Alignment matters - Improving business functions using the Procurement Alignment Framework

The procurement business function is increasingly recognized as strategic. We propose an improvement approach of the procurement function using the Procurement Alignment Framework. The framework is based on the hypothesis that the performance of the procurement business function is positively related to (1) the single maturity of five business dimensions (strategy & policy, monitoring & control, organization & processes, people & culture, IT) with respect to procurement, and (2) the alignment of these five maturities. A survey tool (‘scan’) based on the Procurement Alignment Framework is applied to 55 Dutch organizations from various industries and size categories. As expected, we found significant correlations between maturity and alignment of the business dimensions on the one hand, and procurement performance on the other. Consequently, the tool and framework can be used to provide specific recommendations for organizations to move their procurement business function forward. Introduction Back in the 1980’s, Kraljic (1983), Speckman (1981), Porter (1985), and others early identified the strategic importance of procurement. Many companies, however, have unnoted the competitive value of the procurement business function, until the late 1990’s. The primary interests of managers concerned the internal processes, and sales and marketing. Nowadays, new opportunities related to procurement arise: e-procurement, spend management, outsourcing (e.g. procurement in the service domain), joint product design, and more. Although the opportunities for improvement seem abound, anecdotal evidence shows that many procurement initiatives in general – and IT-implementations in the procurement domain specifically – do not deliver the expected benefits (cf. Adamson, 2001; Pan, et al., 2004). As the number and diversity of procurement models, perspectives and concepts continues to grow, the need to combine or integrate these increases likewise. In addition, the demand revives for their empirical validation, including evaluation of the claims and assumptions of models and approaches to improve procurement in organizations. In this paper, we attempt to achieve both the practical and academic benefits of (1) integrating existing approaches to procurement improvement and optimization, and (2) validating the assumptions underlying these approaches through data surveying a substantial number of procurement managers. The practical question we want to address in this paper is as follows: How can organizations plan their investments in procurement in such a way, that the critical business dimensions to the procurement business function are aligned, and hence procurement performance is increased. As will be explained below, we provide an answer to this question by developing the Procurement Alignment Framework (PAF), and subsequently validating it through testing its underlying hypothesis: The procurement performance of an organization is positively related to 1) the single maturity of five business dimensions (strategy & policy, monitoring & control, organzation & processes, people & culture, IT) with respect to procurement and 2) the alignment of the maturity levels of these five business dimensions. Below, we will first elaborate on the foundations and construction of the Procurement Alignment Framework. Then, the survey tool (‘scan’) that is based on the framework is described including the ex-ante validation of this measurement tool. Next, the data collection by surveying 55 procurement managers from different organizations is explained, i.e. the practical application of the PAF-based questionnaire. After testing our central hypothesis through several analyses, we provide leads for procurement improvement plans, based on the PAF-scan and its outcomes. We close with recommendations and suggestiosn for further research. Constructing the Procurement Alignment Framework Procurement maturity The first pillar of our theoretical framework is based on the concept of progress maturity. In general, the idea of maturity is presented by sketching a number of growth stages that depict the potential-upward development or performance of organizations during several sequential periods of time. In most representations time or periods are labeled on the horizontal dimension, whereas the performance level is projected on the vertical dimension. Within the field of information systems, the Nolan model is often quoted as the origin of the maturity perspective (Nolan, 1979). Nolan’s model represents the specific pattern of IT-adoption or ITmanagement by organizations. Its baseline is that IT-adoption or IT-management are adopted slowly by a small group at the beginning of its emergence, quickly followed by a large group, and finally with a small group that might stay behind in adoption for a long time. This pattern is labeled the S-curve, as this resembles the cumulative frequency distribution of adoption within groups (cf. Rogers, 1995). With the adaptation of the Nolan growth model by the movement of quality management and related activities, the principle of defining stages of growth was further extended and applied to the development of organizations or their parts. Within the field of information systems planning, Earl’s model of learning curves with respect to IT can be considered as one the first examples of this extension (Earl, 1989). Since then, both the original Nolan and Earl models have been revised, extended, specified and modified, in line with progress made in the field of information systems and software engineering (see Galliers, 1991). After publication by the Software Engineering Institute (SEI) at Carnegie Mellon, the Capability Maturity Model (CMM) has become an established model in the field of information systems. It is designed to measure, monitor and evaluate the professional development and engineering of software and many related domains such as IT-governance, project management, people management and so on (Peppard and Ward, 1999), with the assumption that the higher the level, the more mature and the higher the performance of an organization. With the idea that the procurement function has the ability to influence corporate profitability favorably, the functional development has been a topic of great interest. Departing from the passive, re-active clerical viewpoint of the 70’s the procurement function has the ability to develop itself in a strategic pro-active function contributing, as much as other business functions, to the creation of (sustainable) competitive advantages. The fact that such a significant advantage can be achieved is described by many authors (e.g. Adamson, 1980; Porter, 1985; Cavinato, 1991; Herberling, 1993). During the last two decades numerous authors proposed, and constructed, development models for corporate procurement, most of which assume a stage/step-wise development. Van Weele and Rietveld (2000) derive an integrated purchasing development model, based on twelve of such distinct models, (a.o. Keough, 1993), addressing procurement maturity through development stages: • Transactional orientation; • Commercial orientation; • Purchasing co-ordination; • Internal integration; • External integration; • Value chain integration. In our framework we will adopt these stages. Procurement alignment The second pillar of our framework is based on the concept of business-alignment. We explicitly reflect on the alignment of Information Systems and Information Technology (IS/IT) with the rest of the business: deployment of new IT is often a trigger for improving the business (Ward and Peppard, 2003). Since the 1980’s, scholars, analysts and consultants alike have advocated an aligned approach with regard to introduction and deployment of information systems in organizations. One widely cited source is Porter (2001), who argues that the Internet does not make business strategy obsolete. Instead, an Internet and business strategy should coincide. On an operational level, many authors can be cited for the statement that IT implementations should come along with a careful consideration of business processes and other organizational issues (cf. Peppard and Ward, 1999; Hammer and Champy, 1994). This message is also recognized within practical guidelines, such as Sowa and Zachman (1992) who propose a system development perspective that can be considered holistic, taking the views of data, function, network, organization, strategy, and scheduling into account. All of the mentioned authors similarly encourage the alignment of IT with business processes, structures and strategies. Historically, Scott Morton’s book on The Corporation of the 1990’s (1991) can be considered as the foundation of business/IT-alignment. Better known however, is Henderson and Venkatraman’s Strategic Alignment Model, one of the first concepts to support organizations in leveraging new IT technologies (Henderson and Venkatraman, 1993). Business strategy, IT strategy, organizational infrastructure and processes, and IT infrastructure and processes should be in balance through strategic fit, and functional integration (see also Luftman et al., 1993). Subsequently, several authors applied the Strategic Alignment Model. With varying success, the connection between alignment and organizational performance has been investigated (Cragg, et al., 2002; Kearns and Lederer, 2000; Peppard and Ward, 1999). With this in mind we elaborate the business domain (while explicitly connecting it with the IT domain) by using the strategic alignment model of Turban, et al. (1999) and specifically its extension by Scheper (2002). In Scheper’s adaptation of the model, the following five ‘business dimensions’ are crucial parts of every organization that need to be integrated: • Strategy and policy • Monitoring and control • Organization and processes • People and culture • Information technology Basically, Scheper’s hypothesis is that synchronizing or leveling of the five dimensions will significantly contribute to the performance of an organization. Based on his benchmark study over 265 Dutch housing corporations this hypothesis is indeed confirmed (Scheper, 2002). In addition, the same hypothesis was confirmed by data collected among 30 CRM-managers (Batenburg and Versendaal, 2004). We will take Scheper’s framework of (strategic) business-alignment. In fact, its foundations are applied to combine the concept of procurement maturity and procurement alignment within one integrative framework. The six maturity stages as identified in the previous paragraph are allocated as the concrete achievement levels for a (equal) number of indicators that cover each of the five business dimensions in relation to the procurement function. The empirical appearance of the framework will be described in the next section. At this point, it is important to stress that our procurement framework serves the goal of measuring, monitoring, and comparing corporate procurement related design and activities through self-assessment in absolute and relative terms. The key is that the framework is generally applicable, yet it provides situational instead of general recommendations. Other scholars and practitioners have identified multiple perspectives in describing the procurement business function. Cavinato (1999) identifies 15 attributes or viewpoints, to track procurement across developmental maturity stages: a.o. key procurement measures, management style, budgetary approach towards procurement. A.T. Kerney's house of purchasing and supply management framework identifies eight dimensions ("The New," 2000): purchasing/supply strategy, purchasing/supply organization, strategic sourcing, supplier management, day-to-day purchasing, performance management, information management, human resource management. The Michigan State University (MSU) purchasing model (cf. “Purchasing Excellence”, 2003) distinguishes eight strategic processes (e.g. insourcing/outsourcing, commodity development) that need to be supported by a number of other aspects: general purchasing and supply chain strategy, organizational strategies, globalization strategy, purchasing and supply chain measurement, IS/IT support, human resource development and training. The major characteristics of our procurement framework are: • Each dimension is equally important and should be ‘in-alignment’. The performance of the organization in the procurement domain is as high as the weakest (least mature) dimension. • Information technology is addressed explicitly, and is also valued as a potential enabler for improved procurement performance. • We allow for a situational application of our framework, taking into account company characteristics, like company size, branch, etc (see next chapter). • We explicitly incorporate procurement performance (see next paragraph). Procurement performance The goal of our framework is to let organizations perform better in the procurement domain. Therefore, we explicitly insert procurement performance into our framework. Berkowitz and Mohan (1987), Monczka and Trent (1991), Porter (1985) and Sutton (1989) identify the following benefits when effectively manage the procurement function: cost reduction, enhanced profitability, assured supplies, quality improvements, and competitive advantage. The I-Frame (Versendaal and Brinkkemper, 2003), a procurement improvement framework, provides no less than twenty different benefits derived from several sources in the (procurement and e-business) literature. Those benefits can be categorized as follows: process-related (with e.g. the benefit of improved sourcing decisions), cost-related (e.g. reduced purchasing costs), product quality-related (e.g. better product quality), and organization-related (e.g. increased trustworthiness). In an investigation of procurement improvement effectiveness, Accenture (2002) identifies the following four procurement performance indicators: purchase price index, quality conformance, raw material inventory turnover, and supplier delivery accuracy. These indicators can be easily mapped onto the identified benefits in the I-Frame. So for our framework we can select from many performance indicators and benefits. In order to have a manageable set of performance indicators for our framework we include only a very limited set of indicators per procurement level (strategic, tactical and operational) (Note that procurement functions can be considered on the strategic, tactical and operational level; e.g. De Paoli (1999), Weele (2001), mySAP (2003), and Versendaal and Brinkkemper (2003)). The successful research from Accenture encourages us to select the following procurement performance indicators. • Quality conformance (strategic) • Price purchase index (strategic and tactical) • Supplier delivery accuracy (operational) • Transaction costs (operational) Resulting framework Figure 1 depicts the procurement alignment framework, and visualizes the hypothesis. Business dimension Transactional orientation Commercial orientation Purchasing coordination Internal integration External integration Value chain integration Strategy and policy increasing maturity Monitoring and control increasing maturity Organization and processes increasing maturity People and culture increasing maturity Information technology increasing maturity Procurement performance Quality conformance Price purchase index Supplier delivery accuracy Transaction costs Figure 1: The procurement alignment framework