Procurement Maturity Development in Oil and Gas Midstream
In a variety in industry verticals, procurement maturity can be assessed and classified into three stages of maturity; Reactive, Proactive, and Strategic. Besides interviewing and quantifying a maturity assessment, the best ways to determine the maturity level of a procurement organization is to examine the organization’s goals, what they are focused on improving, and see what value they are bringing to the enterprise. Having aligning priorities between procurement and the other business functions is critical for becoming a mature, strategic business function.
Briefly, let’s review the three stages of maturity.
First stage: Reactive – the least mature.
At this stage, a purchasing organization is very inward-looking. The focus will tend to be on organization design, leadership issues, and bottom lines savings from de-centralized suppliers. At this stage, marginal results and savings may be achieved as tracking methods for savings might be laggard and never fully realized from negotiated rates. Here perhaps the organization does not have a CPO, but they probably have an ERP, but they might still be very tactical in procure-to-pay and analytical processes and methods.
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Second stage: Proactive – medium and transitioning maturity.
Here the organization has increased their purchasing maturity. There is likely a CPO in place or strong leadership under the CFO who assesses and drives performance out of their employees, analyses business processes, methods, and their section of technology management. At this stage the procurement organization has a broader picture of procurement health, realizing savings, validating those numbers, working capital and finding efficiencies in the procure-to-pay (P2P) processes. Here, the processes are starting to be streamlined for spend optimization.
Third stage: Strategic Business Partner – high maturity.
All areas within the “four walls” of the procurement organization and leadership have been addressed, or have continuous improvement plans in place. The organization becomes focused on shareholder value, strategic vendor relationship management, innovation and being a value-add player to the enterprises internal business clients.
In order for any growth and evolution to occur, there has to be an element of change management at every echelon of development. Without leadership buy-in and readiness for change, change with never occur.
Recently Perficient MC completed a Strategic Procurement Roadmap for a Midstream Oil and Gas client. The client was looking for a path to becoming more mature in their purchasing organization. The maturity assessment rated this client as a low to medium maturity, or still very tactical and reactive. Through more interviewing, workshops and data reviews the team determined there were 10-12 projects that could be executed over the next three years to move their procurement organization to the right in maturity and industry procurement benchmarks.
The entire work break-down structure was constructed to include stakeholders, general time frames to execute, the intended outcomes of each initiative, effort and resources required, and the enablers or roadblocks to completing each project.
The Management Consulting group (MC) identified four major projects to stand up the twelve or so solutions. The first was to develop the strategy and governance team and cadence and include a RACI for each project. Next, we suggested a new organizational design that raises up category management to lead the organization in strategic sourcing and spend, and having the category management group reporting directly to the organization’s director. The Perficient business case estimated an additional 8-12% savings to the enterprise’s bottom line spend by optimizing category management standards and procedures with emphasis on training and analytics. The business case also proposed five additional category managers for discrete and complete coverage of all the client’s available sourcing categories that are unattended, or minimally attended. The net present value of that business case was estimated at $194MM over the next 5 years.
Thirdly, the team recommended defining and building out a set of key performance indicators (KPIs). We held a two-day workshop at one of their Midwest refineries with all of the general procurement strategic advisory board. From this workshop we carved out and agreed upon the KPIs that the organization will be measured on from its enterprise stakeholders and shareholders, how category managers will be universally measured, and how buyers in the refineries and the field will be measured and reported. The KPIs are to be placed on a communication cadence and distributed across the enterprise to show the value of the general procurement organization as a service provider to the operational aspects of the entire organization.
Finally, Perficient drew up a business case for installing a Chief Procurement Officer. The net present value of a CPO is estimated at ~$300MM over the next five years and will serve as a political arm reaching across enterprise functional units, creating relationships, communicating the value of procurement as a service organization, and help getting more spend under management to create economies of scale for all indirect purchases in the corporation.
Delivering value as a service organization, having that value proven with metrics on savings and efficiencies, having a category-led, proactive procurement organization, and a forward-looking CPO will move the maturity needle in any industry vertical, but particularly in Midstream. By establishing a governance to their changes, and optimizing all standards and procedures, and having the CPO push for training and development in the organization, the company can scale both their strategic sourcing and ability to be more nimble with growth by M&A.