A recent study by A.T. Kearney provides benchmarks for a proprietary metric, return on supply management assets, and characterizes the attributes, achievements, and leadership agendas of top-performing procurement organizations. So what does the study show?
The study revealed that the procurement profession has a top-tier group of standout performers, a middle-tier that is delivering value, but performing well below the top tier, and a large group of bottom-quartile performers that add limited value to their organizations. So what is behind the rankings?
A.T. Kearney's 2016 Return on Supply Management Assets (ROSMA) Performance Check Study, “What Good Looks Like,” showed that the procurement profession has a top-tier group of standout performers, a middle-tier that is delivering value, but performing well below the top tier, and a large group of bottom-quartile performers that add limited value to their organizations. The study is a collaboration between A.T. Kearney, the Institute for Supply Management (ISM), and the Charted Institute of Procurement & Supply (CIPS) and is designed to evaluate the role of procurement in an organization and its role in value-generating activities.
“The top-tier procurement teams will sustain great core practices and move forward with employing disruptive procurement strategies, bringing entrepreneurship and innovation to supply markets and supply chains," said Joe Raudabaugh, A.T. Kearney partner and co-author of the report, in commenting on the report.These organizations will be rich in top talent.”
The research from ROSMA Performance Check Benchmarking, which collects the financial performance of procurement as reported by chief procurement officers, and the Voice of the Stakeholders, which captures views of non-procurement executives about the performance of their performance organization, illustrate what good looks like for high-performing teams. ROSMA is the performance management standard developed and administered by A.T. Kearney through CIPS and ISM. This year's ROSMA finding include cumulative insights from more than 1,780 executives since 2009 and an additional 367 executives participating in this year's research. The key findings are outlined below:
Top-quartile performers. The study found that top-quartile performers deliver more than seven times their cost and investment base in procurement, with 2016 results showing that procurement in this group delivers more than $1.7 million in financial benefits per procurement employee. Companies in this group have a low functional cost-to- serve, high levels of value creation, advanced sourcing methods, and good productivity. Top procurement organizations lead across all seven drivers of procurement's financial productivity: spend coverage, velocity, category yields, compliance, additional benefits, period costs, and structural investment.
Middle-tier performers. This study showed that middle-tier performers generate value three to five times their cost and investment base. Procurement organizations in this group have performed at a stable pace, but have yet to show upward results trajectory that would signal improved productivity.
Bottom-quartile performers. The study showed that bottom-quartile performers showed some improvement over prior periods but the average team is marginally accretive, and 50% are dilutive. Part of the problem with this group,is that a large portion of procurement teams lack the capability or discipline to report on performance.
Earnings potential. The study, as noted in previous studies, showed that improving procurement performance can result in large percentage earnings gains. For example, the study showed that improving bottom-quartile performers to average performers could potentially increase earnings by 15%, and a mid-tier performer improving to be a top performer, could potentially realize a 21% earnings improvement.
Performance variance. The study found that most procurement organizations have weak or limited performance-reporting capabilities with two factors, variability and lack of transparency, creating ambiguity about the value of procurement.
Metrics. The study found that only 21% of stakeholders report that procurement has well-defined and respected performance metrics, and that 68% of stakeholders say that procurement’s reported results are sometimes, frequently, or widely questions. Another key point in the study is that it showed that stakeholders believe that 78% of procurement organizations either realize less than 60% of the promised contracted savings or they don’t know the amount of savings realized.
In contrast, leading procurement organizations are viewed much more positively with respect to metrics by stakeholders. Ninety-six percent of stakeholders said that leading procurement organizations have clear and respected performance metrics, 70% have reporting rigor and depth, and results are accepted 69% of the time.
Raising the bar. The study found that good-to-great teams in the procurement function are able to sustain a ROSMA score above 15, which is due in part to operations technology with process automation (which reduces functional costs below 30 basis points) and a mix of talent with analytical and supply market expertise.
Well-performing procurement teams
So what makes for a well-performing procurement team? According to the study, the top attributes of good procurement organizations are outlined below.
1. Strong procurement teams are recognized by their stakeholders as integral business partners with a seat at the business leadership table.
2. All stakeholders, from both business and finance, say that procurement leaders are accountable for results, stakeholder satisfaction, and team productivity.
3. Procurement has well-defined and respected performance metrics that all stakeholders understand and support.
4. Finance and procurement jointly, routinely and thoroughly evaluate procurement performance.
5. Principle stakeholders (C-suite, finance, and the businesses) are aware of and understand procurement value drivers and performance ranges.
6. Principal stakeholders have a rich understanding of how procurement creates and delivers hard value to the business’ financial results.
7. Good-to-great procurement teams deliver at least seven times their cost in hard financial value to their organizations.