This document summarizes key findings from a survey conducted by ISG and GEP on procurement strategies and challenges. The top challenges cited were gaps in resource skills and lack of business unit support. While cost reduction targets were achievable, procurement struggled to influence high spend categories like professional services and marketing. Priorities for procurement included increasing strategic alignment, delivering cost savings, and expanding categories under management. Overall, the survey found opportunities for procurement to strengthen business partnerships, skills, and processes to drive more value.

1. GEP Value Trends: Procurement Strategy
Industry Trends and Implications
First in a Research Series on Procurement from
Information Services Group (ISG) and GEP
Research Sponsor:
September 2012
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2. Introduction
ISG conducted research from January 2011 through June 2012 with support from GEP. The purpose of this
research is to provide insights to CPOs and other procurement executives and to give them a better understanding
of some of the key issues facing other procurement organizations. Additional goals were to provide insights to steps
that they might take to address some of these issues and to move their organizations to the next level in delivering
value to their companies.
Respondents to the survey were primarily based in North America with 28 percent of respondents representing
other geographies. Respondents included leaders from the financial services, healthcare and pharmaceuticals,
business services, manufacturing, energy, government and public sector, media and telecom, retail and travel and
transportation sectors. Fifty-nine percent of respondents were from businesses of more than $5B in annual revenue
and respondents were generally CFOs, CPOs or their direct reports.
The research focused on three key aspects affecting the procurement function:
• Procurement Strategy: Key Challenges and Transformation Drivers
• Procurement Technology and Implementation
• Procurement Outsourcing
In this three part series, we will share insights from our research which will reflect the voice of numerous
procurement leaders across several industries and can be an effective tool in benchmarking your own procurement
organization.
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3. Headlines from the Research:
Most leading procurement executives believe that their organizations should be playing a more significant role in
driving value in their companies. In moving toward a higher-impact role in their companies, leading CPOs are
focusing on managing the procurement framework through:
• Sourcing Strategy
• Policy and Process Design to Improve Controls and Manage Risks
• Spend Governance and Transparency
• Transformational Deals
• Supplier Management
• Approach to Technology and Support
These are ambitious goals, and in many cases procurement organizations may try to take on more than they can do
well, within their available resources and support within their companies. Enterprises spend 20 to 40+ percent of
every expense dollar on external goods and services. Because procurement organizations try to take on so much
responsibility, prioritizing activities is often a challenge, with many resources focused on lower-value activities.
There are difficulties in freeing these resources to address the highest potential areas of impact to their
organizations. Some of the general challenges that we have found among our clients include:
• Many companies lack the skills, expertise and tools to effectively manage spend across all categories,
business areas or geographies
• Developing needed competencies internally is both costly and time-consuming
• Procurement can take an arms-length approach to vendors to the extreme, precluding opportunities to drive
value through better vendor collaborations
• Some buyers tend to focus on areas of questionable value in negotiations
• Procurement professionals may not distinguish between approaches to commodity procurement and
procuring strategic capabilities resulting in a cost or price focus, where this is a relatively minor component
of the value sought from the procurement
• Many procurement professionals believe that they have an inability to take ownership of cycle times,
especially during the contracting process due to their reliance upon other stakeholders (including legal and
various approvers), and thereby often fail to achieve results within a committed timeframe.
These are key issues, and we hope that procurement executives will gain insights into how these might be
addressed as a result of this report.
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4. Survey Approach and Respondents
Respondents to the survey were primarily based in North America with 28 percent of respondents representing
other geographies. Respondents included leaders from the financial services, healthcare and pharmaceuticals,
business services, manufacturing, energy, government and public sector, media and telecom, retail and travel and
transportation sectors. Fifty-nine percent of respondents were from businesses of more than $5B in annual revenue
and respondents were generally CFOs, CPOs or their direct reports. It should further be noted that respondents
tended to be from organizations that participate in forward-thinking professional societies and are therefore likely to
have a higher degree of awareness of more advanced trends in procurement. Organizations that do not actively
participate in such societies may therefore be underrepresented in the survey.
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5. Procurement Challenges and Procurement Transformation Drivers
Procurement executives indicated that Resource capabilities, including “Gaps in Skill-sets” were the greatest overall
challenge to their organizations, with a significant number of respondents indicating that business unit support was
their top challenge. There is a clear relationship between these challenges, as appropriate skill sets are critical to
winning the acceptance, and ultimately the support, of business units toward achieving more comprehensive ability
to effectively manage spend across the company.
During ISG discussions with CPOs we have consistently heard that proactively addressing and adding value to the
spend that occurs within various business units is difficult to achieve, often because procurement organizations are
only brought into the contracting process at the time of contract negotiation, if at all. When procurement
organizations are brought in, it is often after requirements have been defined, market analysis has been completed
and a supplier has been selected, leaving procurement with the challenge of attempting to optimize a contract and
mitigate risk with very limited time and leverage. A contributor to this challenge is the resource and skill gap to have
the right talent to engage with the businesses proactively and to build strong peer relationships with economic and
technical buyers. Those relationships and regular touch points help shape the strategies of defining requirements
and approaching the market in a way that will lead to superior business outcomes.
The required skills to achieve these results, and to become trusted advisors to the businesses usually include the
same types of skills that organizations seek from a consultant, including business analysis skills covering financial,
process and market knowledge, and leadership attributes such as communications and change management skills
that go far beyond what many organizations typically associate with a procurement skill set. Business units will only
trust procurement to lead strategic business imperatives to the degree that procurement organizations demonstrate
that they understand the context and challenges of the business, and are able to articulate procurement’s value
proposition in the language of the business and not just in the language of procurement.
Other challenges articulated by procurement executives include analytical and transactional tools that will enable
procurement organizations to better define and describe opportunities to the business, to track and manage
outcomes, to relieve the amount of apparent “bureaucracy” and clerical work from both procurement and the
businesses, and to more accurately demonstrate the business results achieved.
Surprisingly, “Achieving Cost Reduction Target” was the area least commonly cited as a challenge by procurement
executives. This indicates that perhaps targets are commonly set at an achievable level for the organization, based
on spend already being influenced by procurement. It may also indicate the goal has been an area of focus and
improvement for sufficient time that procurement executives simply feel comfortable that it is more under control
than other areas. Interestingly however, few procurement organizations tend to track cost reductions or savings on
a realized or EBITDA basis, which would bring a much higher degree of unqualified acceptance of their savings
contribution to the company and which would clearly be embraced by the CFO. ISG believes that this is a critical
area for future focus for procurement leaders, but this point of view was not necessarily reflected by our survey.
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6. Procurement’s Top Challenges
Resource capabilities - gap in resource skill sets 12% 18% 28%
Business Unit support 33% 14% 9%
Lack of analytical tools/capabilities 14% 20% 20%
Lack of transaction automation 11% 25% 15%
Resource shortage - more demand than supply 16% 18% 9%
Ability to achieve cost reduction targets 14% 5% 19%
Rank 1 (n = 57) Rank 2 (n = 56) Rank 3 (n = 54)
Source: ISG Procurement Technology and Outsourcing Trends Survey March 2012
# Please rank the top three challenges that your procurement organization currently faces.
In terms of spend influenced by procurement, respondents indicated significant headroom for improvement in
addressing marketing, IT, consulting and professional services spend. These are often areas of high spend which
tend to be managed within business units and can be more difficult to proactively address, consistent with our
discussion above. (Even IT, which has traditionally been relatively centralized within the CIO organization, is
increasingly migrating back out to the businesses as it adapts cloud, SaaS and BPaaS solutions for many of its
requirements, thereby circumventing the dependency upon, and control by, IT organizations for successful
implementation.) Strong domain knowledge is required to effectively address these areas, and price can often be a
much less significant decision factor in selecting a solution than the perceived or real business benefits that a
higher-quality solution can deliver over a more generic one. For example, marketing is generally less concerned
with reducing its spending than it is with delivering superior brand recognition, customer loyalty and ultimately sales
as a result of its spending. Similarly IT, consulting and many other professional services are purchased on the basis
of business drivers other than cost, although businesses still need to achieve their objectives within their budget.
This means that a high degree of business sophistication on the part of procurement professionals is an absolute
prerequisite to being able to influence and improve spend in these areas.
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7. Procurement executives also showed a strong belief that there was a need for process improvement and vendor
management approaches to drive better results. Process improvement is critical in several areas:
1. Procurement processes often are opaque to end users and stakeholders, with a lack of clarity in terms of
what information and approvals are required, what steps are necessary to ensure that best practices are
utilized in managing spend and controlling risk, and exactly how long all of this will take.
2. Procurement activities are often perceived as bureaucratic, with unclear turnarounds between when a
requirement is provided to procurement and when a contract or purchase order can be executed with the
supplier.
3. Delays in the process may often result from incomplete information from the requester, and variable
turnaround times for reviewing statements of work (SOWs) or specifications, negotiation times and legal
reviews.
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8. 4. Inconsistent processes often create perceived delays. For example, the end user may think a requirement
is ready to go to contract or PO, and either a contract is executed outside of appropriate controls, or a
review of the spend determines that additional steps unknown to the end user must be undertaken prior to
the requirement being placed.
5. A large percentage of spend may simply never fall under a consistent approach to management or visibility.
Vendor management is, to a large degree, the greatest untapped opportunity for procurement organizations. There
are multiple reasons why vendor management is both increasingly important and difficult to solve.
• Decentralization – Many strategic or critical vendor relationships are managed within an operational
business unit, rather than through a central vendor management organization.
• Relationships cross multiple business units – For example a typical company may have relationships with
IBM as an IT outsourcer, a BPO outsourcer, a consultant, a hardware supplier, an integrator and a software
provider, with each role managed by different entities with limited coordination.
• Financial scale – Vendors have become increasingly important, with external spend representing nearly 47
percent of sales.
• Operational – Vendors have become more operationally and technologically integrated with core processes,
presenting both greater risk and greater opportunity for value creation.
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9. Increasing strategic alignment with the business units, and delivering on cost reduction targets are by far the top
priorities for procurement leaders at this time. This priority was consistent between large and middle-market
businesses. Delivering on cost reduction targets was a much higher priority for manufacturing than other verticals,
and strategic alignment with the businesses was a much lower priority in the business services segment.
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10. Future Outlook: Key Focus Areas
Strategic alignment to other business 32%
Delivering on cost reduction targets 26%
Driving business support for procurement 11%
Addressing more spend under management 10%
Driving transaction automation 9%
Filling gaps in resource capabilities 7%
Developing analytical capability 5%
n = 57
Source: ISG Procurement Technology and Outsourcing Trends Survey March 2012
# What is your procurement organization’s key focus are for improvement in 2012?
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11. Key Focus Areas by Organizational Size
35%
Strategic alignment to other business
33%
28%
Delivering on cost reduction targets
24%
10%
Driving business support for procurement
15%
4%
Developing analytical capability
10%
3%
Driving transaction automation
10%
10%
Addressing more spend under management
9%
10%
Filling gaps in resource capabilities
0%
$1 B - $10 B > $10 B
Source: ISG Procurement Technology and Outsourcing Trends Survey March 2012 n = 50
# What is your procurement organization’s key focus are for improvement in 2012?
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12. Key Focus Areas by Industry
17%
Addressing more spend under management 10%
10%
6%
0%
Filling gaps in resource capabilities 0%
20%
0%
0%
Driving transaction automation 20%
0%
11%
50%
Delivering on cost reduction targets 20%
20%
22%
0%
Developing analytical capability 10%
0%
6%
0%
Driving business support for procurement 30%
10%
11%
33%
Strategic alignment to other business 10%
40%
44%
Manufacturing (n = 6) Business Services (n = 10) Healthcare & Pharmaceuticals (n = 10) Financial Services (n = 18)
Source: ISG Procurement Technology and Outsourcing Trends Survey March 2012
# What is your procurement organization’s key focus area for improvement in 2012?
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13. Spend under management is generally a strong proxy for the influence that the procurement organization exerts on
the broader organization. While organizations tend to define “spend under management” somewhat differently,
ranging from a strong role in sourcing and contracting at the “more managed” end of the scale to simply reviewing
contract terms and conditions or tracking spend on a PO system at the “less managed” end, this measure still is a
good indicator of a degree of collaboration between procurement and other functions within the corporation.
Not surprisingly, our analysis showed that procurement had a very high degree of influence on traditional areas
such as office supplies and travel, and relatively lower degrees of influence on more strategic areas of spend such
as professional services, consulting and marketing, with marketing being the spend category where procurement
had the lowest level of influence. Decision making around the latter categories tends to be more complex and less
driven by price vs. qualitative or business impact drivers. The lower level of influence in these categories suggests
that the organization’s perception of procurement’s skills and insights into decision drivers and how value is
perceived in these categories may lag at this time.
Spend Under Management by Category
0% 2%
5% 4% 5%
11% 12% 11%
14% 15% 16% 17% 7%
16% 22%
20%
5%
14%
18% 16% 18%
7% 15% 13% 9%
5% 14%
11% 4% 4% 11% 14%
7% 9%
18%
13%
11% 9% 7%
16% 22%
11%
22% 18%
13%
18%
21% 21%
15%
13%
32% 14%
63% 23%
25%
50% 22%
41%
36% 37% 36%
31%
23% 21%
13% 14%
General Travel MRO Facilities & Logistics Direct Spend Temp Labor IT Marketing Consulting Professional
Office Services Real Estate Spend Services
Supplies
81-100 61-80 41-60 21-40 1-20 0
Source: ISG Procurement Technology and Outsourcing Trends Survey March 2012
n = 57
# What is the current percentage of spend under management for procurement at your organization with respect to the following categories?
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15. In implementing procurement operations, most organizations tend to pursue a modest degree of customization,
especially for indirect procurement. Areas of uniqueness tend to be confined to approaches to workflow
approvals, most of which can be configured in common transactional procurement toolsets. The implications of
this are that best practices refined by service providers can be rapidly leveraged, provided that internal
organizations maintain the appropriate governance discipline regarding customized “enhancements.”
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16. Procurement Operations by Industry
Manufacturing (n = 6) 0% 67% 33%
Business Services (n = 9) 22% 56% 22%
Healthcare & Pharmaceuticals (n = 9) 22% 45% 33%
Financial Services (n = 17) 0% 53% 47%
Largely unique and strategic in nature - a product of high customization.
In line with the industry standard, but requiring a high degree of tactical approach.
Largely in line with the industry standard and operational in nature.
Source: ISG Procurement Technology and Outsourcing Trends Survey March 2012
# How would you compare your organization’s procurement operations with the rest of the industry?
In developing strategies to bring their organizations to the next level to meet these challenges, both procurement
technology and third party procurement services (more frequently referred to as “Procurement BPO”) are key
levers being adopted by many companies, and these will be explored in detail in parts 2 and 3 of this report
series.
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17. Conclusion
We will continue to provide research into the increasingly dynamic procurement space.
• Strategic alignment to other businesses is a top priority for procurement organizations this year, followed
by cost reduction targets.
• The relatively high degree to which Procurement organizations’ operations are in line with the industry
standard practices suggest a significant opportunity to take advantage of standardized solutions in the
marketplace.
• Obtaining business unit support is currently the biggest challenge for procurement organizations, followed
by lack of transaction automation and gaps in resource capabilities.
• The professional services, marketing and consulting categories present significant scope for increasing
the amount of spend under management, reflecting both the need for better business unit presentation
and skills enhancement, and pointing to potential “value spots” for procurement service providers.
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