Whitepaper

Generating Procurement Impact

“Industrialization” of sourcing and procurement operations

The sourcing and procurement function is increasingly mandated to contribute to the growth and agility necessary in these volatile and uncertain times. Its current operating models are, however, seldom able to deliver on these expectations—often lacking enough resources to tackle at scale emerging challenges, such as analyzing global and fragmented supply chain risks, as well as enabling frequent changes of company “perimeter” brought on by geographic expansion, M&A, and so on.

PROCESS • ANALYTICS • TECHNOLOGY Global Business Services (GBS), an evolution of shared services with a larger global footprint serving multiple functions, can benefit the sourcing and procurement function because they have the ability to streamline processes under a unified—although not always centralized—operating entity. Decoupling business functions combines the advanced use of metrics, scientific process management, specialized data analysis, and effective IT enablement. It can industrialize business support processes and operations and—when combined with end-to-end process management—can result in the ability to scale, lower costs, and superior delivery. The resulting transformed business processes enable faster decision-making and the ability to adapt to market conditions. This paper presents a scientific, granular approach to procurement transformation, proven through industry-specific experiences.

Enterprise strategy and the • Factoring supply chain risks, such as supplier bankruptcy, financial crisis, natural disasters, demand on procurement and price/currency volatility, are a “byproduct” Procurement leaders, now more than ever before, of business volatility. The supply chain is prone are key players in the transformation of their to controllership risks because of its multiple company’s operating models; however, their physical and transactional hand-offs function is routinely strained by such challenges as: • Evolving technology and analytics beyond the comparatively limited current use. Limited • Tactical, transactional activities are still the core automation has often resulted in a lower (and of many procurement organizations’ DNA—such slower) than expected ROI on technology. as creating POs, helping execute contracts, Predictive analytics—employed for commodity responding to supplier issues, and running price volatility, price forecasting, and so on— is routine negotiations with suppliers. Contributing still underutilized to the growth agenda warrants closer alignment to business operations and closer involvement in decision-making processes Industrialized procurement • Moving beyond cost savings. Procurement faces, operations: A key to agility and and often struggles with, the consistent demands resilience of contributing to “higher touch” roles, such as Industrialized operations can, when executed category management, demand forecasting/ well, help access new growth opportunities, management and supplier risk, and relation create resilience to hostile market or regulatory management, over and above driving costs from conditions, and facilitate enterprise-wide product supplier contracts and business model innovation. They also enable • Solving for globalization and centralization. faster innovation in volatile marketplaces. Serving global markets and newer geographies can sometimes be at odds with the centralization For instance, increasing the size of a large of the procurement function. The central and operation by 20% (or strengthening business regional procurement leaders are asked to infrastructure in a new country) typically takes deliver greater value from global activities while a year or two, but industrialized operations can providing efficiency at reduced operating costs often achieve this in half the time. For some

GENPACT | Whitepaper processes, when the scale of business process service is increased by a factor of ten due to consolidation, the shared model can deliver a 50% savings in cost per transaction. (A leaner, more predictable cost structure also enables resilience and the consistent global application of best practices.)

1 We have already Taking industrial stressed the manufacturing industrialization as an example, potential across functions within various Genpact estimates industries. Figure 1 that 30% of the below reveals that existing procurement procurement is one of activities can be Figure 2 - Companies can realize significant business impact from the least “industrialized” industrialized industrializing procurement support functions functions based on its through sourcing limited inclusion within and direct/indirect Some of the most common procurement areas captive outsourced procurement support. that can be “industrialized” include: global business services (GBS) when compared to business processes such • Spend analytics: Spend extraction, cleansing as F&A, HR, and IT. Taking industrial manufacturing and categorization; supplier market research; as an example, Genpact estimates that 30% supplier risk assessment of the existing procurement activities can be • Sourcing strategy and vendor negotiations: industrialized through sourcing and direct/ Supplier profiling, supplier market analysis, indirect procurement support. sourcing analytics, preferred vendor selection, and negotiation and e-contracting Across industries, companies display a reduced propensity to manage procurement processes when they are compared • Source to pay compliance reporting: Source- to finance, HR, and IT processes to-contract business cycle by driving contract 1% 4% compliance, transaction compliance (e.g., only 11% 11% 6% 8% 20% 19% 15% 18% 27% POs driven through preferred vendors) and 8% 6% 31% 10% discount capture 43% 13% 61% 38% 9%

69% 58% 40% Procurement’s place in the 17% 44% 11% 33% 17% operations maturity curve 17% 17% 4% 5% 4% 6% BFSI Energy Healthcare Manufacturing, Technology Telecom Others The evolution of GBS typically follows three and distribution utilities and retail phases (Figure 3), with focus and achievements Procurement processes HR processes Industry-specific processes shifting over time from foundational (often direct- Financial processes IT processes cost driven) activities to more strategic ones. A Source: Everest GIC database; Genpact analysis typical company’s full realization of benefits using

Figure 1 - Significant potential may still exist for “industrializing” the GBS model is achieved when it moves beyond procurement operations the first two phases, which can take between five and ten years. As Figure 2 shows, we estimate that this effect can translate into business benefits amounting However, forward-looking organizations have to $30 million for every $1 billion revenue in successfully shortened the path and benefited manufacturing companies. from the experience of best-in-class early movers.

GENPACT | Whitepaper Life sciences GBS experiences display maturity curve and improve procurement processes—in turn, Maturation of practices starting to enable leapfrogging enabling their operations to reach world-class levels faster and leapfrog on the maturity curve. Setup Growth Maturity For example, in one major pharmaceutical 0-2 years 2-5 years 5+ years company (a Genpact client) that spends more Reduce complexity, Operational excellence, Maximize effectiveness drive efficiency efficiency, variable cost and continue to drive cost than $9 billion on procurement annually, a supplier • Consolidate • Process risk assessment provided valuable insights for internal buy-in optimization with • Stabilize defined SLAs and contract and price negotiation and lowered their operations KPIs • Push standardization (people, process, • Target global and advanced risk of being hit by supplier bankruptcy. By setting technology), SLA centers with technology (e.g. cloud computing) with • Sharing of 10-25% net up a system to periodically analyze key factors additional 10-15% cost processes with cost savings savings a cost impact of such as the supplier’s financial performance, +5-10% • Radically expand scope (functional, industry ratings, cost-out initiatives, best practices, • Ad hoc solutions geographic) with duplication of • Clarify new business business strategies, and strategic initiatives, the Key strategic challenges challenges strategic Key activities between corporate and GBS case company established bankruptcy indicators and • Aggressively explore hybrid models benchmarked vendors against their competitors. The system let them segment suppliers into Source: Genpact experience high, medium, and low risk categories and Figure 3 - The full benefits of GBS are realized after the foundational stages are completed lent significant advantage in negotiations. The procurement function has already shared Figure 4 shows that most of the industrialized and outsourced key components of high-end (and globally delivered) procurement operations operations like spend analytics, supplier risk and are found in 5- to 10-year-old GBS organizations. relation management, and category management.

80 Other situations where we have witnessed 70 successes include: 60 50 • A global beverage player: Increase spend 40 30 under management through initiatives such 20 as increasing spend visibility, designing

Occurence of processes in GBS of processes Occurence 10 metric structure for monitoring, reporting and benchmarking, 0 - 2 years 2 - 5 years 5 - 10 years >10 years Advanced operating identifying relevant Maturity of GBS (years) models, including F&A Procurement technology stack, identifying change the industrialization Source: Everest GIC database; Genpact analysis of higher-touch Figure 4 – The procurement function gets included in more mature GBS management setups than finance and accounting interventions, and support operations, purchasing channel have enabled While the creation Most of the standardization the procurement of a shared entity industrialized (and • An aerospace supplier: function to leverage is important for 18% cost savings a robust platform harnessing scale and globally delivered) procurement through sourcing from in order to create labor cost arbitrage, lowest cost country operations are found capacity and acquire advanced business (LCC) through an end- processes must in 5- to 10-year-old sufficient capabilities to-end advanced and to assume a more optimize processes end- GBS organizations. globally-delivered to-end, including those program management strategic role. that do not belong to the industrialized entity. including sourcing, procurement, and logistics, Data-driven process improvement frameworks in addition to part development, contracts SM like Genpact’s Smart Enterprise Processes (SEP ) negotiation, and new work transfers, ensuring have distilled the Lean Six Sigma experience of the improved timeliness for deliveries last decade and can help organizations to measure

GENPACT | Whitepaper These examples illustrate how advanced operating • Review as-is state and rationale. Understand the models, including the industrialization of higher- current state of performance, identify candidates touch support operations, have enabled the for improvement, and review the process and procurement function to leverage a robust platform sub-process practices in order to create capacity and acquire sufficient • Identify top improvement opportunities. Use capabilities to assume a more strategic role. best-practice metrics and frameworks to benchmark key areas, identify top areas for Toward an advanced improvement, assess the feasibility and risk of options, and conduct a preliminary analysis of procurement operations model benefits such as cost, efficiency, or effectiveness Scientific understanding of the operating model • Identify delivery alternatives. Assess options of procurement organizations, such as SEPSM, are for consolidating processes into internal now mature and allow organizations to correctly global shared operations, externally sourced estimate the end-to-end business impact of operations, or a combination of both target operating model choices, hence facilitating • Determine change implications. Outline both effective design and more targeted change. Still, financial and risk-related implications for each building out GBS capabilities is not banal. The location and structuring option (e.g., various variability across scope, location, and delivery types of risk) models indicate that while broad strategies and comparisons have a place in this process, each - Build a business case for each alternative. business case is heavily dependent on company- Compile a high-level business case that specific factors. encompasses process improvement, organizational structuring options, location A thorough analysis of the following four choices, and change implications dimensions, described in Figure 5, is critical to • Develop a detailed roll-out plan. Develop a roll- selecting the right target operating or delivery out plan to reach the targeted operating model model. by process and by location • Build the final business case. Identify emerging What efficiency, effectiveness, risk, and Boundary options for each process and develop financial standardization are acceptable during and a conditions and implementation plans after transformation?

Will resources released from transaction Resource Summary processing and control be reoriented b redirection toward decision support? In this paper, we shared Genpact’s analysis and examples of how leading procurement What structure and operating model Organizational organizations are transforming their operating c should the Finance organization have to choices support the emerging business model? models. As discussed in a previous paper, “The Adaptive Roadmap”2, business agility in times What new processes, people practices, of unprecedented volatility is an imperative that New delivery d and technologies are required to achieve DNA demands a new role for many functions. Embracing the desired objective? new operating models can make companies not only more resilient, but also able to out-perform Source: Genpact experience competitors in times of volatility3. Figure 5 - Actionable choice patterns emerge by triangulating four themes

GENPACT | Whitepaper For organizations looking to redefine their strategic needs, capabilities, and industry procurement operating models, a significant context can help craft the right strategy for a amount of specialized knowledge is needed to target, advanced, and possibly “industrialized” navigate the continuum of design choices. While operating model. every company and every industry presents unique challenges, in such a specialized field, it is Contact Genpact’s specialists to learn from our possible to leverage the experience of early and experience in building an industrialized operating sophisticated adopters. Combining this experience model in the last two decades as a leader in business with a clear understanding of the organization’s processes and operations.

1Helping industrial manufacturing companies outperform through right operating models for support functions 2The adaptive road map in uncertain times 3Innovation and industrialized business operations: An industry-specific view

About Genpact Genpact Limited (NYSE: G) is a global leader in transforming and running business processes and operations. We help clients become more competitive by making their enterprises more intelligent: more adaptive, innovative, globally effective and connected. Genpact stands for Generating Impact for hundreds of clients including over 100 of the Fortune Global 500. We offer an unbiased combination of smarter processes, analytics and technology through our 62,000+ employees in 24 countries, with key management based in New York City. Behind Genpact’s passion for process and operational excellence is the Lean and Six Sigma heritage of a former General Electric division that has served GE businesses for 15+ years. For more information, contact, [email protected] and visit, www.genpact.com/home/solutions/reengineering/global- business-services and www.genpact.com/home/solutions/indirect-source-to-pay Follow Genpact on Twitter, Facebook and LinkedIn. © 2014 Copyright Genpact. All Rights Reserved.