Understanding Your Top Procurement Processes

When the IT organization understands the critical tasks to be accomplished, it can effectively support the enterprise procurement function's efforts to manage most or all spending categories. This research outlines the five major procurement processes – spending analysis, strategic sourcing, contract life cycle management, purchase-to-pay and supply base management – and what the IT department needs to know about each.

• A high-performance enterprise procurement organization needs strong, mature processes for each of the top procurement processes: spending analysis, strategic sourcing, contract life cycle management, purchase-to-pay and supply base management.
• An extensive, but fragmented market of specialty procurement applications, as well as a multitude of application types that are still evolving, challenge the IT organization's ability to assist with the procurement function.

• Consider procurement transformation, benchmarking and process improvements in the context of top processes.
• Balance investments across the top five processes to obtain the best overall results.

Procurement ensures that the goods and services needed to run the business – whether IT services, direct materials, marketing collateral or furniture – are available from reliable sources of supply, at competitive prices, and in a timely fashion, to required standards of quality and as per the procurement/finance policies of the organization. Supporting enterprise procurement with technology-based solutions is not always a straightforward job for IT, because of the complexity and diversity of tasks that must be completed to achieve this mission.

The IT organization's ability to assist is additionally challenged by the evolving, extensive and fragmented market of specialty procurement applications. An orderly approach to supporting and automating procurement demands a framework to organize the diversity of tasks that the procurement organization needs to address. The "top-processes lens" serves this purpose well, because it focuses attention on the primary things a function must do to be effective. The most important categories that procurement must tackle to be successful for all categories spending are:

• Spending analysis
• Strategic sourcing
• Contract life cycle management
• Purchase-to-pay
• Supply base management

Spending Analysis

Definition: Spending analysis is the process of generating a single, enterprisewide view of all spending. The process begins by extracting and aggregating historic purchase transaction data from relevant systems, including accounts payable solutions, purchase-to-pay applications, travel and expense applications and procurement card statements. To prepare the data for analysis, duplicate and related suppliers are identified and tagged, spending is classified by category and a standard schema, such as UNSPSC (see Note 1), is often used. Further cleansing and enhancement at the part number level is accomplished by tagging and altering part descriptions, so that spending for the same parts can be aggregated. The resulting data should be analyzable against multiple dimensions, including supplier, commodity, cost center, division, geography, time and which suppliers are also customers.

Why Important: Spending analysis delineates an organization's opportunities for cost reduction, automation and compliance. Cost reduction is supported by bringing to light spending categories with too many or too few suppliers, enabling the organization to eliminate variability in prices paid and identify excess inventory. Conducting a spending analysis helps organizations rightsize investments in category-specific solutions, as well as measure compliance to sourcing plans and system guidelines.

Tackle When: Managing procurement without first analyzing spend is like sailing a ship without a rudder. A strong spending analysis process should be a top priority for all organizations.

Solutions: Spending analysis services and applications are widely available in the market. Smaller organizations with a single accounts payable system may be able to analyze spending through business intelligence tools or a report writer, with manual cleansing and enhancement performed in Microsoft Excel or Access.

Avoiding Common Pitfalls: Success with spending analysis can be impeded by multiple challenges, including a lack of sufficient detail in transaction descriptions and general ledger codes for accurate classification; the presence of transaction data in multiple languages, which can make supplier deduplication and category-level classification difficult; and the lack of a sufficient standard classification schema to use the output. Carefully choose a spending analysis vendor, using purchase-to-pay systems for line item detail capture wherever possible. Adopt a classification schema that relies on standards, but is tailored to your particular needs. This can dramatically improve spending analysis process improvement initiatives.

Suggested Process Metrics: Percentage of spend transactions accurately classified, by supplier, category and part; spending analysis refresh cycle time

Related Research

"Magic Quadrant for Strategic Sourcing Application Suites"
"Procurement Analytics: Dealing With the Relevant Issues"

Strategic Sourcing

Definition: Strategic sourcing is the process of establishing negotiated agreements – for supply contracts that span an extended period of time, and for large, project-type purchases, such as large software buys. Strategic sourcing involves several steps, including demand forecasting, requirements development, market analysis, supply strategy creation (i.e., how many suppliers to contract with), supplier qualification, bid analysis and agreement negotiation.

Why Important: Strategic sourcing enables an organization to reduce costs and make prudent decisions in a transparent manner. Gartner's rule-of-thumb guideline for cost reduction from strategic sourcing is 10% savings from rationalizing suppliers and negotiating supply agreements that extend beyond immediate needs. An additional 10% can be saved when the organization standardizes on the goods and materials it buys, because doing so enables suppliers to build economies of scale.

Tackle When: The strategic sourcing process is the primary way that the procurement can reduce enterprise costs. All organizations that care about managing cost should maintain a strong strategic sourcing process.

Solutions: Many mature software applications available in the market support strategic sourcing. Applications can be used stand-alone or as elements of a suite, bundled with contract management, spending analysis and supply base management solutions. Strategic sourcing can alternatively be outsourced to a business process outsourcing specialist or a group purchasing organization. Manual strategic sourcing processes can be quite effective, although the results are likely be more variable and less transparent.

Avoiding Common Pitfalls: Organizations in the early stages of procurement transformation often lack the knowledge and skills necessary to source effectively. Training, temporary staff augmentation, and outsourced services can address this common problem until the organization comes fully up to speed. On an ongoing basis, however, even mature organizations often need help sourcing dynamic, complex categories, such as telecom expense management, because it may not be practical to maintain in-house, up-to-date knowledge of the market.

Suggested Process Metrics: Accumulated savings, percentage of spending under management, sourcing project timeliness

Related Research

"Magic Quadrant for Strategic Sourcing Application Suites"
"Best Practices for Choosing, Implementing and Using E-Sourcing Solutions"
"The Benefits and Drawbacks to Group Purchasing Organizations and Collaborative Sourcing"

Contract Life Cycle Management

Definition: Contract life cycle management is the process of creating, executing and managing an organization's formal agreements with its partners. Process steps include contract assembly, contract negotiation, contract execution, financial management (i.e., ensuring that spending does not exceed the contractual maximum amount and/or the matching of invoices to the contract for payment authorization), and task/deliverable management. Contract management in IT is often handled by the vendor management team.

Why Important: Contract life cycle management is critical when an organization has a significant number of contractual obligations, to govern what is agreed to and proactively manage the resulting commitments.

Tackle When: Most organizations can manually handle contract life cycle management processes when they have a hundred or fewer current agreements. However, manual contract life cycle management processes tend not to scale well. Organizations with several hundred or more contracts tend to struggle with unacceptable terms and conditions in documents, lost agreements, contracts unexpectedly renewing or terminating, and too-long cycle times for contract creation or review. Hence, they should prioritize contract life cycle management process improvements.

Solutions: General-purpose contract life cycle management applications designed to support any type of contract are available. Procurement also often has the option of using a contract life cycle management solution that comes bundled with a procurement, procure-to-pay or IT asset management suite. These add-on solutions usually deliver lighter functionality, but also provide native integration with related applications.

Avoiding Common Pitfalls: A common error in contract life cycle management process improvement is failing to anticipate that many procurement contracts, and IT contracts in particular, will be on the supplier's paper. A robust approval process and checklists for common agreement types, such as IT hardware and software, can address the issue. In addition, it's common for procurement contracts to be overused. Consider linking purchase orders to standard organization terms and conditions, instead of issuing a formal contract, whenever possible.

Suggested Process Metrics: Cycle time for assembling and approving contracts; percentage of contracts that fully comply with preferred terms and conditions

"Enterprise Contract Management Solutions Vendor Guide, 2010"
"Exploiting a Single Contract Life Cycle Management Solution Across the Enterprise"

Purchase-to-Pay

Definition: The purchase-to-pay process spans the creation of a requisition to the approval for payment of resulting invoices for the goods, materials or services.

Why Important: All organizations purchase goods and services to operate. Effective procure-to-pay processes ensures that purchases are made expeditiously with proper authorization, funding, sourcing and in accordance with policy.

Tackle When: Consider improvements in a purchase-to-pay process when current processes fail to efficiently get cost-effective goods and/or services to the organization in a timely manner, and/or when requisitioners are struggling to place orders in compliance with strategic sourcing agreements.

Solutions: Most purchase-to-pay systems are tailored to support a particular category of spending, because the steps involved in purchase-to-pay processes vary significantly by category. For example, direct materials purchasing often starts with a computer-generated plan or inventory replenishment notice. Hence, this process is often well-supported by a machine-to-machine integration-based solution, such as VMI (see Note 2). In contrast, purchases for contingent services are most deeply supported with specialized VMS solutions (see Note 3) that capture right-to-work documentation, facilitate worker onboarding (i.e., granting access rights to facilities and applications) and enable online timecard submission.

General-purpose purchase-to-pay solutions can be used to manage all spend types; however, the level of overall support is often quite basic. Purchase-to-pay solutions from ERP vendors provide native integration to accounts payable and general ledger modules. Specialty solutions are commonly deployed as integrated add-ons to one or more back-end financial suites.

Avoiding Common Pitfalls: The most common pitfall in automating a purchase-to-pay process is a lack of user adoption. Many organizations balk at the high cost of mandating usage, even when the result is a significant amount of lost savings, due to a history of empowering individuals and/or business units to buy as they wish. Mandate use whenever possible; otherwise, implement an extremely easy, fun-to-use system that makes buying simpler for the requisitioner and delivers obvious cost savings.

Suggested Process Metrics: Cycle time from requisition creation to approval; percentage of paperless spend; percentage of spend on purchase orders; percentage of invoices that match orders.

Related Reading

"Case Study: Jeppesen Gains Agility With Contingent Workforce Management"
"Critical Capabilities for Best-of-Breed E-Procurement Vendors"
"Cut Indirect Costs Now With E-Procurement"
"One-Size Procurement Transaction Tools Don't Fit All"
"Q&A: The Top 21 Questions for Evaluating and Implementing E-Procurement"
"Examining the Embedded Multienterprise Integration Market"

Supply Base Management

Definition: Supply base management is the process of evaluating, monitoring and classifying suppliers for performance, capability and risk. Supply base management process steps include evaluating prospective suppliers for suitability; gauging the financial, security and other types of risks for particular suppliers; capturing and sharing key performance metrics; and documenting supplier development work.

Why Important: The purpose of supply base management – which Gartner calls "vendor management" when it is specific to IT – is to ensure that the organization maintains highly qualified, high-performing suppliers to meet its needs. Supply base management is the capstone of the procurement processes. When procurement chooses strategic suppliers to serve the organization, it has a corresponding responsibility to ensure that those suppliers perform.

Tackle When: Procurement has dozens or more suppliers that it needs to proactively manage, or when there is a regulatory obligation.

Solutions: The market for supply base management solutions is nascent and evolving. Most business use proprietary tools, desktop applications and manual processes for supply base management. At this point, only invest in a commercial supply base management application if your organization is an early adopter or a fast follower, and is willing to tolerate evolving solutions.

Avoiding Common Pitfalls: Don't try to generate detailed metrics on thousands of suppliers, unless you are obligated to do as a result of industry-specific regulations, such as Payment Card Industry in the American financial services industry. Focus efforts on managing suppliers that deliver critical goods and services, in terms of revenue impact, to the organization. Also, be aware that there are few broadly accepted models for measuring and managing supplier performance.

Suggested Process Metrics: Percentage of suppliers that are meeting minimum performance standards; number/frequency of supply disruptions Related Research

"The Supply Base Management Application Market and Vendor Landscape"
"Toolkit: Supply Base Management Vendor Evaluation Tool"

Gartner for RAS Core Research Note G00212973, Deborah R Wilson, 11 May 2011