While Chief Procurement Officers (CPOs) remain under relentless pressure to show sustainable savings, most procurement organizations overlook the bottom of the spend food chain. Tactical buying is an opportunity for procurement organizations to transform the way they approach lower-end spend for game-changing results. Building these capabilities and realizing the value of tactical procurement is made possible by advanced “target operating models", which are a combination of targeted Human Resources (HR) and organizational design practices, advanced metrics, appropriately used sophisticated analytics and focused, process-driven technology.
While Chief Procurement Officers (CPOs) remain under relentless pressure to show sustainable savings, most procurement organizations overlook the bottom of the spend food chain. This stems from limited resources and the belief that savings percentages and opportunities diminish as spend value increases.
However experience shows that focusing on indirect spend between $10,000 and $150,000 can actually yield savings of up to 20%. Companies that employ rigorous sourcing processes, specialized expertise and analytics-based change management are leading the way to transformational cost reduction. For instance, a Fortune 500 global security software corporation has notched up to $40 million in savings with a 500%+ return on investment through tactical buying.
Opportunity lost and found
Our experience reveals that in reality, every $100 million in indirect spend may represent up to $2 million of lost savings when there is a lack of focus on lower-end spend, or what we term “tactical buying".
Effectively negotiating tactical spending between $10,000 and $150,000 can yield 10-20% savings, depending on region, category and other variables.
This is especially true for categories such as IT, services, marketing, facilities, maintenance and repair operations (MRO) and office supplies, which add up to a significant portion of indirect buying expenditure for many companies, especially those that are high-tech. Moreover, this spend is easily addressed as a tail spend and doesn’t typically have strong organizational preferences, incumbency issues or risks.
Three building blocks of a transformational tactical buy program
There are several components that contribute to maximizing the opportunity for tactical spend savings. One must begin by realizing the role that category and market intelligence can play not only in identifying and prioritizing the right opportunities, but also in implementing the results. In the Genpact white paper entitled 7 procurement outsourcing myths demystified, we describe how supply market intelligence and deep category expertise optimize savings when supported by the right sourcing, organizational processes and workflow. Our experience suggests that companies who reap the benefits of tactical buying share three characteristics:
- A strong focus on process rigor with operational excellence in sourcing
- Deep category skills, industry experience and access to market intelligence
- Data- and analytics-led change management programs that ensure stakeholder buy in
Building these capabilities and realizing value from tactical procurement is possible by effectively implementing an operating model that is characterized by advanced business processes supported by technology systems and analytics, and delivered through a specialized organizational structure. One such model is Global Business Services (GBS), an evolution of shared services where in-house and outsourced operations are orchestrated under a unified—though not always centralized—operating entity. This model “industrializes” operations, providing improved flexibility and an enhanced capacity to run tactical procurement processes at scale.
Ensuring process discipline with the appropriate levels of policy compliance
Tactical sourcing is still sourcing. It requires a well-defined process and effective negotiation with suppliers to achieve results. Establishing early engagement with stakeholders and taking a proactive stance on collaboration are essential. While compliance lies at the heart of successful initiatives, 100% adherence is difficult to achieve. In addition, companies can generate impressive tactical sourcing savings even at an 80% compliance level.
Another key is to make the procurement process repeatable, consistent, and scale-able. Complete supplier lists with catalogs and rate cards allow stakeholders to access the products and services they need. By compiling a list of suppliers with current contracts, reliable on-time performance, and consistent quality, frontline buyers will feel more comfortable. Introducing new e-sourcing software (such as Coupa and Market Dojo) and marketplace tools can also simplify the processes by enabling frontline users to easily place competitive bids.
We have seen very positive results when experimenting with the lower and upper bounds of tactical sourcing efforts to determine the best zone of opportunities based on relative cost and effort. For instance, we have observed that negotiating all spend above $10,000 is often the best course of action, although this number can go lower in some cases.
Investing in category expertise, industry knowledge and market intelligence
Spend does not discriminate on the basis of volume. Expertise and knowledge count even when addressing sourcing and procurement opportunities that fall below the tactical volume threshold. Category knowledge can make or break tactical sourcing efforts. When in the hands of category buyers with subject matter expertise, price benchmarks are particularly useful. But at the same time, general category knowledge and stakeholder empathy (based on knowing the category) do matter.
For instance, IT products with rigid specifications are typically a large part of a high-tech enterprise’s R&D needs and a significant portion of tactical spend. Given their strategic nature and precise product specifications, suppliers are often predetermined, allowing buyers little room to negotiate. This makes category knowledge and effective communication with both stakeholders and vendors crucial to delivering savings, as is identifying what opportunities are worth pursuing in the first place.
Other important elements to consider are experience and trends within the industry. Many high-tech organizations are rapidly expanding into emerging markets. In this environment, it is important for CPOs to tap into local knowledge and practices, developing a cultural understanding of procurement practices. In India, for example, it is not uncommon to negotiate even valid, implemented contracts. Consider the case of a contract for an assembly of parts that was previously negotiated at a total landed cost of $1,000 per unit and six months later is available in the market for $950. In other regions, this kind of negotiation may not be appropriate unless the prices have changed significantly. It is also important to note that the tax structures, other levies and government policies in India are very complex compared to most other countries. Clearly, a buyer having sourcing experience in Indian scenarios is better suited to negotiate for requirements in India than a buyer who only has experience in the US. The same can be said for many other parts of the world as well.
Moreover, the unique dynamics of the high-tech industry can introduce complexity as many suppliers are also existing clients or resellers of a company. In this case, tactical sourcing teams must partner with marketing leadership to cultivate an approach that is sensitive to the overall business relationship without any party feeling as though it is being taken advantage of.
Expertise in contract negotiation is also an important skill required by tactical buyers. In less mature procurement organizations, teams focus primarily on timely delivery and to a lesser degree on total cost, often ignoring the larger cost and risk picture. In more mature organizations, tactical sourcing teams ensure that risk is mitigated by addressing contract creation where standard purchase order terms and conditions do not adequately protect the interests of the company. Within high-tech companies, industry experience can make a significant difference given the unique category requirements. For instance, a software company may use a lot of outsourced IT talent, a requirement that calls for specialized contract management skills.
Access to highly skilled talent in diverse locations can be gained through operating models that integrate global delivery under a unified operating entity by leveraging state of the art tools for effective collaboration and governance. GBS, for example, by using shared and sometimes outsourced resources, can enable the required flexibility and scalability to utilize geography-specific expertise in multiple global markets without the significant investment of fixed setup costs in each market.
Driving stakeholder engagement based on empirical evidence generated by data
Change management in procurement matters. It matters even more for tactical spend, where engaging procurement is often optional. To start, stakeholders must be motivated to make the switch, rather than being compelled to do so.
Our experience suggests that stakeholder resistance is often due to a perceived loss of control and anticipated budget reductions. But procurement can counter these concerns with a fact-based approach that begins with data. For example:
- CPOs can run “lost savings” analyses and show these figures to CFOs and business unit business leaders. In turn, business leaders can use these insights to encourage the organization to use implemented contracts that will generate material savings.
- Up-to-date cost reduction statistics can also convince stakeholders that a program holds far greater value than they may have anticipated. To get to this point, the tactical sourcing team must run descriptive analytics that reveal trends related to savings delivered, unmanaged spend and consequent savings leakage, the noncompliance of stakeholders by the business unit and related metrics.
Procurement teams should also approach stakeholders in advance when vendor contracts are expiring to check whether they’re interested in renegotiating for better terms and prices during contract renewal. Similarly, buyers should involve stakeholders to identify their preferred suppliers. Then, they can give a target price to these suppliers and ask them to match it. This type of approach can pay dividends, as it delivers savings while addressing stakeholders’ reservations about loss of control.
Furthermore, engaging in regular communication with stakeholders via email, phone, chat, and face-to-face meetings, if possible, and highlighting results, benefits and processes ensures clarity about the “why” and “how” of tactical buy team engagement.
Up to 20% cost reduction, the tactical buy way
Tactical buying is an opportunity for procurement organizations to transform the way they approach lower-end spend for game-changing results. As procurement and finance executives strive for cost savings, risk mitigation and compliance, they should re-prioritize tactical sourcing and buying.
While these benefits were previously constrained by limited resources, employing an advanced operating model for the related processes—often leveraging an outsourcing partner who brings the right processes, skills and analytics-based change management—can make a decisive difference. With the right partner, companies can achieve up to 20% savings in areas they never previously considered.