75% 100%

% of Respondents

20072008

2009

Effective Supplier Management –Managing Risk in the SupplyBaseWhile cost reduction remains at thefore of the procurement agenda, therisk of supply disruption fromfinancially distressed vendors is notfar behind.

Inevitably the economic turbulence isaffecting buyers and suppliers in equalmeasure. While procurementexecutives are chasing significant costreductions in spend to help supportbalance sheets, there is also a growingrecognition of the inherent risk posedby distressed suppliers.

The effects of the credit squeeze,reduced order books from inventoriesbeing run down and lower demand areall having an effect on suppliers. Whilemany will weather the economicstorm, for others it will spell disaster.Business failures are on the increaseand the impact on buyingorganizations in the main is poorlyquantified.

The Survey results showed that a focuson supplier management to avoidbusiness disruption from bankruptciesin the supply base was the secondhighest area of activity fororganizations responding to theeconomic downturn. It is therefore noreal surprise to see that 65% ofrespondents indicated improvedsupplier management as either a top 5initiative or an area of planned activity.Only 12% of organizations stated thatthey had no intent to improve theexisting supplier managementapproach.

Typical supply bases can run into manythousands of vendors. Although asmall number of these can account forthe majority of spend – perhaps a fewhundred – risk does not necessarilyrestrict itself to solely fiscalconsiderations.

If we consider a small supplier whorepresents less than 1% of total spend,it’s true to say that on financial termsthe supplier would not be deemedcritical. However, seen through another

lens things can appear quite different.If they supply a critical compound,component or material for finishedgoods then their importance risesexponentially. While this may seemobvious, it raises a number ofchallenges for the procurementexecutive.

Challenge one is getting to understandthe relative strategic importance ofvendors across the supply base. Whilean obvious list of candidates willalways exist, understanding thecomplete picture can be somewhatmore complicated.

Often intelligence on relativeimportance does not reside wholly inprocurement but requires closecooperation with end user groups.Successfully affecting and influencingthis requires strong stakeholdermanagement and cross functionalworking.

Once the supplier portfolio isthoroughly understood theprocurement team is then faced withensuring that such vendors can beevaluated on a regular basis. Thisshould consider a range of factors fromfinancial to operational using robusttools, techniques and methods – notall of which may be in place.

The final area of challenge is then towork in concert with business units tocreate contingency plans that mitigatesupply disruptions.

We anticipate that these challenges willresult in organizations segmenting theirsupply bases to understand strategic,bottleneck, leverage and administrativesupply areas of spend. This willprovide the basis for organizations tothen align tools and techniques ofsupplier management appropriatelywith the characteristics of supply andto manage spend more on a portfoliobasis than is done today.

There are also implications for thecapabilities needed by procurement. Agood buyer does not necessarily makea good supplier manager. While theformer concentrates on creating



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innovative go to market strategies andexploiting these, the latter depends ongood relationship and operationalmanagement skills.

We have found that one of the biggestchallenges to embedding robustsupplier management withinprocurement is differentiating theseskill sets and having the differencesrecognized by the organization.

We will discuss the continuing talentproblems in the next chapter but oneof the keys to successfully pursuingeffective supplier management in thecurrent climate will be aligning theright relationship and analytical skillswith the tasks at hand.

Finally, trying to understand the ‘atrisk’ suppliers within any vendor basegoes well beyond simple financialanalysis. It will need a 360o

assessment. Organizations need to beconsidering not just the relativestrength of vendors’ balance sheets buttheir downstream exposure within thevendors’ own supply chains, theiroperational competencies and definedcontingency plans as well.

Upstream the procurement executivewill need to consider effective in-housecontingency plans to overcome areas ofpossible supply disruption. These mayinclude finding alternative sources ofsupply (where feasible), switchingcosts, buy-outs for certain types ofconstrained supply, changes tospecifications and the accumulation ofstrategic stocks.

All in all, the current environmentdemands a higher degree of scrutinyand wider consideration of factors thanwould be typical in a more benigneconomic climate. In building futuresupplier management capabilities theorganization will face the challenge ofbringing on board comprehensive toolsand techniques as well as finding,training and deploying the right talentto execute effectively.

The Talent Gap – ContinuedIssue of AppropriateCompetence and CapabilityWe highlighted last year that theCPO continues to see a dearth oftalent as a major obstacle. Despitethe focus over the past 12 monthsthis issue appears to have shown nosigns of easing.

Second only to improved information,capability improvement and talentmanagement rated highly as a focusarea for the second year running. Ofthe surveyed organizations, some 65%of executives considered this to be atop 5 (30%) priority or a key spotlightarea (35%).

This demonstrated an increase inemphasis over last year where only27% saw it as a top 5 and 30% as aclear area of focus. From commentscollated during the Survey process wewould surmise that the raisedexpectations on procurement to deliverincreased cost savings has re-emphasized the need for talent toexecute.

In our analysis last year we drewattention to the shortage of top talentin procurement with mostorganizations searching for the samepeople, which was further complicatedby the emergence of new global playersfrom India and China.

When considering that feworganizations have sought to reducetheir procurement functions as a resultof the economic downturn it isperhaps no surprise that the talentpool remains constrained.

Indeed, as mentioned earlier we foundthat a high percentage of CPOs wereseeking to or continuing to augmenttheir functions’ skilled resources. Sucha combination would explain in partthe continued focus on developing,retaining and recruiting talent.

Our prediction in last year’s Surveythat any economic slowdown wouldlead to an intensification of the ‘talentwar’ appears to be being borne out thisyear. The acute need to cut costs has

only demonstrated to board executivesthe importance of procurement as alever of cost control.

As a consequence the CPO is underincreasing pressure to deliver faster,larger results. To do this they will needthe right talent to execute differingapproaches capable of satisfying thisdemand.

Given that growing the right talent is aslow business, requiring time to trainand develop mature experience, thispresents a real challenge toorganizations. The conundrum is ofcourse that many do not have the timeto wait given they need to bedelivering results now.

Faced with such a dilemma the onlyalternative would appear to pursue oneof two short-term strategies:

� Recruit

� Use interims/contractors

The issue with recruitment is of coursethe shortage of talent. It appears thatdespite a shrinking jobs market, topprocurement talent still commands aneconomic premium and is universallyhard to find.

Those in possession of talented andexperienced resources seem to be morefocused on retention in the currentclimate and the uncertainty has alsomade professionals reconsider jobchanges. So it would seem thateffective recruitment opportunities arelimited in the current market.

The use of interims also poses issuesfor organizations. While it presentsready access to qualified andexperienced staff it has cleardrawbacks.

Such resources are temporary and theexperience they accumulate with thehost organization is lost whencontracts come to an end. Equally,given their temporary status, it can bedifficult to integrate such resourcesinto the business as usualenvironment.

However, with the pressures onprocurement executives to deliverresults and the difficulty to recruitappropriate talent in the market, theuse of interims presents a readysolution to securing the neededfirepower necessary to address spendin the short term.

What is perhaps of more interest is thedevelopments that need to be pursuedin order to alleviate the long-termproblems surrounding capability.

There appear to be six key steps:

1 Review the portfolio of resourcesavailable and profile the talentwithin it based on established andpotential.

2 Determine the areas of capabilityneeded to execute procurement’sremit: sourcing, suppliermanagement, analysis, majorcontracting, category managementetc.

3 Create the appropriate classroomtraining needed and the follow-upon-the-job training alignment.

4 Understand the gaps and create aclear strategy to address thesethrough recruitment and homegrown talent.

5 Create a clear retention strategy forkey resources and top quartilepersonnel.

6 Evaluate the changing role ofprocurement and consider futureskill areas needed.

These simple steps should form anintegrated approach. Doing one or twoin isolation is not likely to materiallychange the talent problem. Weuncovered elements of these during theinterview process but seldom in anyholistic sense.

If we as a community are to deal withthis fundamental problem then it willtake a fundamental and cohesiveapproach rather than simple monofocused initiatives. Doing what wehave always done will simply yieldwhat we have always had.



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Managing Commodity PriceFluctuations and Volatility

Colin Hartog, Managing Consultant –Procurement, Netherlands Hamish McKechnie-Sharma, Principal –Procurement, United Kingdom

We are in rapidly-changing andunpredictable times, in whichcommodity prices are being driven toextremes on a regular basis. This is thedawn of an increased requirement forflexibility and agility whereprocurement functions large and smallneed to confidently manage costreduction in an accelerated fashion. Ashighlighted in this Survey, improvingthe line of sight remains a criticalactivity for procurement professionals,yet the task at hand is heightened incomplexity with the current economicshifts and patterns.

The Survey findings indicated thatcontract renegotiation is the largeststrategy being adopted to mitigatecurrent economic challenges, with 20%of all responses highlighting this.Additionally, participants were unclearabout when the stabilization of prices

would return to more establishedlevels, with 27% of respondents feelingthis would be in excess of 2 years fromnow. Given these challenges,procurement departments arequestioning how best to deal withprice changes and revisions againstnew contracts.

While contract renegotiation is a corepart of each procurement organization’sfunction, it is no new phenomenon.During periods of economic expansion,we have seen suppliers maintain year-on-year price increases, yet in periodsof economic downturn, supplierstypically follow general inflationaryindicators. It is relatively common forprocurement professionals to have littlevisibility into real market pricedevelopments, as most procuredproducts or services do not allow foreffective global or local tradingexchanges that establish market prices.As a consequence negotiated priceagreements are likely to be validated bythe facts at hand, and are whollydependent on the competence andcapability of the professional buyer.

Supporting Articles

Figure 6: Market development versus price changes

Qualitative Aspects

n Finacial perspectiven Internal perspectiven Growth perspectiven Customer perspective

n Assessment on Krajicn Supplier profile(s)n Audit based assessment

n Transparency cost driversn Supplier locationsn Cycle timesn Performance measurement

n Transparency cost driversn Emerging marketsn Policiesn Downturn impact

Valuedriver

analysis

Relationshipanalysis

Supply Chain

analysis

Industryprofile

Commodityprofileprofile

It is relatively common forprocurement professionals tohave little visibility into realmarket price developments, asmost procured products orservices do not allow foreffective global or local tradingexchanges that establishmarket prices

Managing switching andadministration costs are additionalcomplications buyers often have tohandle effectively with suppliers,where more often than notorganizations absorb the priceincreases directly. Increasingly,suppliers have the balance of power.The challenge, therefore, lies in how toaddress the bargaining power byincreasing the buyer’s market insight inorder to influence the factors for bothpricing and those price developmentrules affecting contracts due forrenewal.

Market Development Versus PriceChangesThe difficulty for a CPO and hisprofessional purchasers rests in the factthat if price changes are fluctuatingoften and erratically, how can these beunderstood effectively during suppliernegotiations? How easy is it to createand maintain a price revision formulathat could support the renegotiation ofcontracts? And what is happening inthe environment in which the supplieris operating?

An extensive commodity profile reportfor any given product or service thatan organization is buying should,ideally in collaboration with the crossfunctional teams and the supplier,identify and expose the basic costelements. Deep analysis increases the

quality and maturity of commodityknowledge across supply and demandareas such as development ofproduction numbers and locations,usage and availability of raw materials,supply chain lay out and applicationareas of the products or services. Inaddition, economic, technology andother external market forces will allhave a part to play in the pricingmodel for a supplier.

Introducing Market Price IndexingBy using a recently developedCapgemini Consulting support toolknown as “Market Price Indexing(MPI)”, we believe that procurementdepartments will be able to benefitfrom further transparency inunderstanding costs and theirrespective drivers as close to a real-time basis if needed. The outcomes ofthe commodity profile are used toderive an index figure that provides anoverall direction on the developmentof the pricing for a commodity.

Capgemini Consulting maintains asignificant historical database thatcontains a comprehensive collection ofcost drivers and economic indicatorsranging from the Baltic Dry Indexthrough to the Japanese inflation rateand the Chicago Purchase ManagersIndex. There are also sufficient data

Global Chief Procurement Officer Survey 2009 I Supporting Articles 21


Figure 7: Introducing market pricing indexing

Quatitative Aspects

n Production numbersn Production locationsn Number of suppliers

n Application area(s)n Substitute componestn Threats in the marketn Polcies

n Inflation ratesn Population growthn Economic sentiments

n Cost structuresn Cost indexesn Overal cost base

Supplyfactors

Demandfactors

Economicfactors

Costdrivers

MarketPrice IndexPrice Index

22

sources publicly available for similarinformation to be extracted and ensurea fairly accurate MPI.

Having earlier identified the costdrivers and indicators that will mostlikely influence the pricing for a suiteof goods or services with a supplier,the sources for these drivers are thenassessed and assumptions are agreedon the level of influence. Oncecomplete the interdependencies areentered in the MPI support tool thatthen also models the historicdevelopment of an indexed price: theMarket Price Index. Once in place thisallows for the regular monitoring ofthose goods and services that arepertinent to the procurementorganization.

Using the MPIAfter creation of the MPI – with orwithout the input of a supplier – thedata can be shared between the buyerand supplier. When a suppliercontradicts a cost driver or the level ofinfluence, the MPI can be easilyamended to levels that are in line withthe perception of the supplier. If theprice development for that supplierstill shows a difference with thecalculated index, the buyer is wellarmed to initiate effective pricenegotiation discussions with thesupplier. The data provided wouldallow for the buyer and supplier to

have an open discussion on bothmark-up and profitability. Ultimatelythis allows for an increased level ofdialog between both parties in whatare turbulent times for organizationsfocused on cost reduction. The MPIcan, as the graph here shows, questionboth the level of a price change and itstiming. If an indexed price for acommodity is showing a more rapidincrease than the MPI, there is a reasonfor dialog. Such tools being usedcollaboratively between buyer andsupplier will drive a greater level ofprofessionalism in the discussionswhen revisiting price negotiations andrevision formulas.

Displaying and maintaining the MPIDisplaying the cost driver database orMPI data in a web-based environmentacross an organization’s intranetenables all procurement professionalsto converse with the supply base in aconsistent and coherent fashion. Evenif it is not possible to arrive at a precisedefinition of an MPI, but a list ofappropriate indices, cost drivers andrates can be provided, this alone willprovide an improved level ofprocurement intelligence, awarenessand maturity throughout theorganization.

Centrally maintaining the data for theMPI is, in our view, the most efficientway of data collection. This allows for

Procurement intelligence can beused to improve theprocurement organization, butin order to make this asuccessful tool organizationsoften face a number of criticalchallenges

Figure 8: Market pricing index

104

103

102

101

100

99

98

97jan feb mrt apr mei jun jul aug sep okt nov dec

Indexed Purchasing PriceMarket Price Index

limiting any data redundancy storedlocally and other such challenges whenindividuals leave organizations. Thiscollaborative way of working keepsvalue-added procurement activity atthe heart of a procurementorganization.

We would recommend regular updatesto the MPI-based data depending onthe requirements of the procuringorganization and the volatilityproperties of a respective commodity.

Why use the MPI?Many job descriptions in the strategicprocurement area are focusing onaspects like “responsible formonitoring market change…”,“monitoring market dynamics”, “leadinternal and external benchmarking...”or “market knowledge owner for thecategory…”. The MPI tool, theaccompanying approach of in-depthcommodity profile knowledge, andabove all a low maintenance solution,will improve the bargaining power ofthe procuring organization. In additionit brings insight as to how and whenprices can be revised.

Procurement Intelligence and MarketInformation are on the agenda for alarge number of organizations. The2008 Survey already showed this as acritical top 5 issue for over 35% of therespondent organizations, and thisyear’s Survey continues in the samevein. Having a cyclical approach tomaintenance of data and commodityprofiles will also assist procuringorganizations in managing risk moreeffectively across the supplier base.Understanding the development of theplayers within your ecosystem willaugment supplier relationships to thenext level of maturity.

Using Procurement Intelligenceto Improve Procurement’sSuccess

Procurement Transformation team, TheNetherlands

Procurement intelligence can bedivided into a number of key focusareas: spend intelligence; procurementperformance measurement; supplierperformance measurement; andcommodity intelligence. Most seniorprocurement executives cite spendintelligence as the number one priority.For the third year in a row in theCapgemini CPO Survey, theimprovement of spend visibilityremains one of the CPO’s top 5initiatives – this is not a coincidence.

Focus Areas for ProcurementIntelligenceThe four main focus areas ofprocurement intelligence are defined asfollows:

� Spend Intelligence: the collection andsubsequent analysis of various thirdparty expenditure across thecompany. This information istypically used to leverage purchasingand supplier rationalization instrategic sourcing, budgeting andplanning functions and for contractcompliance. It provides theprocurement organization with theability to monitor purchasemovements, ensure continuousimprovements and subsequentlyrealize these improvements

� Procurement PerformanceMeasurement: measuring andanalyzing the most importantprocurement indicators within theorganization. These indicators needto be based on the organization’smission and strategy, and aligned toits overall performance managementstructure.

� Supplier Performance Measurement:a proactive process of setting andmonitoring expectations and targetswith suppliers. It uses bothmechanized metrics and non-mechanized measurements, and is astrategic tool to support continuous

CPGlobal Chief Procurement Officer Survey 2009 I Supporting Articles 23


Automating tactical processesallows companies to focus onstrategic initiatives

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improvement across the performanceof the supply base with respect toquality, cost, delivery, development,innovation and management.

� Commodity Intelligence: thecollection and analysis of supplymarket data and key market drivers.In contrast with the other three areas,this area has an external focus andoften uses data sourced externally tothe organization.

Spend intelligence makes use of thebasic data in an organization andshould be the first area ofconsideration for improvement beforeembarking on other procurementintelligence areas.

Basic Requirements for SuccessfulSpend Intelligence Before spend intelligence can be put tooptimum use, CPOs need to fulfillthree basic conditions: effectively andefficiently extract data from multiplesources; ensure the use of high qualityand consistent data; and identify theuser requirements.

At one time people believed that spendintelligence involved nothing morethan extracting data from accountspayable systems, using a classificationscheme such as UNSPSC, eClass or any

other proprietary coding scheme, andcreating a data warehouse and a spendcube for analysis and reporting. This isfar from accurate and is difficult toachieve without the organizationaddressing the three critical challenges:

Challenge 1: Effectively andefficiently extracting data frommultiple sourcesRetrieving the data from systems is thefirst spend intelligence challenge. Thefigure below shows a spendintelligence architecture and thedifferent steps needed to obtain andanalyze typical spend data.

This data is often extracted fromvarious sources (e.g. Legacy, ERP, AP,MRP, P-Card, Third Party Systems,Suppliers etc.), and it needs to bemigrated (from encoded data todescriptions) and integrated (dataneeds to be cleansed). The integratedand cleansed data is stored in a datawarehouse, together with historicaldata. Reporting and presentation toolsare used to retrieve the data from thedata warehouse and it is then used forreports and analysis.

Reporting data is often analyzed withina dashboard environment, which istypically created to generate self

Figure 9: Extracting data from multiple sources

Data warehouse

Extract data from local systems

Cleanse data

Store the information

Operating Systems

Report and analyze data

Presentation tools

Dat

a cl

eans

ing

tool

s

managed reports at pre-definedintervals. These intervals can be yearly,quarterly, monthly, weekly or evendaily depending on the real timecapability of solutions available. It isnot always possible to refresh the datadaily and this may not be necessary insome instances. Spend intelligence canbe used for strategic decisions thathave long-term planning implications.It can also be used in operationalprocesses – for example to monitorcompliance – where the daily updatesmight be somewhat more favorable.For this to be successful, it isimportant to ensure the rightinfrastructure is in place givensolutions may range from completesystem overhauls to ensuring alllinkages are in place.

Challenge 2: High quality andconsistent dataThe second challenge is the quality ofthe data that is used across third partyspend intelligence. Data quality isnotoriously unreliable and thereforethe data would usually undergo acleansing exercise. This would typicallytranscend through the following:

� Completeness – there are few to nomissing records

� Records themselves are completewithin their fields

� There are no duplicate records

� Obsolete, out of date and unwantedrecords are removed

� Values are standardized

� Data is consolidated and madeconsistent often across multiplesources.

Data is usually retrieved from differentsystems with varying data models. Theearlier consensus was that solving thedata quality issue at source would bethe answer, but it has ultimatelycreated silos of information across everexpanding systems. This issue iscompounded further in the currenteconomic climate where merger andacquisition activity is becoming anincreasingly regular occurrence,particularly in larger organizations withmultiple ERP backend andprocurement systems. A regularlyoccurring obstacle is that manycompanies continue to omittransactions from their system capturewhich feeds into reporting. Dataencryption remains equally important.

To resolve this issue, many companieshave developed in-house applicationscontaining numerous rules forcleansing and classifying data.Although these solutions serve aninitial purpose, they are oftenexpensive to maintain and providelimited possibilities for dataenrichment and scalability over time.



Figure 10: Data management programs

Input/ cleanseSource Validate/ Enrich Distribute

Cross -check

multiple sources

Validate data using

business rulesFutureIndustry

Scenarios

References data

sourcesManual/

automated input of data

Identify and correct

exceptions

Validate to check accuracy of input

Enrich data using user defined

business rules

Derive data using algorithms/ calculations

Create the “golden copy” of data

Distribute to downstream data users

Data Vendor Management

Data Analysis

Data Request support

Application development/ maintenance

FutureIndustry

Scenarios

Pricing vendors

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An alternative and increasinglypreferred option to solving the dataquality issue is the adoption ofadvanced cleansing engines. These usealgorithms and sophisticatedmechanisms to detect, understand andidentify the patterns across data frommultiple sources. Although theresulting data is not perfect, it is ofteneasy to attribute common outputs andbehaviors. These engines are not onlyable to cleanse a large part of the dataautomatically, but are also capable ofenriching the data by using externaldata such as product data catalogs.

All the issues above are caused by poordata management and the use ofmaster data management (MDM) couldbe a helpful solution as highlighted inthe next article in this Survey report.MDM can be used to address a numberof concerns including poor dataquality, lack of common datastandards, the need to improveoperational efficiency and lack ofresources for data management.However, to succeed, it remainsimportant to prioritize areas that willhave the greatest impact on currentoperations. The areas where costs areassociated with inaccurate data orcustomer dissatisfaction should behandled first.

The Capgemini Data Managementsolution framework shown hereillustrates an example of how MDMcan be implemented in theorganization. The data needs to besourced, based on multiple data sourcereferences and vendor data, before it iscleansed. The cleansed data should bevalidated and enriched. After that, thedata can be distributed among itsusers.

Challenge 3: Identify user requirementsThe third and final spend intelligencechallenge concerns user requirements.The key stakeholders of spendintelligence need to be identified andinvolved to make sure that the spendintelligence solution is fit for purpose.The requirements gathered from thesestakeholders can be used as input forthe reporting and analyzing tools. Ingeneral, key stakeholders are part of

the day-to-day business and as suchare best placed to understand the typesof data required to maintain and runan organization’s operations. Summaryreports and dashboards continue toprovide a good overview of the mostimportant data, although if extraanalysis is necessary, more detailedreports should be made available.

When embarking on any journeyassociated with improving spendintelligence, it is often unclear as towhat the data exactly means, eventhough there is a perceivedunderstanding of this within thebusiness. Greater insight can beachieved where key stakeholders andthe IT department work intrinsicallytogether. It remains a continuousprocess and will eventually lead to abetter understanding andcomprehension of procurement withinan organization.

How to improve your procurementorganizationWhen the three basic requirements aremet, organizations can use spendintelligence as a successful tool. It willimprove procurement’s ability toprovide timely, consistent and accuratespend data. This data can be used byall departments that have supplierrelationships, but the procurement andfinance departments will find it themost useful. As with any categorymanagement process, the procurementdepartment can use the spend data toimprove contract management, identifysavings opportunities, track benefitsand analyze the total cost ofownership. The finance departmentcan utilize the spend data as input forits budgets and compliancemonitoring, which in turn can driveeffective procurement activity.

Procurement Master Data – TheBedrock of Success

Jim Abery, Vice President – GlobalProcurement Transformation Leader

Information is built on data. Thequality of master data ultimatelydictates the integrity of outputinformation and reporting. In ourexperience organizations arecontinually hampered in their efforts tooptimize the performance of theirprocurement activities because of thepaucity of information and availabilityof reliable data. In effect too manyprocurement activities are executedwhen ‘driving blind’ or made on thebasis of ‘gut feel’ or ‘best guesstimates’.

Poor master data management (MDM)leads to a cycle of detrimental events.It starts with often laborious methodsfor gathering data from various systemsand employs some degree of manualcleansing to create an acceptable levelof consistency. With this, a ‘snap-shot’analysis becomes possible, althoughthis represents merely a moment intime rather than real time.

Consequently the disparate nature ofunderlying data and the inherent datagaps that frequently exist provide theformulae for sub-optimal and/ormisleading analysis. Take a momentand consider the following questions:

� Is detailed, granular understanding ofexpenditure available across all majorareas of direct and indirect spendcategories?

� Can I compare consistently spendinformation at supplier, commodityand line item level across sites,divisions, locations and geographies?

� Do I know definitively what I spend,with whom and on what in real timewithout the need for resorting tospreadsheets and manualintervention?

� Can I track savings consistently?

� Do I have clear visibility of thecompliance levels within myorganization against preferredcontracts and suppliers?

If the answer to one or more of thesequestions is anything other than aresounding ‘yes’, then you almostcertainly suffer a problem with masterdata.

Despite the age-old nature of thisproblem, improvements to MDM havebeen slow in coming.

Capgemini has identified a number ofreasons behind the lack of progress inrectifying this fundamental issue forprocurement success.

The ten drivers of poor master dataWhile no two organizations are identical,the issues with procurement master datatypically come down to a combination ofone or more of the following factors.

1 Poor Data Entry: lack of data entrydiscipline is a common issue. Thiscan take a number of forms.Regular problems include;assignment of “other” or“miscellaneous” as a majorexpenditure category, use ofincorrect categorizations,incomplete application of partnumbering or supplier descriptiondetails in master records,duplication of entries andmiscoding.

2 Legacy Systems and Classificationstructures: many organizationshave grown through mergers andacquisitions or have devolved theirbusiness units (BUs) to recognizedistinctive product offerings ormarkets. Through this process,data structures have often beensilo’d with no overarchingdirection or approach. Hence a“hard hat” at one location becomesa “yellow hat” at another and a“safety hat” at a third – theorganization now has threeproducts when in reality there isjust one. While data structuresmay be consistent withinindividual BUs, harmonizedenterprise-wide information isfrustrated.

3 Data Structures and Schemas: it isnot uncommon to find a lack of aconsistent schema (or its



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application) within an organizationdefining material and servicegroup hierarchies. Multipleclassification approaches aretypical, mingling ‘home grown’with industry standard structures.These tend to undermineconsistency. In simple terms, whentwo things that happen to be thesame are called something differentthey become two different items asfar as reporting is concerned.Although use of schemas such aseClass and UNSPSC has becomemore commonplace, consistentapplication and coverage remainsproblematic. Without a commondata structure to drive uniformityin data entry, inconsistenciesrapidly arise and persist.

4 Governance and Accountability:responsibility for data managementis fragmented with unclear lines ofaccountability. Commongovernance determining roles,responsibilities andaccountabilities for data entry,management and integrity are alsoa major contributing factor. Rigorand clarity provide uniformity andconsistency. Conversely, theirabsence leads to multipleapproaches within the enterpriseproviding an opportunity forconflicting data standards andambiguity.

5 Over-reliance on IT: despitesignificant improvements in theavailable IT solutions to helpresolve master data problems theyare not a panacea. However goodthe technology platform is, it relieson process discipline andapplication. Perceiving IT as a‘silver bullet’ negating the need fornon-technology activity simplycontributes to the problem andholds back progress.

6 Scale of the Issue: The scale of dataissues for some can be daunting,leading to paralysis of action.

7 Visibility: poor spend data isregularly ignored as a significantissue within organizations. Itsrelative importance is frequentlynot understood or underestimated

by executives. The issue of poordata is disguised by a willingnessto manage with what is availableon the part of line management.The focus is too often on what canbe done and not on what is ideallyneeded.

8 Quantifying the Benefits: thebenefits from rectifying masterdata do not reside with masterdata itself but from what is donewith the resulting improvement ininformation. When master data isseen as an IT issue the link toenabling business benefit is seldommade, destroying the economiccase for investment.

9 Perception: MDM is not seen as themost glamorous or strategic oftopics. This can give rise to a‘Cinderella’ attitude towards it,relegating its relative importancedown the pecking order forinvestment.

10 Cost and Effort: while benefitshave regularly been difficult toattribute, costs have not.Investment in tools, technology,expertise and man hour effort atthe enterprise level has often actedas a barrier to act. Delay intackling MDM over a prolongedperiod of time allows the issue tobecome exacerbated, reinforcinginertia through the scale ofinvestment needed.

Issues with procurement master dataarise through a combination of thefactors referred to above. They can besummarized however through acombination of outcomes.Complacency, lack of ownership, poorrigor and an inability to clearly see andquantify the impact for highprocurement performance andultimately the balance sheet are but afew.

Quantifying the Nature of PoorProcurement Master DataOne of the reasons why poor masterdata is so widespread withinprocurement is an inability to eitherhighlight or quantify its nature andimpact. Making the connectionbetween what is often regarded as a

Vast increase in efficiencies andeffectiveness can be obtainedusing a structured, disciplined,and rigorous approach

mundane problem and top lineperformance has escaped many, despitehow seemingly obvious this is when amoment is taken to consider it.

Organizations thrive or struggle basedon the decisions they make. Decisionsshould be informed and based on fact,which in the normal course of eventsrequires analysis to draw conclusion.This ‘chain’ of activity lies behind allrational decisions and its bedrock isaccurate reliable master data. If thedata upon which analysis is conductedis inaccurate, misleading and/orunreliable, then by definition thewhole of the decision makinghierarchy becomes contaminated.

In organizations where master data ispoor, problems compound problems;poor data results in inaccurate analysiswhich in turn is used to makedecisions that can be fundamentallyflawed. Ultimately, this drives up riskof failure, sub-optimal performanceand uncertainty.

Issues with master data, in aprocurement context, normallycirculate around four primary areas:

1 The consistent recording ofsupplier data relating to vendordescription. It is not uncommon tohave the same supplier representedas multiple ‘suppliers’ as a result ofinconsistent data entry. Toillustrate, ‘Capgemini’ becomes‘Capgemini’, ‘Cap Gemini’,‘capgem’, ‘CG UK Ltd’, ‘CapgeminiConsulting’, ‘Sogeti’, ‘Cap-Geminiplc’ and so on.

2 Part or SKU data. Here a range ofproblems are evidenced coveringdescriptions, taxonomies and partnumbering consistency. A singlemanufacturer part which inlocation A is classified as a ‘123’, is‘XYZ’ at site B and ‘ABC’ atlocation C. De facto, we now havethree separate parts when weanalyze. Equally MDM issues affectdescriptions. This is particularlyprevalent with non stocked itemswhere bill of materials rigor is

absent. Actual description linescan be poor or nonexistent rangingfrom incomplete descriptionstrings (e.g. ‘stainless steelbearing’) to ones that areinconsistent across business units(e.g. “bearing, stainless steel, 3cmdiameter” versus 30mm bearing,steel bearing)

3 The third common issue relates tocategorization. These normallysplit into two distinct aspects.Firstly, those with their roots ininconsistent data hierarchies andsecondly those with their roots innon classification. All areas ofexpenditure, whether physicalgoods or intangible services,belong to category families (e.g.Facilities), which can in turn bebroken into commodity groups(e.g. Cleaning) which can again bedriven down to sub-commoditygroupings (e.g. CleaningConsumables). When these are notapplied consistently it underminesthe ability to create robust spendhierarchies. A printer cartridge inone location is categorized as‘Office Supplies’ while a sister sitehas categorized it as ‘ITConsumables’. These problems aremost pervasive within indirectexpenditure areas and can thwartvisibility of spend.More worryingly, however, iswhere spend is not categorized atall. This normally goes by anumber of names; ‘other’, ‘nonclassified’, ‘miscellaneous’ to namebut a few. Often theseclassifications arose to deal withlow value one-off spendrequirements but over time theyhave been abused because of eitherease or lack of rigor over datastandards and have become acatch-all. In one exampleorganization around 20% of totalspend was categorized as ‘other’.

4 Finally, MDM issues also affectprocurement performance data.Suppliers are monitored regularlywith respect to delivery. However,the recording of suppliers’‘promised’ dates by the buyingorganization are often confused



30

with the ‘required’ date fields. Ifthe buying organization is orderinglate and out of lead time it is oftencommon to insert the requireddate into the promised field.Consequently suppliers are seen as‘late’ before they have even startedto fulfill the order, affectingaccurate rating and monitoring ofsuppliers.

So, what does all this amount to? Afterall, companies have long operated withthese problems. In short it comesdown to effectiveness and efficiencyand how this translates intoopportunity. The problems with masterdata described above manifestthemselves in a number of frustrationsthat thwart this opportunity,undermine the effectiveness of aprocurement function and erodeperformance.

The impact of poor MDM determinesthe difference between top quartilebuying performance and averageperformance. This becomes abundantlyclear when we consider theconsequences of each of the aboveareas in turn and extrapolate theimpact.

Defining the opportunities fromMDMDespite the challenge that poor MDMcan pose, the prize for procurement issignificant and demands action. Theseopportunities depend on accurate,consistent and reliable master data.Benefit on its own does not come fromimproved master data management,but from what is done with theresulting information and what itmakes possible. This link is crucial tojustifying investment.

The six primary opportunities arisingfrom improved master data are asfollows:

1 Supplier leverage: consolidation ofsupplier records and consistentdescriptions provides the ability tobetter exploit purchase volumes.Moving from a perception ofspending £5m with twentysuppliers to spending it with one

makes for a completely differentdiscussion with that vendor duringcommercial negotiations.

2 Supplier rebates and discounts:utilizing the same improved dataas ‘1’ above regularly providesopportunities for quick wins oncemaster data is cleansed. Betterunderstanding of total spend byvendor can increase the spend onwhich rebates are applied. Equallythe same information can helpexploit existing pricing models by‘tripping’ the buying organizationinto greater discount bands byrecognizing formerly fragmentedvolumes. These savings can besignificant, quick and helpful forcovering the investment cost ofrectifying MDM issues.

3 Line item leverage: homogenizingpart descriptions and numberingprovides the ability to exploitdifferentiated pricing across theorganization. Once parts areestablished as being the same itemor service, pricing can becompared across different businessunits, locations and functions.Once pricing is understood,harmonization with the lowestpaid rate becomes a simple andoften lucrative exercise.

4 Standardization: similarly,improved line item detail andstandardized information opens upthe opportunity to standardizerequirements to lower cost, but fit-for-purpose specifications. Theopportunity to standardize relieson consistent, transparent data toallow comparison andunderstanding. Standardizationtypically represents significant costsavings of anything between 10and 30% but is only possible ifMDM is consistent, reliable androbust.

5 Cost of Capital: utilizing the data todrive standardization also providesthe ability to improve stockmanagement and the associatedcost of capital. Removinginconsistent categorization andpart numbering provides theability to better leverage stock. In

an example from a Capgeminiproject, a client saved over€400,000 by avoiding thepurchase of packaging at one sitethrough leveraging stock surplusesat another. The former regimewould have perceived these asdisparate parts leading to thecontinuation of unwanted stock atone site and incurring a capitalcost, and significant capitalexpenditure at another site.

6 Productivity: better visibility ofstocked items through consistentpart descriptions and line itemclassifications also improves

productivity.Improved

data

consistencyprovides part availability formaintenance activities throughharmonized records across thestores network. Availability isimproved by exploiting duplicate

stock holdings in differing storesby removing inconsistent partnumbering. Better availability ofmaintenance items leads toimproved up time for plant andthus improved productivity.

We estimate that these opportunitiescollectively represent one of the mostsignificant financial opportunities foran organization. The scale of benefitmay fluctuate from organization toorganization, but the scale for largebusiness is likely to run into tens ofmillions of Pounds, Euros and/orDollars. When translated to thebalance sheet the impact is material,improving gross and net profit,earnings per share and potentially thecompany’s overall rating as measuredfrom a price to earnings perspective.

Exploitation of these opportunities,however, is based on the abilityto link master data improvement

to a procurement program. Thedata provided by the former

affords the later the abilityto drive commercialbenefit and gain. As aconsequence theyrepresent a symbioticrelationship which, ifbroken, thwartsopportunity andprogress. However,once this link isestablished, the case forchange becomes bothcompelling and tangible.

Resolving the MasterData problem

Addressing procurementmaster data requires a ‘look

back–look forward’ approach.Looking back recognizes the

legacy of corrupt or inconsistent datathat needs to be addressed. Parallel tothis is the need to create a sustainableenvironment for future master datacollection. This forward-looking focusis required to rectify the root causeissues of poor master data. These twinareas of focus require a range ofintegrated activities representing aholistic solution to this endemicproblem.



32

The checklist of critical activitiesincludes:

� A business case that clearly links thetangible opportunities from improvedprocurement data and information tothe cost of rectifying the MDMproblem.

� A clear strategy and implementationplan that recognizes theinterdependencies across activities,sequences tasks appropriately, andsets the right priorities.

� Determination of the mostappropriate data cleansing approachfor the situation in hand balancingthe use of software accelerators withthe need for human intervention.

� Clarity about how corrupt orinconsistent legacy data will bequarantined from new records until ithas been cleansed.

� Setting priorities and scope tomaximize cost to benefit, whiledetermining an optimal approach todealing with the legacy low spendbut high volume tail of SKUs andsuppliers that is unlikely to form partof the cleansing scope.

� Determination of the keymanagement informationrequirements for procurement andthe associated prioritization.

� Design and implementation of anoperating model and associatedgovernance required to bringconsistency, ownership andaccountability for managing masterdata records.

� Review, definition and execution ofsystem and technology requirementsneeded to support management ofstandardized and effectiveprocurement master data.

� Execution of an effective changemanagement program to supportconsistent primary data inputs bystakeholders and help colleaguesunderstand the link between dataentries and business performance.

� Development and implementation ofa compliance approach to revised

data capture and entry standardsdevised as part of the program ofchange.

� Finally, define and embed theconsistent data structures, hierarchiesand protocols to optimizemanagement information andexploitation of business benefit.

Dealing with the legacy problem canbe a daunting challenge, but a wellconsidered, pragmatic and integratedapproach to change can break downthe problem into manageablecomponents and drive momentum.

SummaryThe focus on controlling costs andreducing expenditures is a perpetualchallenge to organizations of all nature:public, private, large and small. Speakto any procurement professional andthey will always pinpoint informationas one of the key determinants ofsuccess. If progress is to be made inthis area then the start point must bethe tangible demonstration of fiscaland performance improvementrepresented by change.

This will require the integration oftraditional technology-centric strategieswith the opportunity provided byexploitation of resultant managementinformation. In such a context the casefor addressing master data becomespowerful. Without the link it remainsat best a low priority mundane topiclikely to be shunned by seniormanagement attention.

While resolution of master data issuescan be daunting due to scale andcomplexity, the size of the prize inmost instances demands action. If apragmatic well thought throughcomprehensive approach is taken, withthe end requirement always to the fore,the ‘elephant’, to use a well knownanalogy, can be eaten in bite-sizechunks.

Innovation-Driven Procurement –Innovation and the Role ofProcurement

Robbert den Braber, Senior Consultant -Procurement, Netherlands

Innovation may not be the first wordthat comes to mind when people thinkabout the economic downturn. Butprevious downturns (and upturns)have proved that companies thatcontinue to invest in innovation gainmarket share and increase theirmargins (see figure 111 ). Nor isProcurement the first word that popsup when one thinks of innovation. Butinnovation is no longer the domain ofthe R&D department alone, the mostsuccessful innovations arise fromnetworks of people, universities andnot in the least: suppliers. Leveragingthe supply base as a source ofinnovation can accelerate anorganization’s innovation initiatives andprovide it with an increasedsustainable competitive advantage.

What is Open Innovation?Innovation used to be the domain ofclosed internal R&D departmentsharboring all knowledge internally,protecting IP from outside viewers anddeveloping it all the way from ideathrough to commercialization. This has

its upsides; it keeps competition at bayand good R&D teams will bring greatproducts to market. However, it doesnot make full use of externalknowledge, suppliers, researchinstitutes and new ventures. Nor doesit allow for an open view on othermarkets and is often rigid in terms ofthe envisioned application and market.A good example of how this concepthas continued to fail over and overagain is the Hard Disk Drive Industry2:market leaders in this industry stayedclose to current customers’ wishes bydeveloping the technology purchase.These established firms toppled insuccession when successful disruptivetechnologies were introduced byentrant firms. It is illustrative fortoday’s rapidly changing environments;markets may have shifted well beforeideas reach commercialization. This iswhere Open Innovation3 comes in,which enables:

� Connecting to both internal andexternal knowledge bases (i.e.Universities, Venture Capitals);

� Deciding whether to make-or-buy ineach phase of development (spin outand in);

� Leveraging cross pollination betweenmarkets, both in development andapplication;



1 Capgemini S&P 1200 1995-2005 research2 The Innovator's Dilemma - When New TechnologiesCause Great Firms to Fail, Clayton M. Christensen, 19973 Open Innovation - The New Imperative for Creatingand Profiting from Technology, Henry Chesbrough, 2006

Figure 11: Innovators outperform the market

Return to Shareholders Margin Growth

1100 other companies

100 most innovative companies

Innovators outperform the market

11.1%

14.3%

0.4%

3.4%

Leveraging the supply base as a source of innovation canaccelerate an organization’sinnovation initiatives andprovide it with an increasedsustainable competitiveadvantage.

34

� Scouting for technology in relatedand unrelated markets;

� Enabling the suppliers to leveragetechnologies in other markets;

� Focusing on today’s and tomorrow’scustomers (i.e. crowd sourcing,networking).

The graph below illustrates theconcepts of the Open Innovationfunnel4.

This open focus does not only bring innew ideas into companies, it alsoallows for a better leverage oftechnologies. This is something that is

difficult to achieve for companiesfocused on one type of end customer,but easier and more attractive forsuppliers who have a portfolio ofindustries to serve. Allowing suppliersto conduct innovation activities willprovide economies of scale, as well asnew ideas from other industries.

Innovation Driven ProcurementIn this years’ survey, 29% ofparticipants have supported thesenotions and indicated that innovationand the role for Procurement is a top 5focus area for this year, with a further27% indicating the initiate suchactivities in the coming year. An indepth piece of Capgemini and DutchUniversity research5 finalized early

2009, showed there currently is only alimited contribution to innovationprocesses by procurement.Procurement functions are either notup to the task yet, or are not asked totake up the task. At the same time, weobserve an increase in outsourcingR&D to upstream suppliers, forced byeconomic pressure to reduce the costbase and increase flexibility. Thisbrings into play an important question:how can Procurement support andstimulate these open innovationconnections, and add value toinnovation processes?

Adopting Open Innovation conceptswill impact a company’s businessmodel. The relationships withsuppliers will change, and the valueadded activities may need to berearranged. Suppliers can generatemore value and better time-to-marketthanks to sales to other sectors, andadoption of technologies from othersectors. Open Innovation changes therole of the suppliers from merecontractors (however strategic theymay be) to partners in bringinginnovations to the end market. Thevery same happens internally;procurement changes from a meresupplier of risk mitigation, contractualagreements and efficient call-offprocedures to a partner in managing

4 Open Innovation: Renewing Growth from IndustrialR&D, 10th Annual Innovation Convergence, Minneapolis,Henry Chesbrough, 20045 Strategic Purchasing & Innovation – Master thesis,Casper ten Kate, Utrecht University, Capgemini, 2009

Figure 12: “Open Innovation funnel”4

14 C 2002 Henry Chesbrough EIRMA SIG III, 2005 -10-20

Our current market

Our new market

Other firm’smarket

External technology insourcing

Internal technology base

External technology base

Internal/external venture handling

Licence, spin out, divest

the relationships internally andexternally and finding the rightexternal partners to serve the endcustomer.

The shift in the collaboration betweenthe three main actors Suppliers,Procurement and Business (i.e.Marketing, R&D, Production, etc) canbe illustrated best with the BusinessModel6 shown below. This modeldepicts the relationship between acustomer, which exists for the sake of acompelling value proposition (offer)created by a combination of resources(i.e. a company and its suppliers). Inmore detail it also specifies thecapability map of the resources, andwhat is done by partners to create theoffer. On the customer side it detailsthe interactions with the customer andthe way this affects the valueproposition.

In a traditional Closed Innovationsetup, the high level business model ofProcurement will be as follows (fromright to left):

� Customer: The Business is the(internal) customer of Procurement.The Procurement department hasprocesses and systems in place whichguide the Business through thepurchasing processes, including a

mandatory Procurement involvementin some form

� Offer: Procurement offers riskreduction, cost effectiveness andefficiency to the Business (internalcustomers). The Business profits fromthis by ensuring contracts are in placewith agreed suppliers from whichthey can efficiently call off viapurchasing needs

� Resources: Procurement has a set ofcapabilities which enable it to servicethe Business, among which arenegotiation skills, relationshipmanagement and category expertise.Together with Suppliers(Procurement’s partners),Procurement provides the offering forthe Business

This model makes perfect sense, but itposes major risks with respect toinnovation processes. This setupplaces Procurement and the Suppliersin front of the Business, which in turnhas a business model focused on theexternal client. From this position, it isdifficult for Procurement and Suppliersto fully understand the drivers of theexternal client. There is a translationbetween what the business offers toexternal clients, and to whatProcurement offers to the Business.Our 2009 research mentioned before



Figure 13: Innovation and the role for procurement

0% 10% 20% 30% 40% 50%

Clear intention not to focus on this issue

No real focus

May launch pilot activities and investigations

Area of lesser focus but with intention to execute activities in 2009/2010

A critical area of focus AND a top 5 initiative

Innovation and the role for procurement

% of Respondents

6 Adapted from Alexander Osterwalder

36

showed there is only a limitedcontribution to innovation processesby procurement. What is striking isthat business departments have not yetfound a suitable partner inProcurement to source innovation andto meet their objectives. To fill thevoid, business departments have builtup procurement capabilities to scout,source, contract and manage suppliersfor R&D programs. At the same time,Procurement will struggle in servicingbusiness departments.

An Open Innovation business modelfor Procurement would be as follows:

� Customer: The external customer isthe focus of all departments involved(including Procurement), this resultsin a direct translation of thecustomers’ needs into the offeringprovided. This means Procurementneeds some form of access to thecustomer.

� Offer: A translation of what the(future) customer requires. This canbe anything like short time-to-market, new products, quality, cost,service, flexibility, lead time, etc. Theoffer is not a pure Procurement offer,but a combined offer to whichProcurement contributes directly.Traditional Procurement offeringssuch as risk reduction become a partof the bigger picture.

� Resources: Procurement, the Businessand the Suppliers all partner to createthe offering as one Resource group.Aligned as one team with a singlegoal, this is where all capabilities arecombined and focused. This is alsowhere things get complex: theresources need to align capabilities tobe effective (all required capabilitiesneed to be present) and efficient(overlapping capabilities should belimited). The value created in thispartnership model is shared amongthe partners and made transparent.

All partners involved must benefitfrom the offering’s success.

Procurement has capabilities in storethat fit Open Innovation processesperfectly well. We have seen manycompanies where Procurement isorganized around categories, makingSenior Buyers experts in certainproducts (basically a Businesscapability) and conduct continuousscouting activities. In the samecompanies we found R&D officersmanaging supplier relationships (NB aProcurement capability). This isexcellent, but only when it is the resultof careful positioning of thesecapabilities in a market centric team.Otherwise, one will find these partiesworking more against than with eachother.

Figure 14: Open Innovation model

Core Capabilities

Value Configuration

Partner Network

Value Proposition

Distribution Channels

Customer Segment

Customer Relationship

Cost Structure

Revenue StreamsPROFIT

Financial Performance

Resources Offer Customer

A market centric team structure willforce companies to carefully select andposition the required capabilities for aninnovation initiative. The roles andresponsibilities that come with it canvary, depending on where expertise isbuilt up and planned. Some examplesof capabilities that require mappingbetween the Resources:

� Scouting for innovative technologies,companies and products;

� Assessment of innovation programsin each phase of development;

� Supplier management on the levels ofRelationship, Technology andOperations;

� Networking and scenario building fornew market perspectives;

� Supplier performance management;

� Project management.

How can companies organize forInnovation effectiveness?We have seen that innovation practiceshave changed in recent times, from aclosed process mostly ran by one ortwo departments, to an open networkapproach driven by make-or-buydecisions. We have also seen that OpenInnovation brings suppliers and henceProcurement into play, but that thecurrent Procurement business modeldoes not fit with end market focusedinnovations. Finally we have given ahigh level picture of the Procurementbusiness model. To organizeinnovation in cross company anddepartment teams, companies should:

1. Analyse the value chain, companyand department business models,stressing the offerings for the endmarket;

2. Analyse trends and developmentsaffecting these now and in thefuture;

3. Define the future business modelsfocused around the end marketofferings, including a detailedcapability mapping;

4. Determine which actors in marketcentric teams can add value in thebusiness model and deliver therequired capabilities;

5. Set up organizational structuressupporting the defined businessmodels and market centric teams;

5. Recruit, build and combine therequired competencies ininnovation teams.

On first glance, these changes are notmuch different from the developmentsProcurement has made in adoptingcategory management: obtaining agreater understanding of the internalclient and working together to get theproduct they expect. Yet innovationprocesses demand more than goodcategory management. It requires amarket centric business model, amapping of unique capabilities, strongteams based on that and embedment inthe organization. This will ensureproper supplier involvement ininnovation, whilst maintaining controlover processes. Procurementinvolvement in innovation is crucial asprocurement capabilities cancontribute to accelerated innovationprograms, increased cost effectiveness,proper supplier management programsand mitigated risk at the same time.However it is not easy andstraightforward to achieve Procurementinvolvement, it demands a structuredapproach and strong performancemanagement for Procurement to earnits spot in where it belongs: facilitatingvalue creation through interactionbetween internal and external parties.



Organizations are extendingtheir sourcing improvementinitiatives into more complexareas to increase spend controland reduce costs. The lowhanging fruit has been sourcedand negotiated, the largeropportunities are found in thecomplex indirect categories.

38

Complex Indirect CategorySourcing – A Missed ValueOpportunity

Dan Zoltowski, Randy Smith, DobsonSchofield, Charlotte Baratti –Procurement, North America

Many organizations across the worldachieve significant cost savings eachyear as a result of following astandardized strategic sourcing process.Most often the savings realized fromthese sourcing activities are associatedwith what will be referred to hereafteras standard (e.g. office supplies,express mail, etc.) or frequentlytargeted categories. This articlehighlights the savings opportunitiesmissed when procurementorganizations do not pursue sourcinginitiatives for more complex categoriesthat are considered off-limits for a

variety of reasons. Through sourcingproject experience, Capgemini hasfound that complex categoriesrepresent a sizable and increasing areaof spend across an enterprise that isnot strategically managed and has noprocurement involvement.

Mature companies continuing topursue reduced costs through strategicsourcing generally look to standardcategories or managed categories withexpiring contracts for additionalsavings potential. While the sourcingof these categories typically leads toyear–on-year value savings, there aretimes when additional categories areleft untouched for perceivedcomplexity or political reasons.

Organizations often have the mindsetthat complex categories will be toodifficult to source and the effortrequired to obtain results will outweighthe expected benefit. Historically,stakeholders have chosen not to investthe time and resources necessary tounlock the value from these types ofcategories. Now, however, increasingpressures to achieve additional bottom-line cost savings have resulted in

organizations seeking to address the“untapped” opportunities associatedwith complex category sourcing.Additional drivers for expanding thesourcing scope to complex categoriesinclude disparate pricing for servicesthroughout the organization and poorvisibility of detailed spend and supplybase information.

Figure 15: Critical success factors for realization

Mobilize Initiative Profile Category

Confirm category opportunities &

develop category strategy

Detailed Spend Analysis

Clear understanding of Category & Supply

market

Proper sourcing approach

Clear understanding of savings

opportunities

Organizational support/ Alignment

Sustainability

Analyze and benchmark

pricing &process

Implement category

strategy/ Manage change

Review executed categorystrategy/

Benefits tracking

4

4

4

4

4

4

4

4

4

4

4

4

4

4

4

Success Factors

4

What defines a complex category?Despite the current state of theeconomy, Capgemini has found thatcompanies expect to maintain orincrease spend for complex spendcategories in comparison to standardcategories where spend is expected toremain static or decrease. Asorganizations continue to redefine theircore competencies, restructure theirsupply chains and address reduced

operating budgets, it is necessary forthem to extract savings from sourcessuch as complex categories. Indirectcomplex categories can be defined asthose that require the consideration ofa multitude of non-price factors duringthe sourcing process, including thefollowing: stakeholder preferences,availability of substitutes, serviceproviding suppliers (e.g. legal,consulting, outsourced processes),advanced analytical requirements,specialized sourcing approaches, andregional regulations. While mostorganizations have addressed theirdirect material and standard indirectcategory spend there continues to be achallenge in addressing complexindirect categories.:

� Legal services� Advertising services� Business & IT consulting

Procurement functions continue to faceincreasing pressure to enhanceoperational efficiency, decrease cost ofgoods and services, and improvesupplier performance to provideadditional value for the enterprise.These pressures require organizationsas well as their suppliers to be able toquickly respond to changing businessneeds and supply chain requirements.

Critical success factors for valuerealization include:

� Detailed spend analysis

� Clear understanding of the categoryand supply market

� Proper sourcing approach

� Clear identification of savingsopportunities

� Organizational support/alignment

� Sustainability

Does your company have untapped,unmanaged complex categories?In order to stay competitive andidentify additional areas for costsavings, organizations must thinkbeyond the norm and look foropportunities not addressed inprevious sourcing initiatives or incategories not already managed by



Figure 17: Complex indirect category sourcing

0% 10% 20% 30% 40% 50% 60%

Too many competing objectives

Comfortable relationships with existing suppliers

Lack of business unit cooperation

Doubt that opportunities exist

Lack of cross functional support

Lack of adequate data to support analysis

Inadequate monitoring and control systems

56%

48%

40%

36%

32%

32%

32%

% of Respondents

40

procurement. An overall spend analysisby category and supplier can helpinitiate the process of identifyingcomplex categories worthy of sourcing.Undeveloped relationships betweenprocurement and other areas of thecompany may indicate that increasedsynergies will lead to additionalsourcing opportunities.

The majority of companies in NorthAmerica are still not systematicallyaddressing complex indirect categoriesbut continue instead to focus onobtaining additional value from thecategories that were already sourced inthe last several years. These companiesface the law of diminishing returns.Capgemini has found that the barriershighlighted in the diagram shown hereneed be resolved and theaforementioned critical success factorsneed to be addressed in order tounlock the value of complex categorysourcing.

The 2008 Capgemini CPO Surveyshowed that organizations continue tofocus on ways to transform theirsourcing processes and improve theavailability and visibility of spendinformation. These two objectivessupport a company’s ability to improveits competitive position, increase spendunder management and workcontinuously with its suppliers to meetcost improvement goals. To meetcustomer, market and internal costimprovement goals, organizations mustlook internally and work withfunctional stakeholders who controlcomplex category spend.

At Capgemini we use our projectexperience combined with thegovernance and change managementcomponents previously discussed tounderstand the nuances of complexindirect category sourcing. We helpstakeholders to effectively identify andrealize cost and service improvements.The key to our success with complexcategory sourcing is our strength in

collaboration and cross functionalfacilitation. We enable internal andexternal communication, whilecontinuously educating stakeholdersthrough the change components andadoption of the success factors withinthe sourcing approach.

ConclusionComplex category sourcing is intricateand there is no such thing as astandard approach or ‘one-size fits all’solution. Each complex category has itsown nuances and each organization’ssourcing maturity is different.However, CPOs are aggressively tryingto build procurement functions thatcan unlock savings potential fromcomplex categories. All barriers mustbe addressed during this type ofinitiative. Organizations that build arobust approach can equip theiremployees with the right skills andtools to be better positioned than theircompetitors for the realization ofbenefits from these spend categories.

Organizations working with Capgeminibenefit from our Collaborative BusinessExperience. Combining Consulting,Technology, Outsourcing, andProfessional Services, we have anunrivaled ability to work together toproduce the most innovative businesssolutions. The Collaborative BusinessExperience is designed to help ourclients achieve better, faster, moresustainable results through seamlessaccess to our network of world-leadingconsultants, our technology partnersand collaboration-focused methodsand tools. Our consulting teams workwith companies to quickly solvemission-critical problems byidentifying, designing, andimplementing value added changes intheir strategies and operations. Withour experience and proven approachand tools, Capgemini can work withany company to take the “complex”out of complex category sourcing.

It is a well known truth thatcosts arising from insolvenciescan be significantly reduced oreventually avoided if likelyalternative candidates areidentified early enough andappropriate counter measuresare consequently implementedon time

Supplier Risk Management –How to Manage Within theCurrent Crisis and Learn for theFuture

Stefan Becker, Principal – Procurement,Germany

The risk of insolvent suppliers isrising dramatically The newspaper headlines these daysspell out a clear message: the risk ofinsolvent suppliers is risingdramatically. Our experience atCapgemini Consulting suggests that 1to 3% of a company’s suppliers arefacing acute insolvency risk. Thisrepresents 5 to 12% of the totalpurchasing spend.

In many cases the current creditcrunch is the major catalyst for thefinancial problems of vendors. In themid-term run, however, other factorswill probably intensify the danger ofsupplier failures. Among these are adecline in global demand, the need tocut prices, high inventories, constantpressure from competitors in low costcountries etc. Taken together theseissues will result in a higher number ofinsolvencies and will be accompaniedby a harsh decline in economic growthof the industrialized countries.

To avoid direct impact on itscustomers, products and operatingresults, the procurement department iswell advised to start pro-activelymanaging the risks of its suppliersinstead of reacting to insolvency cases.

Proactive management of supplierinsolvency risksWe believe that for a procurementfunction to deliver efficient riskmanagement, it has to address threekey objectives. The early detection andrecognition of insolvency risks is themost important objective and, at thesame time, the most difficult one toachieve for a lot of organizations takinginto account their large number ofsuppliers and global supply chains.Furthermore, the procurement itself isclearly limited in terms of resources as,

especially in an economic crisis, it isplaying a vital role to keep productcosts at the lowest level possible.

The second and third objectives are aneffective handling of occurredinsolvencies and the consequenttransfer of insolvency costs to thirdparties such as partners, customers orinsurance providers. As mostorganizations are experienced inmanaging operational issues as part oftheir daily business, it comes as nosurprise that if a supplier insolvency islikely to occur or has already occurred,most procurement departments knowhow to handle them, even at a highcost.

Early detection of insolvency risksIt is a well known truth that costsarising from insolvencies can besignificantly reduced or eventuallyavoided if likely alternative candidatesare identified early enough andappropriate counter measures areconsequently implemented on time.Following Capgemini Consulting’sthree-step-approach, suppliers arefirstly assessed regarding their potentialimpact. In the second step, only thosesuppliers with a high to very highimpact are analyzed regarding theirlikely probability of failure. Finally, the“blacklisted” candidates are thenclosely monitored until the companyhas a clear and validated picture ofwhich measures, if any, have to betaken. Any other approach would, webelieve, tie up too many resourcesfrom procurement and other businessfunctions without providing any betterresults.

Considering the potential impact ofdamage caused by this risk, twocriteria are of key relevance. Firstly, thedirect financial impact caused by a lossof revenues and contribution marginsof products. Secondly, the operationalimpact of production stops or evenslowdowns should be analyzed takingrelevant data out of the company’s ERPsystem. For both criteria, existingsecond or multiple sources and stocklevels should be considered, too.



42

With regard to the probability offailure, again two criteria appear on thelist. The first one is well known andobvious: financial scorings, balancesheets and self-assessmentquestionnaires provide informationabout a supplier’s financial health. Theissue here is that the data is external,sometime self-assessed and historic,but it is what it is – a first indicator toscreen the candidates on the list. Thesecond criterion is the supplierperformance as the result of an

organization’s ongoingsupplier

performanceevaluation process.

As a result of our two-stage-evaluation,only suppliers with a high or very highimpact on a company’s results andoperations and with a high probabilityof failure are carried forward for anindividual in-depth analysis. At thisstage, detailed information about thefinancial health and market

performance is collected, enriched andassessed. In addition, supplier facingcompany staff should start reportingany information that indicates achange, for example, key staffresigning, late delivery, claims of sub-suppliers etc.

Finally, and probably the mostimportant step in this process,procurement has to alert the company’smanagement if high impact suppliersare about to start encounteringdifficulties – then it is time to proposeand decide about counter measures.

Taking preventative countermeasuresWhen considering preventative countermeasures to supplier insolvency,

procurement has two basic choices:strategic or operational measures.

Whereas strategic countermeasures aim at independencefrom the supplier, theoperational ones pursue theprevention of the failure.

In general, re-sourcing orthe development of asecond source, in-sourcingas well as taking over of thesupplier can all be seen asstrategic counter measures.As re-sourcing is probablythe most common one,

procurement has to insure –as an early preventive action –

the company’s full estate, forexample property, patents, tools,

equipment and devices.

Operational counter measures, bycontrast, comprise financial support,for example the modification of theterms of payment, reverse factoring,credits or acceptance of temporaryhigher prices, as well as the transfer ofknow-how regarding cost reduction,process optimization, financialknowledge or miscellaneous measuressuch as binding agreements onquantities ordered. However, twoaspects should accompany theconsideration of operational measures.Firstly, the supplier must open hisbooks, the causes of his problems mustbe clearly identified and he must truly

collaborate on their resolution byimplementing the committed actions.Secondly, other key customers must beon board unless they are totallydependent from the single company.

ConclusionThe risk of supplier insolvency isrising. Due to the close interconnectionof supply chains with tier 1 and tier 2suppliers, this also increases the risk ofdisruptions in the provision of suppliesfor buying companies. To protectagainst these disruptions, theprocurement function has to follow thestrategies of early risk recognition andpreventive counter measures, a straightforward handling of supplierinsolvencies and transfer of resultingcosts to third parties such as partners,customers (if they impact thesupplier), or insurance companies.

Procurement needs to analyze thesupplier portfolio regarding insolvencyrisks according to pre-set indicators ona regular basis and establish a riskmanagement process with directmanagement access when decisionsand investments are needed. In case ofacute insolvency risks, preventivestrategic and operational countermeasures are at procurement’s disposal.



www.capgemini.com/consulting

AustraliaSusan [email protected]+61 2 9293 4055

Phil [email protected] +61 2 9293 4000

BelgiumPhilip Van [email protected] +32 2 7081111

Filip [email protected] +32 2 708 13 63

Central EuropeMartin [email protected]+49 221 9126 44150

Stefan Becker [email protected] +49 89 9400 1126

FinlandMarkus [email protected]+358 9 4526 5612

FranceJean-Gabriel [email protected] +33 1 49672140

JeanPierre [email protected]+33 1 49675159

IndiaSanjeev [email protected]+91 984 545 3017

ItalyPaolo [email protected] +39 02 41493352

Marco [email protected] +39 02 414931

Netherlands

Ton van Dolder

[email protected]

+31 30 689 1323

North America

Charlotte Baratti

[email protected]

+1 312 395 5805

Clay Tippins

[email protected]

+1 404 806 2576

SpainPedro [email protected] +34 91 657 7521

Sweden

Bo Karlsson

[email protected]

+46 8 5368 4065

Michael [email protected] +46 8 5368 4021

UK & Ireland, and all other enquiries:James [email protected]+44 870 238 8722

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Copyright © 2009 Capgemini. All rights reserved.

Capgemini, one of the world’s foremostproviders of consulting, technology andoutsourcing services, enables its clients to transform and perform throughtechnologies. Capgemini provides itsclients with insights and capabilitiesthat boost their freedom to achievesuperior results through a unique wayof working—the Collaborative BusinessExperience®—and through a globaldelivery model called Rightshore®,which aims to offer the right resources in the right location at competitive cost.Present in more than 30 countries,Capgemini reported 2008 globalrevenues of EUR 8.7 billion(approximately $12.7 billion) andemploys over 92,000 peopleworldwide.More informatiis available atwww.capgemini.com.

Capgemini Consulting is the strategyand transformation consulting divisionof the Capgemini Group, with a teamof over 4,000 consultants worldwide.Leveraging its deep sector and businessexpertise, Capgemini Consultingadvises and supports organizations intransforming their business, fromstrategy through to execution. Workingside by side with its clients, CapgeminiConsulting crafts innovative strategiesand transformation roadmaps to deliversustainable performance improvement.

For more information:www.capgemini.com/consulting

About Capgeminiand the CollaborativeBusiness

Experience

Documents

Global Chief Procurement Officer Survey 2009