Cognizant 20-20 Insights

Source-to-Pay: Advancing from Pure Cost

Optimization to Value Generation
To turbo-charge business value from sourcing and procurement
functions, organizations must transcend foundational approaches
focusing instead on refining strategies, heightening efficiencies and
delivering more value across S2P operations, to internal customers,
and throughout the extended supply chain.
Executive Summary

The State of S2P

If the pundits are to be believed, 80% of businesses treat their sourcing, procurement and
payment (S2P) processes as non-core functions,
with the possible exception being the sourcing of
direct materials. As a result, S2P does not receive
the attention, much less the capital and strategic
focus, it deserves.

Our assessment of sourcing and procurement

activities at organizations with global S2P operations reveals a host of challenges in six primary
categories:

There are also external forces at play ongoing

global economic uncertainty and a dearth of S2P
talent at mid- to senior-management levels, for
example that exacerbate the problem. These
issues, plus the lack of enterprise-level S2P optimization, directly impact gross margins and
trigger a variety of other operational challenges.
(See Figure 1, next page.)
This white paper explores in detail the challenges
facing sourcing and procurement heads, as well
as specific levers/strategies that can be incorporated to help overcome these roadblocks and
enable purchasing teams to achieve excellence in
sourcing, procurement and payment. By adopting the new S2P operating model described here,
leaders will be equipped to deliver the highest
level of efficiency in S2P operations, along with
more value to internal customers and the extended supply chain.
cognizant 20-20 insights | december 2015

Strategy: Inadequate S2P strategies (category

management, sourcing strategy, supply risk
planning) at an enterprise level.

Intelligence: A lack of market savvy concerning

products, technology advancements, new
suppliers (inadequate supplier outreach
capability) and global commodity indices.

Policy and process: Shortcomings in the areas

of spend management, cost modeling, working
capital management, material procurement
planning (including demand aggregation) and
contract compliance.

Accountability: Failure to establish SLAs and

controls through S2P KPIs.

Structure: S2P organizations struggle to find

the best structure and model decentralized, centralized or center-led. While structure
alignment can still be attained, tribal category
knowledge remains with a few experts and
overall, inadequate sourcing skills is a recurrent
problem.

Challenges Facing Sourcing and Procurement

Inefficient supplier
management practices
Maverick, spot purchases,
contract non-compliance

Sub-optimal price
discovery of goods &
services procured

Poor service levels

Single-sourcing,
preferential
supplier treatment

Inconsistent & incomplete

catalogue & specifications

Cost overruns

Lack of control &

accountability

Broken procurement
planning processes

Figure 1

Technology:

The inability to strike the right

balance between process efficiency and
advanced technology (catalogue management, supplier relationship management
[SRM], e-procurement, reverse auction, P2P
buying channel, spend analytics) invariably
leads to poor or no ROI on S2P technology
investments the result of bad choices and
favoring automation over value creation.

Organizations with semi-mature S2P practices have managed to plug the savings leaks and
improve S2P efficiency-related benefits by implementing the fundamentals of S2P processes (see
Figure 2). This includes ensuring compliance,
institutionalizing approval-based P2P workflows,
deploying foundational content management and
embracing spend analytics practices. However, to
move the needle beyond savings to value creation,
S2P functions must up the ante on other critical
aspects that can unearth larger opportunities
and enable them to systematically capitalize on
each. Avenues that have the potential to demonstrate greater value to the business include:

Supply

risk management: This remains

an evolving practice (e.g., supplier audits)
within many organizations, which makes

cognizant 20-20 insights

Realizing Savings Through Basic

S2P Processes
S2P SAVINGS POTENTIAL
SOURCING

40-60%
Strategic
sourcing

15-25%

External
compliance

100%
TOTAL POTENTIAL
SAVINGS

15-25%

Internal
compliance

10-15%
Operating
efficiency

PROCURE-TO-PAY

Source: Everest
Figure 2

sense given that other forms Risk management

of risks natural disasters, should not be
political and economic events,
conducted in
contracting, legal, operational
and financial are not collective- isolation; instead,
ly assessed. Moving from a quali- it needs to be
tative approach to a continuous,
embedded within
fact-/data-based
quantitative
risk evaluation is among the key the core sourcecapabilities that can differentiate to-contract and
an organizations S2P function in
procure-to-pay
terms of strategic value creation.
Risk management should not be processes to
conducted in isolation; instead, minimize supplyit needs to be embedded within
exposure risks.
the
core
source-to-contract
(S2C) and procure-to-pay (P2P) processes to
minimize supply-exposure risks.

Category Sourcing Can Result in

Significant Savings

4-8%

Facilities

6-20%

HR related

6-25%

IT/telecom
Marketing/sales
products

3-23%

Marketing/sales
services

6-20%
8-20%

MRO supplies
Office supplies

7-20%

Professional
services
Third-party
logistics

7-20%
6-22%

8-23

Travel related

5-15%

Utilities
AVERAGE SAVINGS

Source: Ariba
Figure 3

Category sourcing strategy: This involves

defining sourcing groups and specifying
strategies (balancing business goals, requirements, buyer dynamics and supply market
complexity) for direct and indirect services and
projects potentially resulting in a range of
savings opportunities. (See Figure 3.)

Finding the Right Buying Channel

CATALOGUE
LEVEL 1

LEVEL 2
Building Contractors

Facility
Management

Electrical Installations
Indoor Infrastructure
Office Equipment
Consulting

Professional
Services

Logistics

Heating
Cooling
Ventilation

BUYING CHANNELS

Water & sewer

Road maintenance
Security
Furniture

REQUISITION
Catalogue
Special request
Online contract
OCR
E-mail/phone/FAX/verbal Non-OCR

IT consulting
Management advisory

Financial

Financial consulting
Auditing

Consumables

Chemicals
Semi-finished steel

Tools & Spare Parts

Components
Electrical engines

MRO

Capital
Equipment

LEVEL 3

INVOICE
T&E card
E-Invoice (EDI)
Self-billing

Scanned invoice
Paper invoice

PURCHASE

Production equipment

Assembly, automation,
grinding, etc.
Measurement, testing,
packing, etc.

Air, Rail, Road & Sea

Transport, Express Parcels

Import/export duty,
costs for brokerage
Warehousing services
Etc.

Figure 4

cognizant 20-20 insights

Non-PO
Hands-on PO

Automatically generated PO
Scheduled PO

predict changes in commodity prices. Likewise,

they must use analytics to access supply risks
and compliance data assimilated from internal
and external sources, using advanced Decision
Tree-based models that enable category
managers to establish a robust risk profile of
their critical parts/services and the associated
savings. The collective multiple data sources
will form the building blocks for a 360-degree
view of the category covering all aspects, such
as risks; TCO and savings; product/service
technology advancements/maturity; quality;
compliance, and supplier performance
resulting in negotiation scenarios informed by
robust analytical engines.

Buying channel strategy: Finding the optimal

procurement channel is critical taking into
account different dynamics in terms of user
efficiency (lowest transaction costs, reduced
complexity of IT solution, etc.), control and
visibility (spend information, compliance to
contracts and specifications) and ease of
use (easy ordering, quick delivery and easy
invoicing). (See Figure 4, previous page.)

Supply

chain financing: This can be accomplished through multiple techniques, such

as vendor-managed inventory (VMI) and
buyer-led credit programs for suppliers. Using
a combination of payment terms (early vs. late)
and associated rebates, invoice consolidation
and P2P automation can deliver additional cost
savings.

Global shared service: This operating model

is responsible for defining and executing
on sourcing strategy, P2P transactions (e.g.,
post-purchase requests), S2P analytics and
local operations, including sourcing support,
purchase requisitions, spot buys and contract
execution.

Given these dimensions of an S2P function and

their varying impacts on shaping the maturity of
operations, it is evident that a chief purchasing
officers task is arguably a multifaceted one. From
managing end users and the plant heads expectations (e.g., complex goods and service demands,
delivery pressures), to maintaining a persistent
cost-containment focus, to conforming to sustainability requirements while balancing supply
risk, the CPOs role can be mind-boggling and
complicated, particularly when it comes to playing catch-up with long-term challenges and S2P
trends and staying ahead of the competition.

Thinking and Working Proactively

Considering the multidimensional complexities,
what should CPOs focus on?

with their customers.

By bringing in outside-in views on technology; owning auxiliary

activities around the product/service; using IT
effectively; and participating in joint product
design/development of innovative commercial
models involving variable and outcome-based
pricing, suppliers will begin to own a larger
share of the partnership with their customers. This type of supplier partnership model
will also require category managers to design
a supplier-evaluation framework to assess
suppliers product/service offerings in a comprehensive manner.

Besides the fundamentals, CPOs must get comfortable with next-set practices that will shape
S2P strategies in the coming years. This will
require them to master the following:

Real-time market intelligence: Technology

advancements in data capture and cloud-based
distribution is making market dynamics more
transparent, since real-time information about
prices can be accessed across trading channels
and online B2B marketplaces. The availability of
relevant data is forcing procurement organizations to move ahead and build data models that

cognizant 20-20 insights

Evolving supplier partnerships: Based on the

principles of core competence, S2P leaders will
recognize that there is much to be gained from
their suppliers. For example, suppliers are more
knowledgeable on key technological advancements in the product/services they provide
compelling category
managers to evaluate By bringing in outsidethem not merely on in views on technology;
innovation, but also
on how the suppliers owning auxiliary
integrate their own activities around
p r o d u c t /s e r v i c e the product/service;
lifecycle
activities
with customers S2P using IT effectively;
activities. In addition and participating in
to staying price-com- joint product design/
petitive and remain
a provider of choice, development of
suppliers will move innovative commercial
up the value chain models involving variable
not just by catering
to specific product and outcome-based
or service needs, but pricing, suppliers will
also by delivering begin to own a larger
an all-encompassing
share of the partnership
solution.

The Future of S2P: Drivers of Change

FOUNDATIONAL
Savings & P2P efficiency.
Spend management.
Material visibility, risk awareness.
Supplier management.
Internal compliance.
Fact-based, one-on-one negotiations.

EXCELLENCE (future state)

Real-time market intelligence
Multi-tier visibility.
Data models to predict commodity prices.
Robust analytics engines for scenario-based
optimization.
Analytics-informed reporting and decision
making.
Variable and outcome-based pricing.

Evolved supplier partnerships

Innovation from suppliers.
Focus on end-to-end solutions.
Enhancing service to internal customers.

DIFFERENTIATOR (current state)

Sustained value creation
Category-level enterprise coordination.
Supplier development, enablement.
Integrated SRM system.
E-Sourcing.
Market volatility management.

New risk management strategies

Mitigate risk through collaboration.
Holistic risk strategies.
Predictive regulatory and enforcement
insight to customers.

Supplier as extended partner

Value-added services.
Global supply competence.
Traceability & visibility extending
to production plans.
External compliance.

S2P outsourcing maturity

Increased outsourcing to service providers.
New business models.

Figure 5

Risk management: Procurement organizations will need to develop holistic strategies

for managing risk, including total risk exposure,
risk-mitigation investments and risk-transfer
pricing. Newer risk-transfer options introduced
by financial services companies will become
the norm for CPOs and their S2P teams to
consider during the risk-exposure planning
process. Mitigating risk will involve external
collaboration between the organizations S2P
function, its suppliers and its key customers.
The use of statistical analysis and simulationbased advanced risk models (e.g., Bayesian,
Monte Carlo) seamlessly integrated with
the S2C activities will become the norm for
category managers, enabling them to evaluate
multiple business-value-at-risk strategies.

S2P

outsourcing maturity: A heightened

focus on S2P core competencies starts with an
assessment of what the organization can source,
followed by the identification of partners that
it can rely on for support of non-core S2P

cognizant 20-20 insights

activities (i.e., P2P and certain components of

tactical sourcing activities). At the same time,
as S2P sourcing matures, organizations should
expect to see a second phase of development,
where companies begin to jointly innovate
with their partners delivering Kaizen initiatives across S2P activities, and exploring new
sourcing and supply chain financing models to
drive competitive performance, manage risk
and optimize working capital.
These factors will cause the S2P function to
evolve propelled by progressive capabilities
such as an advanced commodity trading desk
for category managers and multi-tier engagement with suppliers to afford end-to-end visibility
across commodity supply chains. By adopting
these sophisticated capabilities (e.g., hedge, forward contracts, etc.), S2P functional heads can
demonstrate the financial impact on gross margin,
EBITDA, cost of risk and capital.

The S2P Transformation Framework

S2P STRATEGY

Key deliverables:
Sourcing &
procurement strategy
TECHNOLOGY LEVERAGE

Key deliverables:
Enablement of all
critical S2P stages
with best-practice
tools & technology

S2P
advisory

S2P PLANNING &

ORGANIZATION

COE
PILLARS

Key deliverables:
Savings plan
development, cost
optimization

S2P
business
process
services

S2P
technology

S2P PROCESS & STRUCTURE

SUPPLY BASE DEVELOPMENT &

MANAGEMENT

Key deliverables:
Best-in-class
S2P processes,
actionable KPIs,
aligned organizational
structure

Key deliverables:
Market making,
supplier rationalization

Figure 6

Embracing a Transformation Approach

It all comes down to CPOs needing to ask the
right questions: How do I transform my S2P
function from a mere support activity to a strategic business enabler that eliminates bottom-line
erosion, delivers competitive advantage for my
enterprise, ensures stickiness with customers
and supplier alike, and is viewed as a true partner
to my business?

Our S2P transformation framework addresses

these challenges by providing both strategic and
tactical intelligence to advance S2P functional
capabilities. The frameworks built-in S2P expertise, coupled with sourcing-category proficiency,
can unearth every potential area of TCO erosion
and help ensure sustainable value leading to
true S2P transformation. (See Figure 6.)

Elements of an S2P Opportunity Assessment

1. OPPORTUNITY ASSESSMENT
1.1 Category Mangement

1.2 Supplier Management

1.3 Change Management

1.4 Sourcing Review

Data classification.
Analyze procurement.
Demand/forecast
aggregation.
Category portfolio
analysis.
Sourcing strategy.
Identify cost-reduction
opportunities.
Design activity impact
analysis.
Business case
preparation.

Supplier on-boarding.
Supplier rationalization.
Supplier risk and financial analysis.
Supplier collaboration.
Supplier catalogue
management.

Risk management.
Training.
Communication.

Savings tracking.
Sourcing and procurement efficiency.
Compliance.
Supplier performance
tracking.
Working capital analysis.

Figure 7

cognizant 20-20 insights

Employing a Holistic Transformation Methodology

KAIZEN

CORE COMPONENTS
Service management.
Governance.
Vendor strategy.
Streamlined processes.
Technology.
Performance.
Management.

Continuous S2P excellence.

Develop new sourcing competencies.
Drive innovation through S2P technology.

Spend Analytics
Category Strategy
Procurement Operation

ADOPTION

Accounts Payable

Catalogue Management

Quality assurance.
Pilot, rollout.
Stakeholder
Standardize services.
engagement.
Business value audit.
Multi-vendor ecosystem. Multi-BU/Geo.
governance.
Industrialize.

Figure 8

Our holistic approach aligns with a businesss

growth and margin objectives, and is built on
three pillars: S2P advisory, technology, and business-process service. The tight interoperability of
our frameworks modular sub-components within
these pillars helps to ensure positive outcomes
of S2P operational/tactical initiatives, as well as
business growth measured against KPIs and competitive, differentiation-related metrics.
The frameworks components cover the core
areas of S2P from opportunity assessment (S2P
strategy and planning) as shown in Figure 7 on
the previous page, to market-making, execution
and monitoring (S2P operational/tactical). Each
of these elements are distilled into multiple levels
of processes and activities, with a logical set of
specific controls (metrics), organizational roles
and enabling technology.
We believe that the focus should not be limited
to automation and process digitization. A holistic transformation methodology (see Figure 8)
should be capable of identifying and executing
quick wins on a steady basis (a Kaizen approach),
and institutionalize the larger transformation
mandate (S2P policy, strategy, procedures, structure and change management).

cognizant 20-20 insights

Looking Forward
An organizations current S2P shortcomings, plus
the ongoing challenges posed by globalization
and other external factors, oblige S2P heads to
make sound, proven choices in every aspect of
S2P, from strategy to execution. With this in mind,
we offer key recommendations for S2P leaders
looking to enable true S2P transformation:

Make proactive investments to build a valuedriven S2P strategy (rather than focusing
purely on cost-containment) emphasizing business outcomes in a sustainable and
repeatable manner.

Evaluate and design an optimal S2P

operating model that is supported by a
robust governance structure, value-focused
S2P processes and metrics, and best-in-class
technology.

Adopt

SMAC (social, mobile, analytics and

cloud) technology options such as cloud, omnichannel business collaboration, and real-time
business intelligence on price volatility and
business risks, driven by predictive analytics.

Innovate and automate S2P planning and

execution processes to drive faster time
to market, introduce new products more
frequently, and reduce legal, financial and
operational risks.

About the Authors

Gopal Anandan is a Director within Cognizant Business Consultings Manufacturing and Logistics
Practice. His seventeen years of experience includes business and technology consulting, process innovation and product development. He has led multiple strategic and tactical initiatives at multinational
and Asia-based companies in the areas of business transformation, IT strategy for SCM/operations, and
digital and advanced analytics. He holds an M.B.A. from the Indian Institute of Management, Bangalore,
India, and a Bachelor of Technology degree from Indian Institute of Technology, Roorkee, India. He can
be reached at [email protected] | LinkedIn: https://in.linkedin.com/in/gopalanandan.
Antriksh Kumar Sinha is a Senior Consultant within Cognizant Business Consultings Manufacturing
and Logistics Practice. His seven years of experience includes working in the automotive sector and
across diverse consulting engagements with leading OEMs. His areas of expertise are product planning and development, supply chain and procurement, and telematics. He holds an M.B.A. in operations
management from SPJAIN, Mumbai, India and a Bachelors Degree in mechanical engineering from NIT
Allahabad. He can be reached at [email protected] | LinkedIn: https://in.linkedin.com/in/
antriksh-sinha-b429a826.

About Cognizants Manufacturing and Logistics

Cognizants Manufacturing and Logistics business unit operates as a trusted partner to global manufacturing leaders, helping them accelerate business performance in the digital world. The unit is recognized for its forward-looking
approach by industry gurus, such as IDC MarketScape, which bestowed on it a Leader rating for service lifecycle
management. Our business consulting professionals ensure that manufacturing and logistics clients receive exceptional business results from their technology investments and sourcing programs. Our domain solutions leverage
digital technologies to build smart products, connect with digital consumers, provide real-time visibility into manufacturing operations, and automate knowledge work with cognitive computing. Learn more at www.cognizant.com/
manufacturing.

About Cognizant
Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process outsourcing services, dedicated to helping the worlds leading companies build stronger businesses. Headquartered in
Teaneck, New Jersey (U.S.), Cognizant combines a passion for client satisfaction, technology innovation, deep industry
and business process expertise, and a global, collaborative workforce that embodies the future of work. With over
100 development and delivery centers worldwide and approximately 219,300 employees as of September 30, 2015,
Cognizant is a member of the NASDAQ-100, the S&P 500, the Forbes Global 2000, and the Fortune 500 and is ranked
among the top performing and fastest growing companies in the world. Visit us online at www.cognizant.com or follow
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