Not long ago, soaring jet fuel prices prompted one airline to initiate a review of its fuel usage—its largest spending category. What the procurement-led team found was that the airline had no overarching strategy for buying fuel. The airline's operations group managed tactical purchasing; its treasury unit handled price hedging. There was no real consideration of opportunities to cut demand.

The airline's sourcing unit created a comprehensive sourcing strategy for fuel and identified opportunities to reduce consumption. Its members partnered with engineers to form a team whose analysis subsequently persuaded senior managers to invest in fuel-saving winglet extensions for the company's fleet of older aircraft.

The initiative was an immediate success. The winglets shaved the airline's annual fuel consumption about 3 to 5 percent and extended the operating range of its aircraft by more than 125 miles (200 kilometers), making new routes possible. The exercise had far-reaching implications not only for the company's cost structure but also for its earnings stability, its market positioning and for the status and influence of its procurement team.

That is a relatively rare example of purchasing's real power in action. It also speaks to unusual levels of talent within the airline's purchasing organization—professionals with a much broader view of the value they could contribute, with the collaborative outlook and clout to break down barriers to change, and with the knowledge and skills to bring complex cross-functional opportunities to life.

This article will describe recent research that demonstrates the surprising leverage of the procurement function, show what some procurement exemplars are doing to deliver value to their organizations and point to talent as the “foundation factor” that can revitalize procurement activities everywhere.

A decade of globalization-fueled competition has opened the eyes of executives everywhere to the strategic benefits that can be achieved through the intelligent use of purchasing and supply management. Often, however, evolution in the way executives think about purchasing hasn't translated into results. Our experience suggests that the role of purchasing at many companies hasn't evolved much beyond the function's narrow, transactional roots as a buyer of materials, components, and services. But some purchasing and supply-management organizations are attracting the attention of CEOs by taking the function to the next level. Integrating their activities more closely with those of their internal customers, they have gained sustainable cost reductions in nontraditional areas (health benefits, for example) where previous optimization efforts have fizzled. Others go further still, using their insights to enhance manufacturing or administration activities. And some use purchasing as a springboard for innovation, leveraging a broader supply base of tangible and intangible goods to enhance product-development efforts.

While no single company we've studied has reached its full potential in purchasing and supply management, a look at the practices of high performers sheds light on what it will take to get there. These pioneering organizations are laying the foundations for a better approach to procurement—an approach that average performers shouldn't ignore.

Business leaders have long known that purchasing improvements can directly improve the bottom line. Consequently, the role of purchasing has evolved around the idea of cost containment—say, squeezing external suppliers for price reductions or creating processes to restrain wasteful “maverick” spending. Today, such fundamental practices remain indispensable across a range of supply- and demand-side circumstances (the former largely through controlling prices, the latter through better management of what is purchased).

For many companies, however, average proficiency in purchasing and supply management masks a troubling problem: Purchasing hasn't grown beyond its transactional origins. Talent shortfalls are the largest factor in this problem, and we find that most companies consistently overlook the role of talent in purchasing. At one consumer-driven European company, for instance, the purchasers' lack of marketing savvy prevented any meaningful and productive dialogue with marketers as the two groups attempted to define a new sourcing strategy. Indeed, senior executives found that constructive conversations between the parties were impossible until the company hired several purchasing managers with backgrounds that gave them a better understanding of their internal customer's needs.

Low aspirations and a transactional mindset are another problem. At one consumer product manufacturer, procurement's historical emphasis on transactional activities (mainly handling purchase orders) contributed to management's unwillingness to entrust purchasers with the wider set of centralized outsourcing opportunities they might otherwise have “owned.”These responsibilities were instead left scattered inefficiently among several business units until a broad reorganization effort eventually addressed the problem.

An interrelated difficulty occurs when purchasers' activities are misaligned with company strategy. Among poor performers, this problem starts when companies fail to involve purchasing in the early stages of strategic planning. The ill effects appear throughout the organization. One large European company, for instance, was more than two years behind in incorporating a product innovation that had been widely adopted by rivals.For the most part the problem was that the company's purchasers had a single-minded focus on price, which created tensions with the supplier responsible for the innovation, making collaboration impossible.

As we'll see later, top purchasers have the breadth of vision, the skills and the influence to avoid such traps. They are fully aware that procurement processes and technology by themselves don't improve purchasing's performance. They set clear aspirations—and bigger ones at that. They ensure that their actions are aligned with their companies' strategic goals. And they take a much more rigorous approach to ensuring that they have the right procurement skills on board in the first place.

So just how important is talent in purchasing? Our experience and research suggest that it is the deciding factor separating the financial performance of top purchasers from ordinary ones. The purchasing leaders hire better people, set clearer performance aspirations for them and create strong purchasing cultures that encourage purchasers to better link their activities to corporate strategy. The payoff? Top purchasers annually save more than twice as much as do low performers.

These are among the findings of an ongoing research study of more than 350 global companies about their purchasing practices. The figures mentioned in this article refer to a survey of 200 of these companies that examined purchasers' practices against recognized best practices and then assessed their responses using a one to five scale, with five the highest. When we compared the executives' scores against the financial results of their companies' purchasing efforts, we found a striking correlation. Top companies saw purchasing savings of more than three percent a year—two percentage points higher than the low performers. (Average savings over the three most recent fiscal years.) High performers also enjoyed EBITDA margins that were fully five percentage points higher than those of low performers.

A closer look at the relationship between a company's purchasing score and its financial performance revealed that three talent dimensions accounted for a disproportionate share of the benefits. Together, these factors accounted for 57 percent of the financial improvements associated with a one-point improvement in purchasing score.

The first of those factors involves the capabilities of the purchasers themselves. For example, high performers were five times more likely than low performers to employ purchasing managers with analytical expertise and general management backgrounds, in addition to deep knowledge of a particular purchasing category (such as packaging). Likewise, purchasing managers at top companies were six times more likely to have worked in another functional area (such as product development or engineering) than were managers at low-performing companies.

Top companies also set clear career paths for purchasers. Seventy-six percent of high-performing companies tailor the training that purchasers receive, for example through functional rotationsthat ensure purchasers obtain broad business experience. Only 11 percent of low performers did so. In our experience, such organizational insularity prevents purchasing executives from contributing to the product- and service-development discussions with suppliers and other stakeholders that often lead to bigger savings.

The second factor involved the way purchasers view their roles, and the aspirations they associate with them. Among top performers, 69 percent of purchasing executives felt that their CEOs expected more from them than cost reduction (and 81 percent of these purchasers articulated clear visions for achieving these goals). By contrast, 49 percent of purchasers at low-performers believed their CEOs viewed purchasing as a limited support function, and nearly two-thirds saw little indication that this would change. In our experience, such attitudes discourage purchasers from exploring new practices or ideas that might create value. Indeed, among low performers, only 11 percent of purchasers felt their efforts contributed to a culture of continuous improvement within the company, compared with 62 percent of high performers.

Finally, high performers were more likely than the others to actively involve purchasing executives in strategy development—influence that, in our experience, results in better decision-making. For instance, 80 percent of top companies involved purchasing executives during the concept phase of product development, and 90 percent reported that purchasers were actively engaged with sales and marketing executives—for example to explore how innovations among suppliers might inform new products or services. This influence extended to M&A: Top companies were twice as likely as low performers to involve purchasing in due diligence before a merger, and in value-capture activities after one.

Our findings reinforce the view that while the processes and technology that companies employ are important, such factors are alone insufficient when it comes to improving a company's purchasing performance. Indeed, we found the effect of such systems and tools to be minimal when it came to explaining the differences in financial performance we observed among respondents.

So what does an emphasis on talent look like at the company level? What do top procurement organizations get for their investments in and attention to talent? Our experience points to several areas in which stronger talent enables purchasing to add value beyond the core cost-containment categories. High performers extend the influence of purchasing within their organizations by closely linking its activities to those of its internal customers, product developers and other functional groups. Here are three ways in which top purchasing units find new ways to add value:

“Finding gold” in nontraditional categories. Top sourcing organizations excel, first, by extending their activities into areas that have gone unnoticed in the past or areas that have proved too difficult to optimize. Consider a government agency where purchasers helped the HR staff benchmark the agency's benefits plans against alternatives. After analyzing the historical costs of the existing plans, the agency's sourcing group teamed with HR to develop and assess various options jointly and to test their appeal with employees before adopting a new plan. Purchasers brought to the project their analytical expertise and their skills in assessing suppliers and negotiating with them, while HR formalized the design. The resulting plan was approximately seven percent cheaper than its predecessor and received a 25 percent higher satisfaction rating from employees.

At another organization, the intelligent use of purchasing helped rein in rising legal costs by separating legal services into commoditized segments (including paralegal and research needs) and creating sourcing strategies for each segment. Meanwhile, the company introduced systematic performance metrics—such as indemnity averages—and created an independent general-counsel office staffed with lawyers trained in purchasing basics. The outcome: The company consolidated its provider base from 900 down to nine, capturing significant savings.

Challenging (and improving) the business system. Some leading purchasers also work closely with others in their organizations to challenge and improve the way that products or services get to market. At a European conglomerate, for example, purchasers drove a push to outsource more manufacturing activities. By benchmarking the company's capabilities against those of outsiders to identify outsourcing partners and by subsequently managing the resulting relationships, the company reduced the level of in-house manufacturing by 30 percent and significantly improved its times to market. A bonus: The company found that sharing a supplier improved a historically thorny relationship between two business units.

Purchasers can also directly support the goals of other functional groups. Some companies already use sourcing hubs in low-cost countries as beachheads to generate additional sales in those markets. Top purchasers take such collaborative efforts much further. At one restaurant chain, for instance, purchasers teamed up with the sales unit to devise a way to manipulate dynamically the menu items that consumers see. If shrimp became cheaper to source than beef in a given week, for example, the sales staff could quickly position menu items featuring the former more prominently, and vice versa, thus directly influencing customer demand in response to changing conditions. This approach allowed the chain to maximize profits and minimize the risk of supply disruptions associated with key ingredients.

The ability of high performers to expand their horizons can have strategic implications as well, as the example of the aircraft winglets demonstrates. By extending the operating range of the airline's older aircraft and thus permitting new flight routes, the procurement group helped change the competitive positioning for the airline.

Stoking the innovation engine. Suppliers have always provided critical fuel for innovation—serving, for example, as a potential source of valuable insights and technologies that support product and process improvements. Purchasers serve as a fundamental link between a company's supply base and the rest of its value chain. Some companies exploit this connection quite effectively. Procter & Gamble, for instance, has made notable progress on its target to source a high percentage of its products from outside the company. Its purchasers played an important role in nurturing the early development of the company's popular SpinBrush—an inexpensive battery-powered toothbrush brought to P&G by outside inventors who had modeled the product on technology they'd used earlier to create a spinning lollipop.

Certainly, few companies have extended their innovation models so radically, and in many cases they would not be wise to do so; a company's approach to innovation must reflect its industry, its unique strategy and its competitive position. Still, forward-looking purchasers can work closely with suppliers to spur product and process innovations that save money and even offer strategic advantages. At one high-tech company we studied, for example, purchasers worked intensively with a supplier to adapt the software menus that governed a key piece of capital equipment used in manufacturing. This effort, part of a broader lean-manufacturing initiative, ultimately freed the valuable time of the operators of the equipment, who could then support an important expansion of the plant.

Although several organizations are making considerable strides along the lines discussed above, none has reached its full potential in any one area, let alone all of them. Still, a look at what allows these purchasing standouts to distance themselves from the pack can offer insights into the skills and approachesnecessary for achieving wider success in purchasing. We have identified three key directions that procurement leaders must take if their organizations are to echo the successes demonstrated by their profession's exemplars:

1. Connect Purchasers to the Business

The role that talent plays in connecting purchasers more closely to the business cannot be overemphasized. In most industries, we find that the application of commercial negotiation tactics accounts for as little as 20 to 30 percent of the impact available from purchasing improvements. The rest comes from managing product specifications and demand—practices that purchasers learn as a result of deep functional and category expertise, their ability to apply it across a broad range of circumstances and their understanding of the company's wider aims. Recognizing this reality, top companies start by filling key purchasing positions with people who thoroughly understand vital spending categories—for example, carbon composites for an aerospace company or marketing for a telecommunications company. By exhibiting a strong hiring bias toward experts, these companies improve procurement's credibility among internal business units and create an environment that nourishes collaboration. The best purchasing groups aggressively recruit such professionals from within the ranks of their own companies, by finding, for example, a talented development engineer to manage the company's sourcing of electrical components or a senior IT professional to develop strategies for sourcing the company's technology. No matter where companies find these experts, our evidence suggests that the benefits of hiring them are significant.

Top sourcing groups also use systematic talent-development programs that help purchasers beef up their commercial acumen and establish relationships with internal customers. For promising university recruits, this training can take the form of a rotation program offering a variety of operational experiences. For long-term staff, some companies create special training programs. One large logistics conglomerate, for instance, suspected that a lack of relevant skills in the central purchasing group was hampering its interactions with an important business unit. The conglomerate therefore created a two-year “training academy”that offered high-potential candidates classroom training, workshops focused on specific product categories and individualized development plans.

The company also established strict criteria to ensure that purchasers running sourcing projects had appropriate functional knowledge in addition to skills in project management, communication and leadership. Today the company's purchasers are seen as peers by the business unit (indeed, purchasing employees have been poached to fill some of its leadership roles), and cooperation between purchasing and internal customers has improved dramatically.

Top companies also actively link purchasers with other groups in their businesses. Some rotate key personnel through engineering, manufacturing, marketing, or quality-management roles, while all forge partnerships between purchasers and these areas by creating standing cross-functional teams. These teams, led by purchasers and organized along spending category lines, form the backbone of a company's sourcing activities. They could, for example, define the specifications of necessary products and services, create sourcing strategies and conduct supply and market analyses.

Following this approach, one large European manufacturer created more than 50 such teams, charging them with uncovering savings opportunities and developing new sourcing strategies. Within nine months the insights, analysis and commercial thinking that the teams generated were responsible for 100 million in savings. Such results aren't atypical. Indeed, we estimate that employing cross-functional teams can nearly double the impact of a savings initiative.

2. Shoot for the Moon but Start on the Ground

The best sourcing groups strive to transform their roles within the organization, and this effort starts with high aspirations. Within high-performing sourcing groups, for example, employees are far more likely to view cost reductions as a vital (though not sufficient) stepping-stone to a wider impact than are their counterparts in low-performing groups. Top performers view purchasing not only as the commercial conscience of the organization but also as its competitive eyes and ears.

However, these groups back such lofty aspirations with a pragmatic approach to achieving them. Typically, the transition to achieving such a mindset begins when a CPO works closely with the CEO and other senior executives to set (and subsequently meet) aggressive, organization-wide savings targets. While it may seem counterintuitive to start with costs only to move beyond them, it's important to recognize that many low- and even average-performing purchasing units either don't set such targets or else create uncoordinated ones—for example, applying goals across a smattering of spending categories or business units. This mindset often results in blurred accountabilities, a diminished sense of urgency and, consequently, unrealized or unsustainable results.

By contrast, when CPOs collaborate with other senior managers to champion goals that cross organizational and product line boundaries, the savings potential not only is greater but also creates an opportunity for purchasers to establish credibility with other business units. The large European manufacturer mentioned previously, for example, is following this path. After setting a goal to reduce spending on purchased goods by 13 percent, and supporting that goal with a robust cross-functional initiative, the CPO observed that the purchasing group's relationships with business units improved and that its broader aspirations gained traction. As the initiative proceeded, the benefits of working more closely with suppliers early in the design and manufacturing process became clear, and senior engineers who had initially resisted the changes began to come around. Indeed, less than a year into the change, the CPO found that several top engineers from key business units had actually applied to join the new purchasing group.

3. Align Purchasing with Strategy

As the mobile-telecom company's experience suggests, once high-performing sourcing groups establish a track record of value creation and become collaborative peers within an organization, they can begin to realize their broader strategic potential. This new role must be codified by the CPO and other senior managers and communicated throughout the company so the responsibilities and decision rights of the group are understood and embraced by the business units. Of course, the details of the sourcing unit's new responsibilities will vary with the company's strategic aims—for instance, is the company pursuing innovation-led growth or outsourcing its manufacturing to compete with low-cost competitors? The answer to such questions will determine how purchasers identify, manage and interact with suppliers.

Once the sourcing group's mandate is clear, CPOs can actively engage with other senior executives in the early stages of strategic-planning activities to properly align purchasing with company strategy—and begin applying sourcing expertise in a variety of circumstances. For one North American retailer, for instance, a major purchasing initiative gave the company the financial leeway to pursue a broader restructuring plan that included revamping the appearance of its stores and enhancing its marketing approach.

Finally, given a high-performing sourcing unit's role as a bridge connecting different groups within the company, it can even support organizational change. The European manufacturer, for example, had suffered heavy losses in a core business area as a result of the dot-com collapse and subsequently needed to instill a stronger commercial mindset among its engineers to cut costs. The CEO found that the procurement-led cross-functional teams provided an excellent mechanism for successfully communicating management's new message throughout the company while simultaneously preparing it to compete in the new environment.

Top purchasers adopt a more rigorous approach to talent by simultaneously upgrading their procurement skills and exploring clever ways to connect employees across the organization in a common purpose. That emphasis forms the foundation for everything else they do right—from setting high aspirations and establishing concrete goals to aligning their sourcing efforts more closely with corporate strategic goals.

Other companies can readily emulate such “talent-first” approaches—and can look forward to similarly beneficial outcomes. The gains won't happen overnight, but the processes to enable them must begin soon.

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