Data from the Procurement Strategy Council’s (PSC) diagnostic benchmarking service shows that staffing cuts are weighing heavily on procurement employees as they take on the responsibilities of their former colleagues. The data show that less engaged staff are striving to manage greater amounts of spend in addition to finding increasingly rare cost-savings opportunities:
- Procurement’s return on investment increased by 64% from 2008 to 2009, driven primarily by a 38% decrease in function costs.
- The average amount of managed spend per staff member increased by 64%—from $20 million in 2008 to $29 million in 2009.
- Meanwhile, Procurement’s savings rate only increased slightly, by 3.6% from 2008 to 2009, compared with 12.2% from 2007 to 2008.
So the procurement function is faced with two important challenges in 2011 and beyond: maintaining employee engagement amid increasing workloads, and supporting those employees in uncovering more difficult opportunities to make savings. Our work shows that both challenges can be tackled by asking procurement employees to take on innovation projects.
The Importance of Employee Engagement
Staff engagement is a combination of both emotional commitment—the extent to which employees value, enjoy, and believe in their jobs and teams, and rational commitment—the extent to which employees believe their company will provide competitive compensation and the opportunity for professional development.
While rational commitment is on the rise, PSC research shows that emotional commitment fell by approximately 17% in 2009. Of the key attributes that can improve employees’ emotional commitment, the top three are risk-taking, job impact, and the opportunity to undertake innovative work.
While it is currently rare for procurement functions to help their staff engage in risk taking and innovative work, procurement staff can provide tremendous value if given the opportunity, both with their own ideas and by being empowered to encourage supplier-enabled innovation. Instead of disproportionately relying on more familiar spend management techniques, procurement organizations should take on longer-term, “breakthrough” projects to ensure continued staff engagement as well as uncover new savings opportunities for the business.
Using Innovation to Engage Staff and Uncover New Cost Savings
In order for their employees to source useful and innovative ideas, procurement organizations should create a culture of innovation. Time and again, our work with numerous companies shows that an organization’s talent, environment, and processes drive its ability to innovate. “Without a culture of innovation,” explains a VP of R&D at one of PSC’s member companies from the electronics industry, “you end up with a culture of ‘we’ll do what’s safe’ and lose opportunities to grow the company.”
By building this culture of innovation, procurement organizations will be able source new ideas for cost-savings, as well as product, service, and channel innovations, and boost their employees’ engagement with their work and their teams.
Additionally, staff can also fuel supplier-enabled innovation. Companies such as GlaxoSmithKline and Procter & Gamble have said that at least half of their innovation will need to be filled via external sources in 2011 and beyond, up from about 25% in 2005. In order to capture these ideas, though, our research shows that Procurement needs to develop and maintain strong supplier relationships to gain preferred customer status. Once achieved, these preferred companies, or customers of choice are 82% more likely to receive first access to ideas for product and/or service innovations than other, non-preferred customers.
Procurement Innovation at Work
Johnson & Johnson’s procurement function provides a good example of how staff working on innovation projects can find innovative cost savings, and source more ideas for the firm’s R&D pipeline. Central lab supplies is one of Johnson & Johnson’s largest categories of spend, but it is also an area in which suppliers often lack experience eliminating waste. The firm’s procurement organization asked its own staff with six sigma expertise to train its suppliers to reduce their own costs.
Procurement devoted 1.5 FTEs to provide nine weeks of training annually to select suppliers. In return, suppliers provided all project-related gains to the company during the first year, with gain sharing split over the next two years and finally phased out in favor of their suppliers. Procurement exceeded its goal of project returns of $1 million the first year. In three years, six sigma projects have become 70% of the total saving achieved in the central lab supplies category for Johnson & Johnson. This helped Procurement exceed its larger goal of reducing central lab supplies costs by 30% in 2009.