In order to gain that much-desired edge, finance and procurement leaders are increasingly looking to fundamentally transform the procurement function. After all, compared to your average continuous improvement initiative, transformation can produce significant impact and returns.

In fact, true transformation programs can deliver a three- to four-fold return on investment and can reduce total cost of ownership (TCO) by five to six percent of addressable spend. This is a major improvement over continuous improvement and productivity initiatives alone, which yield reductions in the range of a mere 0.5 to 1 percent.

And while no single aspect of process or technology can achieve an impact as profound as one that transformation can deliver, achieving true transformation can be easier said than done. In light of this, following are five levers that any effective procurement transformation program will need to incorporate:

1. Understand the End-to-End Process View

In many companies, a strong relationship exists between sourcing, procurement and payables. As a result, a true end-to-end process view is critical to driving transformation impact. Every area of sourcing and procurement has a link with downstream processes. And without understanding those linkages, true transformation is incomplete.

For instance, a large service company had a serious problem with vendor satisfaction, which led to poor results at the negotiation table and reduced leverage with key suppliers. The main reason for their low vendor satisfaction? Delayed vendor payments (less than 45 percent were on time), due to a feature in the customer enterprise resource planning (ERP) system that prevented invoices from being posted without a proper goods receipt. In fact, it turned out that more than 50 percent of POs lacked a proper receipt. The company addressed the issue of its disciplined goods receipt process and as a result, improved payment accuracy and restored supplier leverage, resulting in significant price advantages.

This example is typical of how transformation engagements thrive. Focusing purely on payables and trying to improve efficiency through extra manpower or technology would not have fixed the problem.

2. Focus on Metrics to Reveal Interdependencies

While many companies focus on metrics and KPIs, true value exists in stacking metrics in a schema that clearly brings out the interdependency of one metric on another.

For example, many companies track metrics for spend compliance and the cost of processing. Because sub-level metrics of both interact with each other, trying to optimize one often makes the other go awry. So investing in systems and processes to improve spend compliance can generally hike the transaction processing cost. Companies, however, can optimize both by following a comprehensive framework that lays down metrics in logical combinations and drill-downs.

Benchmarking is also a useful tool to engage, but only when skillfully applied. While benchmarks provide an important indicator of where a firm stands, they should not be used without understanding the context of an organization's larger journey. Enterprises should stay focused on solution design and deployment rather than intricate benchmarking exercises.

3. Phase and Prioritize Transformation Initiatives

Proper phasing helps firms attain ongoing buy-in from organizational stakeholders and achieve paybacks within 18 to 24 months. In addition, phasing and prioritization are vital from the point of view of risk management, as when assessing an initiative's risk of non-implementation.

In order to phase and prioritize transformation initiatives, companies need a deep understanding of the linkages between them and the multidimensional profile of each project. And when deciding the prioritization roadmap, companies need to consider overall program benefits, alignment with larger organization initiatives and the need to show quick wins. For instance, a marketing sourcing initiative in a consumer goods company is probably best conducted in alignment with the annual planning cycle, not in the middle of the year when marketing programs are in midflight and stakeholder collaboration is difficult to obtain.

4. Engage in Detailed Organizational Effectiveness Analysis

Designing an effective organization is a lynchpin of transformation success. And transformation engagements, because of their leadership sponsorship, can help drive the message of restructuring.

When designing an effective procurement organization, it is important to benchmark the ratio between strategic and tactical staff. In well-streamlined companies, typically 40 to 45 percent of the supply management team are focused on strategic activities encompassing $15-20MM of managed spend per procurement SME.

Setting up regional centers of excellence in geographic "hot spots" also works well, especially where close interaction with stakeholders and a constant exchange of knowledge and best practices are crucial to garnering broader stakeholder buy-in. This aligns staff ratios to within acceptable levels by driving increased spend under management and concurrent consolidation measures. Engaging the human resources (HR) function early and having HR leadership represented in the program office is a best practice to ensure early response plans and backups are created for managed and unmanaged attrition.

5. Prudent Technology Intervention Speeds Transformation

While technology cannot by itself transform businesses, it is a potential disrupter in transactional procurement. Automation of standardized processes that leads to scaling down shared service captives is a case in point. Automation makes it possible to reduce effort and manpower, which in turn introduces intriguing options for creating more capacity in strategic positions.

For instance, automating the procure to pay process (such as catalogs and blanket purchase agreements) can yield an incremental productivity of four to seven percent over and above process reengineering. Typical case studies substantiate using e-RFX platforms, while online multilayered auctions can yield 20 to 25 percent extra price deflation and as high as a 30 percent reduction in sourcing lead times compared to manual processes. Similarly, improving supplier–buyer collaboration through e-portals improves SRM models and helps reduce transaction error rates by 20 to 30 percent.

Technology choices should be dictated by deep industry knowledge and technology platforms configured in line with business needs. Proven templates, work flows and best practices are as important as the technology itself. Software-as-a-service (SaaS)-based sourcing execution, procurement processes and vendor e-collaboration may be suitable depending on individual needs. For a company with sharp seasonal volume swings in a key process, a service provider can ensure that infrastructure -- including technology -- is thoroughly stress-tested well in advance of real-world spikes.
Proven Path to Success

A surprising number of companies focus on just one or a few of these transformation levers -- and fail to create a sustainable impact. To achieve and retain best-in-class status with performance levels at least two to three times above average means fundamentally altering the procurement organization. It takes all five levers of transformation, deployed together with a strong program management office that includes a judicious mix of domain subject matter experts, execution specialists and change evangelists. Partnering with a service provider possessing deep execution experience in smartly leveraging all five levers creates a winning combination for intelligent enterprises looking to maximize their procurement transformation initiatives.