Finance chiefs should view corporate procurement outlays as investments rather than costs, suggests a new report — investments in the people who run procurement.
Indeed, at the best purchasing departments, staffing leans much more toward the strategic, according to research and consulting firm The Hackett Group, which published the report. In what Hackett calls “world-class” procurement departments, 76 percent of employees are professionals and just 9 percent are clerical workers; in more-typical procurement departments, the mix averages 58 percent professional, 24 percent clerical.
Top procurement outfits also pay top dollar, according to the report. Including salary, bonus, and benefits, they spend an average of $98,557 per employee, 41 percent more than their more typical peers. Hackett also found that top departments provide more internal and external training: an annual average of 61 hours per employee, compared with 35 at typical companies.
As for results, the best departments have operations costs that are 20 percent lower than typical companies, and they operate with little more than half the staff, Hackett found. And for every $1 million spent on purchasing operations, these top-notch outfits generate $6.3 million in savings; average companies realized savings totaling only $2.7 million.
To conduct its research, Hackett searched its database of several hundred companies and identified the top quartile in efficiency (including cost and staffing levels) and effectiveness (quality and performance). The consultancy then examined those “world class” procurement departments to ascertain what they did differently, explains Hackett’s procurement practice leader, Chris Sawchuk. He declined to give the exact number of companies that were studied.
The report found that top purchasing departments are more involved in such strategic activities as enterprise-level planning, budgeting, new-product development, and the use of cross-functional teams for purchasing activities. Rather than focusing only on purchase price, says Sawchuk, top departments take a big-picture view and devote time enough to grasp the meaning of their policies for suppliers, customers, and shareholders.
In addition to hiring and retaining highly skilled employees, the best purchasing departments drive value by aligning their goals with those of the company as a whole — financial goals, especially. “CFOs manage the business based on performance metrics such as cost, profitability, and cash flow,” says Sawchuk. “Procurement is very strategic and essential in terms of helping improve the performance of these metrics. If a CFO wants to use procurement to drive the business, there is a need to make sure the objectives of the business and procurement are well aligned.”