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ISG White Paper

Strategic Governance: Achieving Next-Generation Benefits with Sourcing

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by Cynthia Hollandsworth Batty

Sourcing relationships that are merely tolerated are not fertile ground for innovation and value creation. The ability to create an environment that fosters innovation and process improvement by clearly articulating the roles and responsibilities of all the players is today’s strategic imperative and what many CEOs demand of their Chief Procurement Officer. This focus on added value represents an extraordinary leap in expectations for both the procurement function and the enterprise at large, and it underscores the need for diverse and elevated skills in the people who perform procurement functions. 

The SIG Global Summit, held in March 2012, focused on innovation and new value drivers. A central theme was that strategic governance practices are inherently linked to innovation and new value. One participant summed it up by saying, “Cost reduction and sourcing is ‘old school;’ now the bigger discussion is on long-term relationships where both sides want to invest.” 

In the session we conducted at the summit, the audience was polled to determine the rate of failure of outsourcing relationships. With “failure” defined as a “being in a miserable relationship where services are delivered to contract standards but no one is happy,” more than 50 percent of the audience raised their hands. This points directly to the need for change in the governance approach.

The evolution of procurement is directly tied to the advancement of purchasing and related functions. Purchasing was first identified as an independent department with a clerical support function in the early 1800s. More than a century later, following the introduction of mass production by Henry Ford and World War II’s effect on industrial production, purchasing emerged as an important factor in large-scale manufacturing organizations. The function became “buyers” – a higher skill set than merely clerical support. Purchasing continued to be described as an administrative function through the 1970s. 

In the 1980s purchasing again transformed, this time to “procurement.” The focus on just-in-time manufacturing practices drove the need for more collaboration with the supply base which, in turn, drove the development of supplier relationship management. A large component of this transformation was the concept of strategic sourcing. From that point until the early 2000s, technology advances, globalization of supply chain networks and process re-engineering elevated the status of purchasing and sourcing functions to that of significant contributors to a company’s success.

This ISG white paper, coauthored by Carol Britton, Managing Director & Chief Procurement Officer at BNY Mellon, explores how a company can build a framework for strategic governance so that all partners in the supply chain work to achieve enhanced and innovative relationships.