The six pillars for building a world-class procurement function

28 August 2023 Consultancy.uk 9 min. read
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Research by The Hackett Group reveals that evolving beyond a firm’s ‘standard’ procurement function is key to more effective, efficient and agile operations. But what makes for a ‘world-class’ procurement team? According to the researchers, there are six key pillars for achieving superior performance.

For decades The Hackett Group has been conducting research into best practices in procurement, and what makes for world-class procurement. The company’s research has consistently identified that world-class functions, those which perform in the top quartile for both business value and operational excellence are much better for themselves and the business stakeholders they serve, including executive level management.

So, what benefits does being world-class bring? Beyond operating with a lower costs and higher margins, world class procurement organisations excel across five key facets of business value and operational excellence.

The six pillars for building a world-class procurement function

Better financials

World-class procurement teams help firms spend as much as 21% less on operations. This can also help to achieve returns on investment which are as much as two times higher for companies, which also exhibit superior resiliency as  a result. Meanwhile, with 32% fewer staff, they possess a financial robustness that can help navigate uncertainty with strategic focus and adaptability – resulting in an 80% boost to net margin, and a 24% higher EBITDA margin.

According to The Hackett Group, the fact that world-class procurement organisations have traditionally run with far fewer full-time staff than peers, means they have to apply their resources in a more concerted manner. The most notable variation in staff allocation is for operations and compliance roles, where top-performing teams have 56% fewer full-time staff, as compared to peer companies.

Greater spend influence

World class procurement organisations are able to influence or manage 20% more spend than the peer group. Being able to manage and influence a company’s spend is a key enabler to driving cost savings for an organisation, which is the primary objective of every procurement team. Critically, top-performing procurement teams are 23% more likely than peer companies to get involved at the start of the sourcing process when requirements are being defined.

This further enables procurement’s ability to guide the selection of suppliers, which will best meet business requirements. The benchmarking analysis of The Hackett Group shows that greater influence helps world-class procurement teams to streamline the number of suppliers being used by the enterprise to more than three times less in spending than their peers.

More focus on value creation

All procurement teams have been battling hard against inflationary price increases, which is reflected in higher levels of total procurement cost savings for both world-class procurement organisations and the peer group when comparing year-on-year savings generated in 2022 and 2023. However, top-performing teams are returning almost twice as much in cost savings as their rivals. World-class procurement organisations have also increased the savings contribution from 2022 to 2023 at a rate that is almost five times faster than the peer group.

Superior value creation by world-class procurement teams is also evident in the return on investment metric, which compares total procurement cost savings versus the cost of the procurement function (e.g., labour, outsourcing, technology and other costs). Top-performing companies in 2023 have an ROI that is more than twice the rate of their peer group, too.

Faster time-to-value

The sourcing cycle time – the business days from communication of requirements by the end user to the signing of the supplier agreement – for Digital World Class procurement organizations is 17% shorter (versus peers), allowing top-performing teams to meet the needs of the business more quickly. Additionally, for transactional processes such as order cycle times, Digital World Class procurement teams also react faster than peer companies. For example, ad hoc purchases are ordered 42% quicker, while catalog orders are processed 66% faster than the peer group. This enables them to react faster and influence a higher level of spend – a key source of sustainable competitive advantage.

A key reason they work faster and deliver value sooner is process automation. For example, they are more likely to electronically process purchase requisitions and POs, while also electronically processing five times more PO change orders.

Elevated stature as a business partner

Advantages in spend influence, value orientation, and speed contribute directly to greater enterprise agility and resilience. It is not surprising then that world-class procurement organizations are 86% more likely to be viewed as a valued business partner. This also carries through to internal customer ratings of procurement services where top-performing teams are two times more likely to be rated as exceeded expectations versus peer companies.

Achieving world-class: Six dimensions

At present, though, only around 15% of all procurement functions have achieved the world-class level of maturity, illustrating that most procurement teams have long way to go. To make that leap, The Hackett Group states that technology enablement is essential. But to fully unlock the potential of technology, leading procurement organisations will need to also transform five other key areas.

The six pillars for building a world-class procurement function

Technology enablement

The adoption of procurement technology has focused on enabling core transactional processes with both upstream and downstream procurement tools. Among world-class procurement teams, the most commonly adopted technology is spend analytics, taken up by 93% of leaders, followed by e-procurement tools at 77%, and e-invoicing and contract life cycle management on 76%. And while digital tools – such as robotic process automation, artificial intelligence, chatbots and blockchain – are still not widely adopted, significant piloting of different technologies means many world-class procurement teams will soon be deploying them.

Data and analytics

The heightened demand for a faster and more accurate insight-driven approach to decision-making is forcing organisations to rethink their existing data analytics approach and required tools. In the age of big data, world-class procurement teams are putting analytics and insights capabilities front and centre of their work, to help anticipate changes and challenges. As such, 48% of procurement teams have started to deploy advanced analytics tools, with 73% reporting that these tools are meeting or exceeding expectations.

Modern cloud architecture

World-class procurement transformation involves integrating or retiring legacy systems, adopting emerging technologies, migrating applications into the cloud and integrating data from disparate sources. Modernising architecture design and managing it effectively are absolutely critical for simplifying the complexity. To that end, The Hackett Group’s study found that 32% of organisations have already implemented a cloud-first approach to new applications in the past five years, and 31% are planning to migrate most transactional and analytical functions to the cloud in the next three to five years.

Operating model evolution

Operating model success in the future involves decisions about scope, modality and placement of work that leverages organisations’ centres of excellence (COEs), customer-facing business units, global business services (GBS)/shared services and strategic outsourcing partnerships. Business services functions must reimagine, redesign and evolve their operating model as digital operations mature. Operating model success in the future involves decisions about scope, modality and placement of work that leverages organisations’ centres of excellence (COEs), customer-facing business units, global business services (GBS)/shared services and strategic outsourcing partnerships.

Business partnering

The expectations of procurement teams have been increasing as their wider organisations look to procurement to enhance their risk management capabilities, support the digital transformation agenda and enable corporate ESG objectives. A critical enabler for contributing more value is effective business partnering to work collaboratively to empower enterprise objectives. World-class procurement organisations are 86% more likely to be viewed as a valued business partner, and as procurement continues to evolve its value proposition and elevate its trusted advisor status, this will provide such operators with a keen advantage in the market.

Talent management

Aligning skills and talent with changing business needs fell out of procurement executives’ top 10 priorities in The Hackett Group’s report, but it still featured as the top procurement improvement initiative, with 68% of teams focusing on talent management. This is an opportunity which more world-class procurement organisations recognise, and they are again ahead on key talent management performance as compared to peer companies. Top-performing teams have a voluntary staff turnover rate that is 28% lower for manager employees, while for these same manager employees, tenure with the organisation is almost twice as long. World-class procurement teams also commit to twice as many external training hours for staff.

Concluding the firm’s findings, Amy Hillcox, Senior Research Director at The Hackett Group, said, “Despite factors presenting unprecedented challenges such as inflation, supply disruption, and geopolitical risk, the performance advantage achieved by world class procurement organisations is more impressive than ever. They are better at navigating uncertainty, risk, and complexity than peers because they are more disciplined at maintaining strategic focus and more adaptive to rapidly changing circumstances. In large part, they do this by harnessing actionable data more effectively, which enables them to deliver faster and better insight, and make better decisions.”