The Evolution of Strategic Sourcing by Joe Payne

A few weeks ago, I had the opportunity to sit in on some roundtables at the Corporate United Synergy conference in Scottsdale, Arizona.  The majority of attendees were strategic sourcing and procurement professionals primarily focused on indirect spend categories, many at companies with $1 billion or more in annual sales.

The underlying theme of most of the discussions I heard, as well as the presentations that I listened in on, was change management.  Specifically, people were talking about how to best communicate within the organization, both with end users as well as with upper level management, to ensure the sourcing group is able to perform their job effectively.

Procurement people talking about change management?  Isn’t their job just to buy stuff?

These discussions got me thinking about how far strategic sourcing has come, just in the 9+ years or so that I have been a consultant in this industry.  When I came aboard at Source One, the purchasing groups within most of the companies we worked with were only responsible for buying raw materials.  While some had sourcing in their title, the process they used was anything but strategic, with a three bid process and preferred supplier relationships dictating the results of their efforts.  I can recall a conversation with the head of purchasing at a fairly large manufacturer telling my boss, “You can’t benchmark plastics.”  Not surprisingly, we didn’t land that account.

At that time, many of our customers (large and small alike) still did not have a dedicated sourcing group for indirect spend items, and the stakeholders and department heads that were responsible for budgets would do the buying for anything they needed.  When we spoke to a new customer, we spent a lot of time explaining what strategic sourcing is – the concept was not commonplace, particularly to those outside of the procurement space, such as Finance or IT groups.

Since that time, strategic sourcing has certainly become more familiar.  Out of the traditional three-bid process and tactical or reactive buying came strategic sourcing in its infancy.  Originally utilized for raw materials, the process quickly took over in areas such as packaging and shipping.  As the success of the process grew, so did its applicability, and soon departments unfamiliar with strategic sourcing were asked to use the process or get procurement involved when making buying decisions.

From there, sourcing progressed further to what we know today as category management.  Under a category management structure, individual sourcing leads are assigned to particular departments (IT, Marketing, Administrative, Capital Projects, etc.) or categories of spend (telecommunications, office equipment, media buys, etc.).  Companies started hiring experts in one or more of these areas and structured procurement departments to ensure they had 100% of “spend under management.”

In many organizations, this process is still underway, but as more companies move to the category management model, the newly assigned sourcing teams are finding that they do not have the organizational clout to be effective spend managers.  End users and stakeholders look to avoid involvement from the sourcing team, they follow new SOP’s reluctantly (and often too late), and department heads kill sourcing engagements before they start in the name of supplier relationships or project deadlines.

The new sourcing groups are finding that their strategic sourcing and category expertise is becoming less and less important, and are using their negotiating skills internally more than they are with suppliers.  The category manager now must become a change manager – pushing through the internal corporate political structure – in order to be effective.

Different groups handle this in different ways.  At Synergy, I heard that some sourcing teams assign a single resource (a “friendly face”) to deal with department heads and get end user buy in for sourcing activities.  Others lean on an executive sponsor, more likely than not a CFO, to help push through the agenda.  Still others look for quick and easy wins to build credibility, end user by end user, department by department.  Not surprisingly, this process can be slow, and often areas ripe for sourcing go untouched due to organizational constraints.

Not long ago, the blogs lit up over the idea that strategic sourcing was dead, outdated, or that some other “new” process is better suited to help companies manage spend.  But I see the process simply as one that evolved over time.  From the basic concept of buying pro-actively, we have come to the time of change managers negotiating just as relentlessly with internal constituents as they do with outside vendors.

This change manager role requires a whole new skill set that today’s procurement people must adapt to.  Still, as the sourcing groups for best in class companies start to find their way in this new environment, others continue on unabated with no sourcing teams to effectively manage spend.  While there will always be leaders and laggards, it will be interesting to see what the change manager of today evolves into tomorrow.

Joe Payne is the Vice President of Professional Services at Source One Management Services, a consulting firm specializing in strategic sourcing and cost reduction.   Recently he co-authored the book Managing Indirect Spend:  Enhancing Profitability Through Strategic Sourcing.  More of his posts can be found on the Strategic Sourceror blog.

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