By relying on suppliers more than ever before, forward-thinking organizations can no longer afford to consider the procurement function as a zero-sum game, where one side’s win is the other’s loss.
Too much is at stake. Companies spend an average 15-27 percent, of total revenues, on external suppliers. But a full quarter or third of the negotiated value is lost over the term of the deal.
With large, complex deals hanging in balance, organizations essentially have two options: they can continue attempting to wring the last dollar of cost savings from contract negotiations, or they can invest in creating value through collaboration with the supplier by driving innovation over the course of the contract.
While the first option is risky for categories that have already gone through frequent sourcing exercises, the opportunity to generate value through the second option remains wide open.
Creating joint value for the buying organization and its suppliers will require the development of a supplier relationship-centric framework that can drive performance to new levels while fostering innovation and mitigating risk.
What good SRM looks like
KPMG’s experience in helping organizations design and implement supplier relationship management programs shows that six key attributes distinguish leading-practice SRM programs from mediocre ones:
- Value management framework—Leading organizations have a clear methodology in place to capture, monitor, and track value from their SRM programs. There is clear alignment on the methodology among finance, procurement, and SRM organizations, which in turn ensures clear understanding of the investments (e.g., resource addition) and the return on investment (ROI) available from the program. The financial impact, coupled with qualitative impact, can pave the way for the organization’s future growth.
- Organizational structure—A well defined organizational structure that describes roles and responsibilities explicitly among the sourcing, SRM, and business partners, with minimal overlap.
- Opportunity for future growth—Growth can be anticipated throughout the SRM function because there is a clear understanding of resources and responsibilities required to meet the larger goals of the business. Such goals include cost savings, revenue generation, and total quality management improvements through lower defects, improved customer satisfaction, and shorter go-to-market lead times.
- Executive sponsorship—Senior leadership supports SRM when issues are escalated because the function’s value is aligned with the strategic goals assigned by the leadership team.
- Proactive strategy—SRM implementation is based on a thoughtful, proactive strategy, rather than simply reacting to market needs, which helps ensure that the solutioning and approach are aligned to business needs.
- Culture of trust—Such a culture can help unlock the potential of internal resources and external suppliers alike. People in high-trust companies report 74 percent less stress, 106 percent more work energy, and 76 percent higher engagement. Organizations with leading supplier relationship management programs effectively extend a culture of trust from their internal organization to their strategic supply base—to the point where it’s difficult to differentiate between organization and supplier resources. All are working in a unified manner for one common goal.
CNA – Insuring its future as a “customer of choice”
Senior executives at CNA Insurance, a leading provider of commercial insurance, knew they faced significant challenges in the procurement function. Frequent changes in the strategic supplier ecosystem, decentralized operations for managing suppliers, and ineffective responses to regulatory pressures had led to significant value leakage—in excess of $9 million per year. The lack of a supplier-centric model would continue to penalize company profits and deny procurement leaders a seat at the table unless they revitalized their supplier relationship management (SRM) and third-party relationship management (TPRM) programs. A thorough assessment could address pressing issues and also point the way to increased bottom- and top-line impact.
Benefits to client
CNA expects its new SRM and TPRM programs to improve relationships with strategic suppliers, reduce risk, improve governance, and increase regulatory compliance. Aligning the new programs to larger business goals also improved executive support. By becoming the “customer of choice,” the company expects to achieve incremental value of $7 million to $12 million over 24 months.
Leveraging KPMG’s in-depth understanding of the procurement function and deep experience in the insurance sector, we used our target operating model methodology to assess CNA’s current state, evaluate opportunities, and develop a roadmap for a successful 24-month transformation journey.
Interviews with more than 50 internal and external stakeholders and reviews of past actions helped us identify opportunities and make recommendations based on the six layers of the KPMG target operating model: service delivery, organization and people, business processes, governance and controls, reporting, and technology. The resulting roadmap was socialized extensively within the procurement function and with business partners to gain alignment and gauge the need for change, sponsorship, and investment.
Change management programs were implemented at every step of the transformation to help the program gain support from the larger organization, which would be part of the new supplier-centric implementation or see its results.
In addition, a risk management tool was integrated to address regulatory compliance issues.
- A roadmap is imperative when undertaking transformational initiatives.
A roadmap helps the organization examine each opportunity, approach implementation logically, and understand how long the project will take and when results can be achieved.
- Executive sponsorship—and engagement—is critical to keep the focus on speed, value, and execution.
CNA executives were fully engaged throughout the assessment, prioritizing processes and deciding on the right technologies to deliver business benefits. As a result of their involvement, the assessment provided a clear path for driving benefits throughout the transformation journey.