Across Industries, Russian Companies Have a 5-10% Procurement Savings Potential

Reports Booz & Company in its first procurement survey in Russia. Russian Companies still fall short of international procurement best practices.

Moscow, July 26, 2010 – Russian companies have developed strong centralized procurement functions, but are still behind international best practices on key drivers of procurement performance like maximum spend coverage, clearly defined savings targets and incentive systems as well as supplier relationships. Improving on those dimensions will allow Russian companies to realize additional 5-10% procurement savings, according to Booz & Company’s survey “Procurement in Russia Today”, a first survey of that kind conducted by the international management consultancy in Russia.

Booz’s procurement survey in Russia was aimed at evaluating prevailing base procurement capabilities as well as select procurement capabilities of Russian companies with anticipated major improvement potential. The survey and analysis was conducted using a proprietary “Best Practice Procurement Capabilities Framework” developed by Booz & Company and deployed repeatedly in a global context. Companies were assessed on key dimensions as procurement strategy, organization, planning, etc.. Survey participants included top-managers responsible for procurement in companies across 9 industries, generating a total of more than USD 30 Bn in sales.

Overall Russian companies fall short in comparison to international best practice procurement capabilities with an average capability level of 3 against best practice of 3.9 on a scale of 1-4. Nevertheless, the level of basic procurement capabilities is sufficient and procurement executives have a good understanding of key challenges:

  • Russian companies have dedicated procurement functions. About 65% of survey participants confirm a strong procurement function built on a clear procurement strategy, dedicated and structured organizational unit(s) and trained professionals.
  • Procurement in Russia shows a high degree of centralization. In line with international best practice, Russian companies are showing a high degree of centralization with more than 50% of respondents having fully centralized procurement organizations and only around 20% reporting procurement to be managed by local procurement organizations.
  • Russian procurement executives recognize key challenges in procurement practices. Procurement executives interviewed quoted several challenges that they see in terms of improving procurement performance for their companies, including lack of specific motivational system for buyers, gaps in IT system support and automation, and absence of clearly defined negotiation strategies.

Evaluation of Russian companies against the “Best Practice Procurement Capabilities Framework” revealed the following major gaps:

  • Insufficient spend coverage. About 40% of respondents report that spend coverage (i.e. the share of total company procurement managed by a dedicated procurement unit) is less than 80% in their companies. At the same time, leading procurement organizations worldwide achieve spend coverage of more than 90%.
  • Lack of differentiated savings targets and dedicated incentive system. Less than 50% of Russian companies set procurement savings targets differentiated by category or supplier. More than 50% companies surveyed have no dedicated procurement system in place to motivate the company for better procurement performance.

Thereby, Russian companies forgo substantial procurement savings of 5-10% from not fully exploiting best-in-class sourcing levers to achieve ambitious targets and related rewards on a maximum spend coverage. Authors of the survey identified four major steps that will help Russian companies improve the performance of their procurement function:

  • Set clear targets and install performance measurement process. High-performing procurement functions depend on clear and ambitious but realistic procurement savings targets. The targets should be supported by transparent and reliable performance measurement processes and effective incentives to motivate procurement-related personnel for savings capture.
  • Prioritize and consolidate suppliers. The survey finds that around 30% of companies are lacking any supplier selection strategy and only about 50% report a comprehensive supplier relationship approach which includes supplier segmentation, structured performance feedback, joint improvement plans etc.. Measures aimed at prioritization and consolidation of suppliers will help companies reduce procurement complexity and achieve better savings.
  • Upgrade IT-systems support. More than 80% of respondents have no fully automated and integrated ERP systems in their companies, nor systems to support procurement activity. Improving IT-systems support can provide companies with much higher transparency over their actual spend.
  • Improve staffing levels including attraction of international talent. While international benchmarks suggest a share of procurement staff in total company staff of almost 2%, in Russia this indicator is less than 1.4%. Based on this benchmark, as well as other indicators, Russian procurement organizations staffing levels are around 30% lower. In order to achieve high performing procurement, Russian companies will likely require not just an increase of procurement staff, but the expertise from other markets with more seasoned procurement practices.

“Procurement in Russia Today” survey was conducted in Q4 2009- Q1 2010 using a Russia-specific questionnaire developed based on a proprietary Booz & Company Sourcing “Best Practice Procurement Capabilities Framework”. Booz & Company, having large international experience in working with leading companies on developing procurement functions, developed a Best Practice Procurement Capabilities framework aimed at evaluating procurement capabilities. The framework includes the dimensions like vision and planning, organization, supplier relationships, strategic IT, savings targets etc. The Procurement survey in Russia was aimed at evaluating prevailing base procurement capabilities as well as select procurement capabilities of Russian companies with anticipated major improvement potential in Russia. Companies in 9 industries were interviewed, generating a total of USD 30 Bn in sales.

The Authors
Gregor Harter, a Munich based Vice President with Booz & Company, and Angela Dum, a Vienna based Principal with Booz & Company, both have broad experience in advising international clients across industries on a comprehensive set of Procurement related topics. Both authors have also supported leading Russian firms in improving their procurement performance.