Making Sourcing Savings Stick

As a sourcing professional, my most difficult negotiations aren’t with suppliers but rather with internal customers. Based on conversations with my colleagues, that experience is not unusual. One measure of this challenge is “savings leakage” (savings negotiated but not realized). Aberdeen Group reports average leakage rates of 21% as Purchasing strives to implement its sourcing decisions. Best In Class companies experience about 14% leakage whereas All Others see 24% leakage ⁽¹⁾. Small companies experience up to 40% savings leakage ⁽²⁾. Net, there is a huge payout for improvement.

There can be several reasons for leakage:

1. Communication. The using organization is unaware of the award and continues buying from the incumbent.
2. Inconvenience. The new supplier’s process is inefficient providing a negative incentive to change (e.g. a travel reservation website which is difficult to use).
3. Fear of the unknown. There may be a long-standing, positive relationship between the supplier and the user. Alternately, the internal customer may not be thrilled with their current supplier, but at least the incumbent is “the devil they know”.
4. Lack of trust. The internal customer organization doesn’t trust the buyer to properly address non-price criteria when making sourcing decisions.

Regardless of the reason, leakage represents innumerable hours of wasted effort and, more importantly, millions of dollars in missed bottom line profit improvements.

Communication breakdown is relatively easy to address, particularly with the use of eSourcing, eProcurement, Spend Analysis and on-line contract management systems. The other three reasons require a deliberate process and up-front planning. It’s all about effective change management! Successful sourcing managers don’t wait until after the award to sell their internal customers. This is particularly critical in companies where business units are relatively autonomous, and not subject to corporate edicts.

Effective sourcing professionals follow Stephen Covey’s advice: “Begin with the end in mind”. What does that mean? It means involving key stakeholders throughout the entire sourcing process so they will support implementation of the ultimate award decision

Specifically, what does this entail?

1. Ensure upper management support for sourcing initiatives and savings goals.
2. Initiate a comprehensive and methodical change management process early on.
3. Work with stakeholders to clearly define decision criteria with appropriate measures.
4. Conduct the RFP/RFQ with stakeholder input and involvement.
5. Gain stakeholder support for a comprehensive implementation plan and enforce accountability.
6. Monitor expenditures over time to identify any leakage.

Sound like a lot of work? It is. However, it often eliminates months of wasted effort on sourcing decisions that don’t stick. Why is it that we never have time to do it right, but we always have time to do it over? Is this formal process necessary for all savings initiatives? No, but the thought process should be applied to all situations. Thinking through this process allows you to determine the extent of the effort required. One size does not fit all.

Addressing stakeholder fear, lack of trust and potential inconvenience through a comprehensive change management effort and improved communication will have a tremendous impact on savings leakage.

Click here to access a more detailed write up or here for a podcast on the topic.

⁽¹⁾ Aberdeen Group. “The Advanced Sourcing & Negotiation Benchmark Report. January, 2007. http://aberdeen.com/aberdeen-library/3857/RA_AdvancedSourcing_3857.aspx

⁽²⁾ Aberdeen Group. “Sourcing Challenges for SMB”. August, 2007. http://aberdeen.com/aberdeen-library/4420/SI-smb-sourcing-challenges.aspx

This article was originally published on E-Sourcing Forum:

http://www.esourcingforum.com/archives/2010/04/13/making-sourcing-savings-stick/

Strategizing for Successful eSourcing Implementations

Your company has wisely contracted for an eSourcing solution. You are relying on it to deliver process improvements and sorely needed cost savings. You’ve trained your people, but you recognize that the challenge has just begun. Internal adoption is key to your success.

The challenge you face is culture change. It is the biggest obstacle in any software deployment. Less than 15% of your user base will be “early adopters”. The majority will take a “wait & see” approach, and 10% or so will be “foot draggers”. There will be resistance because the implementation requires behavior changes for all involved.

Experience across numerous customers representing a variety of industries has identified some levers which can help to accelerate user adoption. These are:

• Goals and Measures – Creating a “pull” enviornment
• Organization – the right structure, roles and responsibilities
• Processes – documented best practices

Leadership creates a “pull” environment by establishing Goals & Measures and holding people accountable. Since everyone has more to do than they can possibly get done, they must set priorities. So how do they decide what gets done and what gets left undone? It is human nature to seek pleasure and avoid pain. Therefore, what gets measured by leadership gets done! That’s why goals and measures are critical for internal adoption.

While goals and measures are important they must be supported by the proper Organization. This is not merely about structure – the boxes on the organization chart. You must also have clearly defined roles and responsibilities with the positions staffed appropriately. Key roles include:

Champion – He/she establishes and communicates goals and measures, provides necessary resources, breaks down barriers and holds people accountable.

Master User – This individual “puts the feet” on the implementation. Required skills include: Leadership, Change Management, Project Management, Sourcing & Communications. He/she is the liaison with the Champion and becomes the on-going center of eSourcing expertise. A strong Master User is a key indicator of success.

Super User – In larger organizations, the Master User can’t do it all. The Super User is typically an on-site resource who teaches tools and tactics, models best practices, coaches other sourcing professionals, shares learnings within and across the organization, and identifies barriers and improvement opportunities.

Sourcing Professionals – The sourcing professionals do what they’ve always done – apply sourcing expertise to deliver cost savings, cycle time reductions and process improvements. However, they perform these tasks with the assistance of an eSourcing solution supported by new processes and best practices under the tutelage of the Master and Super Users.

The third lever for internal adoption is Processes. A quality tool called the P-D-C-A cycle (Plan-Do-Check-Act/Adjust) is useful for this purpose.

Plan includes: creating an implementation project plan, user training and spend analysis which enables sourcing pipeline development. There is a tendency to shortcut planning and jump to action. This typically results in significant frustration and rework.

Do refers to the actual implementation. This involves the application of processes, best practices, templates and checklists to conduct successful eSourcing events. Most eSourcing solutions provide templates and allow you to embed processes and best practices into the project management feature of the solution.

Check relates to tracking your progress. Are you achieving the goals established on both a program and project basis? Your goals must be supported by specific measures against which you track.

Act/Adjust focuses on continuous improvement. This includes periodic reviews where individuals share learnings with each other, identify improvement opportunities, and develop an action plan. The cycle then repeats.

Using the three levers: Goals & Measures, Organization and Processes, helps to embed eSourcing into your organization’s culture. Ignoring these important considerations will impede your efforts thereby delaying the efficiencies and savings that are critical for survival in today’s economic climate.

Barbara Ardell - Vice President - Paladin Associates

This post was originally published on E-Sourcing Forum at: http://www.esourcingforum.com/archives/2010/04/01/strategizing-for-successful-esourcing-implementations/