In today’s fast-paced business environment, technology companies are switching from selling products to providing solutions and services for growth and profitability, often requiring them to be more responsive and more agile. In order to successfully meet this increased demand of efficiency, tech companies are finding that they need to position their sourcing and procurement (S&P) functions as key drivers of growth and competitive advantage.
S&P organizations have always played a reactive role for tech companies, but this is no longer sufficient. At the present time, technology companies are shifting from selling products to managing solutions, and competitive advantage falls to dual-speed S&P organizations that manage costs and drive business growth. However, meeting the right balance can be a challenge.
According to Accenture Strategy’s client experience and benchmarks, 50 to 60 percent of tech companies’ S&P organizations should be growth-focused, but only 10 to 20 percent of S&P resources are currently allocated to strategic roles. Unfortunately, many companies don’t realize that up to a third of new revenue streams are at risk, if the S&P function continues to focus solely on cost.
For instance, tech companies increasingly rely on the frequency of new product development (NPD). However, many tech companies slow down their NPD by not involving their S&P resources in the process until engineers prepare the product specifications. The issue is that getting S&P professionals involved at that point, results in redundancy and longer lead times for new product launches. Most importantly, tech companies that don’t use S&P strategically typically incur 30 percent higher product costs, which increases the likelihood of losing new product wins to competitors.
An optimal NPD process that reflects a unified effort can protect new future revenue, reduce engineering time by 20 percent and increase new business wins by 10 percent. In addition, it can allow tech companies to tap the expertise and insights of suppliers when needed. Some organizations are already pulling half of their product innovation from supplier collaborations. Apple, for example, limits its R&D by encouraging suppliers to continually present their most innovative technological ideas and products. The tech-giant spends only 3.5 percent of its revenue on research and development, while its competitors spend 15-20 percent.
Our research found that refreshed S&P organizations’ cost-to-procure is less than one percent. And, tech companies who implement a strategic S&P function can earn an additional one percent cost savings on managed spend with the right structure and capability. Here are the five key characteristics of a successful S&P function that can be a critical enabler of business growth, innovation and speed:
- A hybrid structure. A hybrid structure that focuses tactical and transactional services across multiple areas enables S&P to be more globally agile and efficient, while also responding effectively to local market and regional demands.
- Tailored capabilities. Technology companies with refreshed S&P organizations balance tactical and strategic activities. They often compare their current talent profiles and functional capabilities to peer benchmarks to identify gaps. In addition, they segment their supplier base by importance so they can strategically tailor their engagement and collaboration strategies for each.
- Strategic skills. An optimal S&P organization increases transactional expertise with strategic capabilities, such as cost modelling, supplier collaboration and risk assessment, negotiation and project management. Strategic S&P talent often has a background in business administration or engineering.
- Co-located resources. Technology companies with proper S&P capabilities place strategic resources close to major supply bases, with dedicated product development resources working directly with product managers and engineers. For example, a leading health technology company can create a dynamic ecosystem that works together to create solutions by locating its S&P teams close to supplier markets.
- Optimized technologies. Leading S&P organizations make digital investments to maintain transactional excellence and support collaboration, as well as utilize technologies already in place to their fullest potential. They use cloud-based technologies to automate processes and leverage off-the-shelf technologies that other functional areas may already be using.
In order for tech companies to position their S&P function as a key driver for growth, they must commit, empower and invest. CEOs need to not only push for new S&P practices and gain the support of those affected, but also allow Chief Procurement Officers (CPOs) to redesign their S&P organizations and implement changes. Moreover, leaders must invest, set aside resources and fund the development of a partnership model. This model needs to enable engineering, sales and NPD sourcing to collaborate on innovation, speed up product launches and increase win rates.
Shifting away from the single-speed cost mindset will require leaders to realize that S&P is the new source competitive advantage in today’s battle of supply chains. By refreshing their S&P functions, technology companies can strategically utilize these resources to their full potential. These functions can no longer be viewed as supporting players focused on transactional efficiencies and cost containment, but instead as a critical component to their business that can impact the bottom line.
Vikrant Viniak is Managing Director at Accenture Strategy.