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Becoming A Process-Based Procurement Organization

Author(s):

Victoria Rupp
Victoria Rupp, Director - Acquisitions & Asset Management, American Express Financial Advisors, Minneapolis, MN 55440, 612/671-2692
Paul McDonough
Paul McDonough, Senior Acquisitions Consultant, American Express Financial Advisors, Minneapolis, MN 55440, 612/671-8890

81st Annual International Conference Proceedings - 1996 - Chicago, IL

The Issues. In today's highly focused business environment, procurement organizations are positioned to play an increasingly important role in delivering bottom-line results. To seize the opportunities before them, these organizations must deliver meaningful financial contributions, in the form of cost reduction and avoidance AND revenue generation as well as improvements in productivity, service quality and risk management. This can be done most effectively through 1) clarifying the processes for which the procurement organization is responsible and 2) capitalizing on relationship management with both internal partners and external suppliers. Our objective is to present a case study of how to design and implement a process-based procurement organization. We will cover major challenges, key learnings and critical success factors.

The Opportunity. In January, 1995, as part of a corporate initiative, Acquisitions & Asset Management (A&AM), the procurement organization for American Express Financial Advisors (AXP Advisors), undertook a project to identify and "map" the processes for which it is responsible. The processes are: 1) Support Resource Planning, 2) Select Suppliers, 3) Negotiate Contracts, 4) Manage Contracts and Life Cycle costs, and 5) Manage Supplier Relationships. "Mapping" meant driving the high-level processes to the task level in the three procurement practices within A&AM: Technology Acquisitions & Asset Management, Professional Services Acquisitions and Purchasing.

The trick then was to establish A&AM's ownership for its processes throughout the AXP Advisors organization. As the reader will appreciate, there are significant challenges when the procurement organization attempts to "move forward" in the value chain from contract negotiation to active involvement in resource planning. Taking responsibility for managing total life cycle cost of acquired resources and managing supplier relationships was equally challenging. Internal partners do not easily "forfeit" these responsibilities.

However, during 1995, A&AM established a corporate role for itself in delivering all five processes in the acquisition and resource management of distributed and mainframe computer resources, consultants and contract programmers, commercial printing and outsourcing.

Background. AXP Advisors, formerly IDS, is a 100-year-old financial services company which was acquired by American Express in 1983 and rebranded to its present name in 1995. AXP Advisors' Mission, which was established in 1984, is: "To help clients achieve their financial objectives -- prudently and thoughtfully -- through a long-term financial planning relationship with a trusted and knowledgeable advisor."

AXP Advisors achieves this mission by providing financial planning and financial products to over 2 million individual and institutional clients through a force of 8,000 financial planners nationwide.

In the decade following its acquisition by American Express, AXP Advisors has seen unprecedented growth:

  1984 1994
Field Force 4,400 8,000
Financial Plans 15,480 130,000
Sales ($ Billions) 6.1 19.3
Assets ($ Millions) 19.5 106.0
Earnings ($ Millions) 62.0 428.0
Return on Equity 8.3% 19.3%

AXP Advisors is the largest financial planning firm in the country. If it were an independent entity, it would be the 125th largest company in corporate America today.

A&AM is the procurement organization for AXP Advisors. In January of 1995 it was reorganized out of Information & Technology and into the Finance organization with the express purpose of assuming corporate-wide rather than departmental procurement responsibilities. At the time, A&AM was responsible for acquiring computer resources, I&T contractors and purchased goods, which represented approximately 69% of total 1994 spend. By the end of 1995, consultants and outsourcing had been added.

Designing a Process-Based Procurement Organization. At the time of the A&AM transition, AXP Advisors was in the process of transforming itself from a functional to a process organization. Corporate level processes (e.g., manage finances and resources) had already been identified and mapped. So as part of its transition, A&AM seized the opportunity to reengineer and reorganize itself through an initiative to identify and map its own processes. This initiative began with a reaffirmation of the A&AM Mission, established four procurement strategies, completed a three-level processes map, and ended with an organizational realignment -- all in nine weeks.

First, a look at the outcomes of design phase of this initiative. A&AM's mission is: "To maximize the value of AXP Advisors' investment in acquired resources."

Its strategies are: 1) Supplier Management: consistently apply high quality supplier management processes and procedures; 2) Service: work with internal partners, using a dynamic acquisition service model which integrates resource planning with asset management; 3) Information: effectively leverage critical supplier, asset, contract and industry information; and 4) People: empower a team of high performing, ethical individuals working in an environment that values diversity.

The final phase of design was to realign the organization. Our objective was to organize in a way that would be intuitively obvious to internal business partners and external suppliers and to provide the procurement organization with maximum flexibility. The solution was three acquisitions "practices" -- Technology, Professional Services and Purchasing -- and a support group consisting of a financial expert, a process and project management expert, and a negotiation and supplier management expert.

The nine-week design phase was a very inclusive process. Eight members were selected to represent their peers on the design team which also included the A&AM director and a process facilitator. The team met twice a week on a tightly focused schedule. For each objective (e.g., development of strategies), the first session was to develop a draft position. That position was presented to the rest of the organization for review. Feedback was collected and presented to the design team at the second session. The draft was reworked to incorporate the feedback, and final polishing was done by the process facilitator off line. The final polished version was presented to the design team and organization at the beginning of the next session. Any concerns or additional suggestions could then be raised with the process facilitator or director.

We deliberately chose a rapid design approach because we wanted to address role ambiguity as quickly as possible, and we did not want to run the risk of the process dragging on and on. The greatest organizational challenge we faced was building trust in the process and confidence in the results. So we designed the process to maximize involvement -- getting everyone to criticize from the inside rather than resist from the outside. To ensure this, we took a cross section of strategic and tactical thinkers on the design team -- and left a similar cross section off. As a result some of the most critical insights came through the responses to the drafts. The greatest practical challenge, of course, was scheduling. The director and process facilitator scheduled the entire undertaking before the first session was held -- and stuck to it throughout.

We learned that participation is the key to designing processes successfully. Most reengineering failures occur because managers fail to consider the impact they will have on people. A transition from function to process is by its nature a transition from hierarchy to team orientation. The roles and involvement people will be expected to assume in the resulting organization must be built into the process of designing that organization itself. In addition to inclusion and participation, the critical success factors for the design phase of a process reengineering are a clear project plan and open communication. Clarity is critical and must apply to the project schedule, expectations and tools as well as the final deliverables.

Implementing a Process-Based Procurement Organization. It should come as no surprise to learn that implementation was more challenging than design. It was easiest in areas where A&AM did not already have established patterns and working relationships. For example, in June the CFO directed the A&AM director to develop a corporate set of guiding principles for outsourcing, a new "service" for A&AM. These were based on the A&AM process map and A&AM was "designed in" as the coordinator of all outsourcings. Key stakeholders were identified in various business units and were invited to provide input and feedback to the development process. When the principles and various roles were communicated to the AXP Advisors organization, they were accepted without any resistance. The first outsourcing to occur following communication of the guiding principles was facilitated by A&AM and was considered very successful by the business partners.

There were two reasons for this easy success. First, as mentioned, the principles had been reviewed by key business partners and revised to their satisfaction. Thus, they conformed to the corporate culture. Second, the timing was perfect. There had been enough talk about potential outsourcings for corporate leaders to realize the complexity of such undertakings, but things had not gone so far that any group was locked into or out of a specific role. Now, with one successful implementation, the process and the roles for the various players have been set.

Things have not been so straightforward for Purchasing. Despite being responsible for over $60MM in acquisitions, Purchasing has been, and to a great extent remains, a transaction driven organization processing one purchase order at a time. Purchasing's role as acquisitions process owner is being established one commodity at a time. Furniture contracts were renegotiated in mid-1995 using each phase of the acquisition process, from resource planning through resource and supplier management. Commercial print is in process. By mid-1996 approximately 15 commercial printers will be certified to do all of AXP Advisors' external business under terms of 2- to 3-year master agreements.

One challenge to implementing the new acquisitions processes for Purchasing has been changing the mindset about commodities from transaction based to relationship based. This is equally true for internal partners, external suppliers and the purchasing organization itself. Another, perhaps greater, challenge is the incompatibility of existing business processes and systems with the newly redesigned acquisition processes. To avoid becoming lost in a sea of transactions, AXP Advisors is implementing the corporate purchasing card. We are also initiating a systems requirement project to define enhancements needed to our procurement, accounts payable and materials management systems. These initiatives will enable purchasing professionals to focus on resource planning and relationship management.

Our key learning to date regarding the implementation of a process-based procurement organization is that it is easier to do in areas in which new ground is being broken than where past practice needs to be changed. There simply is more resistance to doing things differently than to doing new things.

In addition we have found that just as communication, involvement and team building were key to success in the design phase, they are equally critical for implementation success. Here, communication took the form of multiple presentations on the new acquisitions processes and the role of A&AM. Our considerable progress has depended heavily on the clarity of our process map. Involvement has meant engaging everyone from senior leaders to line managers. We have had many dialogues, always with our eye on involving internal partners in reforming from the "inside" rather than resisting from the "outside." Team building has applied to both internal partners and external suppliers. Ultimately our role is to broker long- term, productive, mutually beneficial relationships between those two groups.

Summary. A&AM originally undertook to realign itself as a process organization in an attempt to cope with the new, expanded and more challenging responsibilities it faced when it became a corporate rather than a departmental entity. In the process we rediscovered how adaptable people are, as long as the reasons for change are logical and they are actively involved in creating the new paradigms.

Rapid design and systematic, focused implementation is an effective way to transition from a functional to a process organization. Some critical success factors in making this approach work are design through iteration that is as inclusive as possible, clearly articulated purpose and processes, open communication, flexibility and a commitment to the development of internal and external partnerships.

REFERENCES

  1. Hammer, Michael. "Beating the Risks of Reengineering." Fortune, May 15, 1995, 105-114.
  2. Fisher, Anne B. "Making Change Stick." Fortune, April 17, 1995, 121-131.
  3. Kotter, John P. "Leading Change." Harvard Business Review, Mar/Apr, 1995, 59-67.
  4. Hammer, Michael and Stanton, Steven A. The Reengineering Revolution: A Handbook. New York: HarperBusiness, 1995.

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