Noted business analyst Andrew Bartolini recently released his annual report on the effectiveness of procurement organizations. The results, as they have pretty much every year, showed continued cause for concern. They also offer another compelling case for automated e-procurement solutions.
The bottom line: Bartolini’s survey of nearly 270 procurement leaders found just 62 percent of enterprise transactions were compliant with negotiated contracts. That non-compliance rate, approaching 40 percent, hasn’t moved much in years. Way back in 2000, a Forrester survey estimated up to 40 percent of annual spending by U.S. companies were from “maverick” or “rogue” purchases – outside the companies’ preferred procurement process. More recently, a study by the Aberdeen Group pegged the figure at 35 percent.
That’s three studies saying roughly the same thing over more than a decade: Companies invest significant energy in negotiating contracts for necessary goods, only to have a third or more of their purchasing dollars flow outside those deals. Bartolini has estimated that between 5 and 20 percent of total enterprise spending is lost this way.
There are several obvious and direct upshots to rogue purchases. As Bartolini has noted on his blog, CPO Rising, rogue purchasers often pay higher prices. Companies also risk losing out on volume discounts and rebates.
But where Bartolini’s report offers gloom, it also offers light in the form of lessons from companies he labels “best in class,” enterprises that currently manage at least 85 of their total spending through procurement processes. At those companies, about 72 percent of transactions are contract-compliant, the study found.
So, how do they do it?
Bartolini says they use several “levers” for success “to a greater degree and a greater effect to gain a significant advantage in the marketplace.” For example:
People: They are 67 percent more focused on broadening the business skills of their staffs and 157 percent more likely to initiate advanced training programs for skills development and technology usage.
Process: They are far more likely to have formally standardized procurement processes over the past two years. According to the study: “The ‘Best-in-Class’ are 80 percent more likely to have full visibility into spend and a full 90 percent of all ‘Best-in-Class’ groups have the ability to leverage spend data directly into their sourcing efforts (almost twice the rate of their competitors).”
Technology: Top companies, writes Bartolini, get their edge by “having a significantly higher level of visibility into spend which they accomplish via automated spend analysis and by leveraging their e-procurement systems to a greater degree, capturing a significantly higher percentage of spend and driving superior compliance.”
These are some valuable lessons for companies struggling to eke out profits in a still-shaky economy, not the least of which is that, if your company hasn’t formalized a procurement process by now, it needs to do so.
Beyond that, and the investment successful companies make in training their workers, organizational visibility is paramount. Says Bartolini: “Operational excellence within the procurement function begins and ends with spend visibility.” He notes that only 42 percent have that visibility today, and he strongly advises investment in spend management solutions as a high priority.