Ann All spoke with Samir Khushalani, a senior manager and the national SRM capability leader at Capgemini U.S., a global IT and management consultancy.
All: Capgemini's research shows that companies' interest in supply relationship management is growing. What are the primary drivers?
Khushalani: We're seeing a real resurgence of interest in the sourcing/procurement area, which is now being called supply relationship management. Cost control is a really big driver that has contributed to the popularity of SRM. SRM can help reduce the total cost of ownership for an item, which has a direct impact on your company's bottom line. In terms of impact on profit margin, if you have a 10 percent reduction in the TCO of goods or services you procure, it can have the same impact on corporate profits as a 30 percent increase in sales. SRM increases the efficiency and effectiveness of the source-to-pay process. When you talk about efficiency, it's about doing things right. And effectiveness is about doing the right thing. SRM in its entire scope can help address both of those.
You can reduce your costs through transactional efficiencies, through electronic purchase orders, invoices and approvals. Right there you have a much more efficient process which can translate into headcount reduction. The biggest chunk of savings, however, comes in the effectiveness layer. Companies can use SRM to give themselves greater compliance to their contracts. A lot of spend today is totally fragmented because people buy from their favorite suppliers instead of using and leveraging the strategic contracts that have been negotiated by procurement. This is often called maverick or off-contract spend. Bringing that spend within a strategically negotiated contract can significantly increase cost savings. Compliance helps consolidate spend and furthermore, when it comes time for renegotiation of the contract, you can use your volume leverage to negotiate better prices and terms. This is the supplier interest as well. It's an area where you are not hurting someone, but where if you do it right, you can have the win/win.
In the last year-and-a-half, we're beginning to see compliance with regulations like Sarbanes-Oxley (SOX) coming into play. I actually had a client tell me that the primary value proposition to implement SRM was SOX compliance rather than cost. With SRM, you have total visibility and much greater transparency in the end-to-end procure-to-pay process. The segregation of duties and other functions becomes more visible and transparent, which gives you improved audit-ability of the process. How many purchase orders are being created after an invoice was received? People pick up the phone and order what they want, then when the invoice comes in, they just pay the invoice and create a purchase order. Quite frankly, that doesn't buy you much. The whole idea of creating a PO upfront is to have greater control and visibility of your commitment. You don't want to find out how much you are spending after the fact.
All: Your research also shows that chief procurement officers would like to standardize across the sourcing process but have made limited headway in doing so. What are the issues that are making it difficult for them to standardize, and what are some strategies they can try to improve their standardization efforts?
Khushalani: From our experience, the biggest success can be attributed to two key factors: the level of executive sponsorship for the standardization effort and the procurement governance model that is in place for an organization. The thing is, procurement impacts everyone; anyone and everyone in the company will have some need to buy something. Because the total stakeholder group is so huge, it is really important that the sponsorship for standardizing how you buy and pay comes from the very top. And when I say the very top, I mean the chief procurement officer, a VP of supply chain, the CFO. Some companies have even done videos where the CEO supports and articulates the need to do process standardization. If middle management drives this effort, people out in field will say "why should I?"
The other important aspect is the procurement governance model. Very often companies have business units that are quite autonomous and have decentralized purchasing. If you have decentralized purchasing, that leads to non-harmonious processes. If there is no person at the top driving a standardization effort, each business unit will say, "Why should I change? My process is better than yours." There is a natural cultural resistance to change. But if have a model where all the procurement functions report to one central person, that really helps drive the standardization. Another way you can also standardize processes is using technology. If have a common application, that can facilitate standardization. You need to make sure that compliance is not an option.
All: Your research also found that folks are underutilizing their supply relationship management systems. For instance, less than half of users utilize SRM application to track orders, instead typically taking information out of the system and running reports separately. What are the primary barriers here?
Khushalani: We found that less than 50 percent of users are actually utilizing the system to track their orders. Only seven percent of the purchasers were using the reporting functionality, and 35 percent never use the reporting function at all. Less than 40 percent of buyers said they could use spend information from SRM to prepare their contracts with their suppliers. So the reporting and contracting functions were significantly underutilized. Yet those are some of the biggest value propositions of SRM. There is a disconnect between the business imperatives and the way the systems are currently being utilized. Contract compliance was one of the big ticket items on all of CPOs' agendas for 2007. And then you see that function isn't being used or is being minimally utilized. Why is that?
A big barrier is an inadequate focus on training and change management. Very often companies approach SRM as an IT initiative. Yet remember, it is used by everyone in the company. So the correct approach is "people first, technology second." A lot of people feel procurement should be like shopping on Amazon.com. Yet 30 percent of the users surveyed said they need training before they can use an SRM application effectively. The technology guys may think it is easy, but people in the field may not. There is still a level of sophistication that is needed to use these tools, and that is often overlooked. An important part of change management is engaging people and making sure they fully understand the value SRM can bring and how it can improve their lives so they no longer need to use separate offline spreadsheets to track their orders.
There are some second-tier reasons as well. Response time is one. Some users say it takes a couple of minutes for an electronic catalog to launch. If that's the case and it takes a couple of minutes, how many people will be willing to try it a second time around? They'll pick up the phone because it's faster. Another reason is poor product coverage. As we already said, a lot of the value of having electronic catalogs is that they can serve as a compliance vehicle by guiding buyer to the right strategic suppliers. But companies often don't do adequate upfront analysis. They might have too few catalogs or catalogs that don't represent the mainstream spend. So when an end user goes into a catalog to find what they want, the hit rate is low. So again, how many people will use these catalogs after an unsuccessful hit?
It's important to focus on right suppliers during implementation. Also, from a process standpoint, how you buy materials and how you buy services is very different. But when companies implement SRM, they tend to approach it as one size fits all. That's a bad idea. When we go in, we try to identify the commodities that we are enabling, define the correct buying channels for those commodities and enable them through SRM.