May 30, 2005 12:00 PM,

Procurement power

By Sid Carr and Robert Tevelson

Telecom companies need to be faster, quicker, smarter and more innovative. No surprise there. This has been the mantra for a few years now. But increasingly, new and more complicated forces within the industry are hastening the need for change. The rate of consolidation among traditional service providers and new competitors, such as MSOs and MVNOs, and the unparalleled pace of technology transformation (i.e., VoIP, broadband mobility, IPTV) are resulting in an ever-shifting environment.

In the face of these shifts, expectations for procurement are taking a strategic step forward. According to findings in A.T. Kearney’s most recent Assessment of Excellence in Procurement study, more chief executives are looking to procurement as a source of value capture, of innovation, and competitive advantage--gaining an edge through their supply markets. As a result, leading procurement organizations are playing a central role in rapidly transforming cost structures and supporting the innovation and deployment of new services.

The AEP study outlines top strategies of leading procurement organizations in a variety of industries across the globe. When we applied these findings to the telecom industry, we identified four ways in which telecom service providers can use their procurement capabilities more rigorously to capture value, profits and maybe even competitive advantage.

Suppliers: A key source of innovation

From the AEP study, we know that procurement leaders consider their suppliers a key source for innovation. As part of their supplier evaluation criteria, the leaders include a supplier’s “commitment and potential for innovative value creation.” They also provide clear incentives for their suppliers to innovate and consistently measure their suppliers’ contributions. Procurement leaders also include key suppliers early in the product development process. For example, the leaders engage suppliers in the “initial concept” phase nearly five times more frequently than followers.

The battle for the customer has never been more fierce, and rapid innovation is a must to win. Clearly, finding innovation in your supplier market is neither new nor revolutionary, but becoming more rigorous in the search for innovation is. For example, as service providers continue the journey toward IP-based network architectures, procurement organizations should be facilitating cross-functional teams within their companies and between key suppliers to develop innovative solutions and speed the transformation. More importantly, focus should be applied to technologies that enable revenue-generating services that capture market share and retain existing customers.

Similarly, as legacy purchases decline and suppliers push for higher margins, having the “right” suppliers early in the innovation cycle can make a difference later on. We prefer the carrot rather than the stick approach--using a supplier’s interest in your future business to influence how business is done for legacy purchases. This will be more critical as technology life cycles get shorter and shorter.

Optimizing the value chain

The leaders in the AEP study link their supply chain strategy with their corporate strategy, ever tightening the link as markets become more competitive. These leaders manage and control all processes essential to meeting their corporate strategies, and allow their partners to perform all other, less strategic activities.

The challenge for telecommunications service providers is to understand how their markets are changing and how essential processes are shifting. Take, for example, consumer markets, where the convergence of traditional telecommunications services and media will radically alter how customers access content. Because the change is so complex, and because most telecommunication service providers do not have the in-house resources or competencies to provide such a seamless arrangement, a choice must be made: either develop these capabilities in-house or secure them from outside suppliers.

While there is a great deal of uncertainty and speculation in this market, there is little debate that it represents a huge opportunity. Now is the time to identify the core processes needed to support company strategies. Some will be addressed in-house with others being supported by suppliers. But for the end customer, the arrangement must be seamless.

Employ advanced cost management techniques

Most companies today are well versed in the more traditional supply-market levers--best price evaluation, volume concentration and product specification improvements. Procurement leaders go beyond these traditional approaches to employ advanced cost management techniques. Figure 3 illustrates three of the top techniques:

Collaborative cost reduction: Generating and implementing cost reduction ideas, and sharing benefits and risks with suppliers
Tiered sourcing: Combining company and Tier 1 supplier volumes to enable suppliers to negotiate more favorable terms with their own suppliers
Design to cost: Revising specifications to avoid costs (for example, eliminating over-specifications or optimizing subsystem designs)

With continued consolidation in the telecommunications industry, the race is on for low-cost leadership. Without exception, the acquiring companies in recent merger announcements--SBC/AT&T, Verizon/MCI, Sprint/Nextel and Alltel/Western Wireless--have highlighted supply market synergies as key elements supporting the economics of their transactions. To capture synergies, and thus higher levels of value creation, merging procurement organizations are employing leading cost-management practices. Likewise, competitors are moving aggressively to lower their own cost structures to keep pace with their larger scale rivals.

With everyone moving in the same direction, true competitive advantage may depend on finding answers to some key questions: What advance approaches should we use to achieve next-level savings? How can we work with our suppliers to reduce their cost to serve? Can we source for our suppliers? Should non-traditional and offshore or emerging sources be considered? How can procurement influence what is bought, as well as how much is purchased?

Managing risk and supply continuity

Most respondents to the AEP survey recognize supply risk as a strategic issue, but leaders are more likely to have--and to have tested--contingency plans to provide protection in the event of a supply disruption.

Of course, establishing contingency plans is not a new concept for telecom service providers. With the rapid pace of innovation and end-to-end supply chains reaching around the world (recent emergence of Chinese network infrastructure OEMs and handset manufacturers) the question for most telecom providers is how to leverage the supply base while still protecting intellectual property?

With supply continuity a core element for telecom companies’ risk-management strategies, procurement should be positioned front and center--to define the strategic commodities or functions that merit well-developed risk management plans. After all, procurement is in the best position to prioritize supply locations, logistics and ensure there are multiple suppliers or at least a single supplier with multiple locations. And procurement can demand that key suppliers create contingency plans of their own to stabilize the entire supply chain.

Ideally, to stay on top of risks, your procurement organization will identify and monitor supply-related risk indicators, such as the percentage of purchases in key categories that have a single source, originate in potentially unstable countries or pass through vulnerable transportation bottlenecks. Armed with this level of detailed information, companies are in a better position to conduct scenario-based analysis and deploy more effective risk-management strategies.

Are you ready?

Is your procurement organization ready to go beyond cost containment and move to higher levels of value creation? No doubt the stakes are high, but being a fast follower in this game could be fatal. When the battle for the customer is both fierce and rapid, all four areas discussed in this article may be essential to getting a leg up on the competition.

About the AEP Study

The 2004 Assessment of Excellence in Procurement is the fifth research study in a series that began in 1992. Developed by a global team, the study elicited responses from procurement and supply chain executives from leading companies around the world. The initial 238 companies, with average revenues of nearly US$10 billion in 2003, formed the benchmarking study group. To date, more than 300 organizations have completed the survey, contributed to the database, and benchmarked their performance.

The services sector accounts for 103 participants, with 49 firms representing telecommunications, transportation and utilities; and 54 firms in media and entertainment, finance, professional services and retail.

Participants completed a detailed online survey (more than 600 elements), which the study team aggregated into 25 leadership practices and then into eight dimensions of procurement excellence. The 18 leaders are from the initial benchmark sample of 238 companies; they rank among the top 10 percent in overall scores and attained world-class performance in at least three of the eight dimensions.

In addition to the online survey, 63 CEOs and senior executives completed a shorter survey, which were used to compare the perceptions of procurement and supply chain executives with senior management’s expectations and perspectives.