How 'strategic command of spend' sets leaders apart

24 March 2021

Leaders in procurement stand out from the pack through a “strategic command of third-party spend” that helps them add significant value to organisations, a report has found.

Kearney’s report The power of third-party economics analysed the spending practices of 370 global companies, all with at least $2bn in annual revenues.

It looked at why in the aftershock of the Covid-19 pandemic a handful of companies grew revenues twice as fast as their industry peers.

The report said purchases of goods and services from suppliers consumed on average 50% of revenue in manufacturing companies and 30% in service companies, so strategic command of spend increasingly separated the leaders from the rest.

In the study leaders accounted for 7% of the companies studied and generated nearly five times higher total shareholder return and 33% higher average margins compared to their peers.

There were “aspirants” who made up 8% of those studied, “the pack”, which formed 50% of the total and “strugglers” who accounted for 35%.

The report found leaders felt confident enough to make greater efforts on strategic imperatives like sustainability, product and service innovation, and supplier diversity.

It said leaders' results were “vastly superior” and this was because they looked beyond immediate cost considerations toward creating long-term structural advantages across the supply chain.

Leaders were three times more likely to have long-term category strategies and to report strategic value from supplier diversity initiatives.

They were four times more likely to have formal supplier relationship management (SRM) programmes with key strategic suppliers and seven times more likely to have cross-functional SRM governance.

The report’s lead author, Kearney partner Yves Thill, added: “C-suites that neglect the growing gap between their own company and leaders that are pursuing third-party economics will end up, in effect, subsidising more advanced competitors that can draw from the same supply base on increasingly advantaged economic terms.

“This could result in competitive disadvantage for companies that accept the status quo.”

Leaders also stood out by their readiness to invest in technology but especially in lower-cost innovation partnerships with early-stage digital start-ups, because they were shifting away from making massive investments in major ERP systems.

Kerney vice president Elouise Epstein said such systems required a large effort to implement and often failed to deliver promised benefits.

Lower cost partnerships could make digital capability development faster and more agile at a fraction of the cost, she said.

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