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Upgrade Your Procurement Team Through Recruiting

Jeff Flannery, Managing Partner 720-493-0200;  jflannery@teldargroup.com 

94th Annual International Supply Management Conference, May 2009

Summary: Most companies recruit only when there is need to replace someone that hasrecently left. And, the people that are leaving are usually your best performers, not your poor employees. This leaves executives always on a treadmill trying to just keep up. However, if leaders take a proactive approach to comprehensively upgrading their entire organization, theycan not only exchange poor performers with superstars but also raise the performance of their whole team and add billions of dollars in market value along the way.

Most procurement organizations never realize their full potential because of the team theyhave in place. In leading procurement organizations, employee performance follows a bellcurve where 20% of their people are superstars, 20% are laggards, and the rest fall in therange of below average to above average.

In addition, most companies only fill positions when someone quits. Now, take a second andlook back at all the people that left your organization in the last 24 months? How many werethere? 5? 10? Of all those people that left, what percentage were superstars or goodperformers? I bet it’s higher than 80%. I also bet that very few of your low performers left.

Why would they? They are mediocre performers and know it. No one wants to hire anaverage performer but everyone will make room for a superstar. Plus they have it pretty cushywhere they are. Barring a major restructuring, they will never get let go for poor performanceunless they work for a company named GE. It reminds me of a quote from the movie OfficeSpace: “I work just hard enough not to get fired”.

This phenomenon creates a vicious cycle for the head of procurement/supply chain. Youconstantly need to replace one superstar with another just to avoid a let down in performance

NeedsImprovement

 Avg. & GoodPerformers

Superstars

Employee Performance

20% 60% 20%

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while your mediocre performers continue to stick around negatively impacting your team’sresults. In addition, replacing your open positions never come at a good time. You arereacting and always playing catch up, never getting ahead. However, by being proactive andputting a plan in place to upgrade your organization, you could add tens of millions to thebottom line and hundreds of millions to shareholder value.The two key components of this plan is replacing the current laggards with superstarsand elevating the performance of the entire team. 

Let’s evaluate how. Here is a typical manufacturer.

Revenue: $8 BillionControllable Spend: $4 BillionNet Income: $500 millionP/E: 20Size of Procurement organization: 50 people

We will use cost savings as the only metric for success. Obviously, this is naïve and costsavings in a lot of companies isn’t even the most important metric. However, to keep this

example manageable, we will use this metric as the key for success. Also, remember thatthese numbers will vary by industry. I am sure in some industries and companies 5% annualsavings looks paltry, while in other industries 5% is simply unattainable. However, theconcepts are valid even if the needle is off a little bit.

Using the bell curve described at the beginning of the article, 10 people are superstars, 30 areaverage to good performers and 10 need improvement. Let’s also assume that superstarsdeliver 7% cost savings, average performers 5%, and laggards deliver 3% (See Chart below).

Headcount Spend Managed

Annual Cost

Savings %

Annual Cost

Savings

Needs Improvement 10 $800 million 3% $24 million Average & Good Performers 30 $2.4 billion 5% $120 million

Superstars 10 $800 million 7% $56 millionTotal 50 $4 billion 5% $200 million  

From the Chart, you can see that the superstars delivered $32 million more in savings than thelaggards. By replacing laggards with superstars, you increase your savings by 16% ($32million/$200 million). However, the benefits don’t stop there. If you ever watch sports, thereare several examples of a superstar making the whole team better by being around them(Michael Jordan comes to mind). In addition to replacing the laggards with Superstars, youshould be able to increase the performance of the other team members. How?

First, by replacing the laggards with superstars, you send a message to the whole organizationthat performance is required. Second, you have changed the perception of what average is.There is an old cliché that is very true: “Birds of a feather flock together”. It means if you havea group of underachievers and you bring in an “average” performer, they inevitably will be anunderachiever. However, if you take that same person and put them in a group of superstars, they will become a superstar . The reason for this is because the perception of average is different in each organization. There are several people in organizations that

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regress to the mean. For those people, it is your job to move the mean and they will follow. If you’re average savings is 5%, several people will gravitate to the mean because they feel thatis all they can accomplish. However, if a good portion of your people produce savings that is7%, their internal compass will move up, and with it, their performance. For this example, Iassume that the average and good performers’ savings will go from 5% to 6% just byimproving the people around them. This adds another $24 million in savings bringing the totalimprovement to $56 million or 28%. More importantly, making this strategic change adds over $1 billion in market value.

Headcount Spend Managed

Annual Cost

Savings %

Annual Cost

Savings

Needs Improvement 10 $800 million 3% $24 million Average & Good Performers 30 $2.4 billion 5% $120 million

Superstars 10 $800 million 7% $56 millionTotal 50 $4 billion 5% $200 million  

Explaining how to implement this strategy in detail would take another full article. However, ata high level, there are four steps.

1. Evaluate Organization & ID Laggards

The first step is to take stock of your organization. Identify all the laggards and put a plan inplace to either find them a different position in the organization or earmark them for severance.

2. Construct a Business Case

There are two parts to the business case: savings and costs. When estimating the savings,take a look at the performance of your superstars and extrapolate those numbers to improvingyour laggards. I still recommend you underestimate the benefits when selling to senior management. For the costs, there are three main components: severance costs, recruitingcosts, and increases in compensation. If you are hiring superstars, expect to pay themsignificantly more than your laggards. However, the payoff will be quite large. If you need help

Incremental Savings

Replacing Laggards with Superstars $32 millionImproving Average Performers $24 million

$56 millionLess Recruiting & Restructuring Costs $1 millionNet Incremental Savings $55 million

Stock P/E 20Increase in Shareholder Value $1.1 Billion

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estimating these costs, contact a recruiter in the field that can help you get a pulse on themarket.

3. Sell Senior Management 

 As with any change, it is very important that you get senior management’s support for this“upgrading of the function”. After all, it is going to require a decent investment up front.

4. Execute

I recommend that you start recruiting for these positions in stealth mode to begin with. Notmany organizations can remove 20% of their staff and not expect significant disruptions. It isbetter to fill your pipeline of candidates before you pull the trigger and make somechanges. In addition, communication will be very important to the organization when thechanges are made.

This whole process can take anywhere from six months to a year, from idea inception to fullimplementation.

In closing, I encourage you to stop reacting to change and personnel issues and startdesigning the organization you want, not the one that was given to you. The payoff to thisstrategy is significant and is probably the highest ROI project that can be delivered to your company in the next twelve months.

If you want the Teldar Group to provide consulting or recruiting services for your supply chainorganization, send an email to sales@teldargroup.com or call us at (720) 493-0200.