What makes strategic sourcing strategic?
As enterprises make significant investments in their sourcing and procurement function, they rightfully expect a solid return on that investment. One of the more significant value creation elements of a sourcing and procurement function is the team and process that focuses on strategic sourcing. The Institute for Supply Management defines strategic sourcing as “an organised and collaborative approach to leveraging targeted spend across locations with select suppliers that are best suited to create knowledge and value in the customer-supplier interface”. The process of defining which suppliers, projects or initiatives should be the focus of the strategic sourcing group, as it is one of the single biggest obstacles to delivering the value expected. Why is this? Simply put, most organisations struggle to achieve alignment around determining what is deemed “strategic”.
Developing an approach that has the support of the entire enterprise will help to ensure that the strategic sourcing function prioritises initiatives that will provide the greatest opportunity for value creation, while at the same time minimising wasted efforts.
So what can enterprises do to agree on a common strategic sourcing focus? Many companies successfully approach this quandary by identifying the alignment and overlap of three major elements: 1) cost 2) dependency urgency and 3) value-add. While there may be slight variations on the exact definition of these elements, they should generally look familiar and (at least individually) be lenses through which companies view significant investments and procurements pan-industry.
Aligning all three elements can put a fine point on the specific subset of projects and programs that truly are strategic. This allows the strategic sourcing team to focus their expertise and in-depth attention and support on the most meaningful and “strategic” initiatives of the enterprise.
Element #1: Cost
Cost is the primary element that most enterprises focus on when considering how to identify projects/programs to be evaluated for strategic sourcing attention or focus. The rationale is that if the cost to purchase will be significant, maximising opportunities to drive that cost down should be a high priority. In many cases enterprises may take steps to implement spend or cost thresholds as a gate for what requires strategic sourcing support and engagement. For example, enterprises might suggest any procurement including a commitment of over ~$1M requires strategic sourcing support.
However, this approach can be flawed as purchase commitments for a particular project may start out small but grow to be significant over a series of smaller initiatives, changes or incremental requirements, which in turn would be missed via a specific threshold approach. In addition, a spend gate approach may result in a waste of resources if there are in fact no alternative sources of supply or if there are no available levers to drive pricing concessions. Strategic sourcing organisations typically are stretched for resources, so it may be better to forego a hard and fast spend or cost gate approach and instead focus the expertise and resources that are available on opportunities where greater leverage and more opportunity exists.
Element #2: Dependency Urgency
The second element centers on a company’s sense of urgency relating to key dependencies. While urgency may be defined as importance requiring swift action, calling something urgent doesn’t make it a strategic project. Urgency typically is a reflection of time (or the lack thereof) and time can easily be mismanaged. Considering internal projects or programs that have time sensitivity but also have or create key dependencies across multiple elements of the organisation is a better means for identifying projects that meet the second element in the “what is strategic” equation. Examples might include the opportunity to define requirements for and select a new ERP platform – a decision that impacts multiple organisations with significant consequences for the entire enterprise if handled improperly. Collaborating with stakeholders across impacted business units to understand the potential impacts that arise from dependencies, such as individual requirements, system integration needs or specific regulatory requirements, helps flesh out the true overall urgency of a particular initiative. Fully understanding these dependencies, impacts and potential risks and mitigation is a valuable layer to apply to defining what is (or should be) considered strategic.
Element #3: Value-Creation (or Value-Add)
The third element focuses on projects or programs that add value through material ROI. One example is third-party goods or services requirements that are part of an initiative meant to drive a material return on investment. Projects that are designed to add value to an organisation shouldn’t be afforded preferential treatment over those that are simply viewed as operational or non-revenue generating. However, revenue-generating projects have the unique opportunity to be both self-funding as well as accretive overall (such as partnering with a third-party provider to develop a joint product or service offering). Considering the ability for a project or program to bring in new or additional revenue provides a final component to the overall decision process around whether it should be considered strategic.
As previously noted, many organisations may focus on only one of these three elements to identify what they believe is strategic. This approach often results in the misalignment of valuable strategic sourcing expertise with certain programs or initiatives at the expense of others where such capabilities could have provided far greater benefit. Ensuring that internal stakeholders align on the convergence of all three elements as the arbiter of what should require strategic sourcing support is key to enterprises’ ability to yield the maximum value of their strategic sourcing initiatives in a consistent and meaningful way.
About the Author
Adam Cummins is a director at Pace Harmon, an optimisation and outsourcing advisory services firm providing guidance on complex transactions, process and operational optimisation, and provider governance.