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 has recently 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, they can 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 they have in place. In leading procurement organizations, employee performance follows a bell curve where 20% of their people are superstars, 20% are laggards, and the rest fall in the range of below average to above average.
Employee Performance
20% 60% 20%

Needs Improvement

Avg. & Good Performers

Superstars

In addition, most companies only fill positions when someone quits. Now, take a second and look back at all the people that left your organization in the last 24 months? How many were there? 5? 10? Of all those people that left, what percentage were superstars or good performers? I bet its 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 an average performer but everyone will make room for a superstar. Plus they have it pretty cushy where they are. Barring a major restructuring, they will never get let go for poor performance unless they work for a company named GE. It reminds me of a quote from the movie Office Space: I work just hard enough not to get fired. This phenomenon creates a vicious cycle for the head of procurement/supply chain. You constantly need to replace one superstar with another just to avoid a let down in performance

while your mediocre performers continue to stick around negatively impacting your teams results. In addition, replacing your open positions never come at a good time. You are reacting and always playing catch up, never getting ahead. However, by being proactive and putting a plan in place to upgrade your organization, you could add tens of millions to the bottom line and hundreds of millions to shareholder value. The two key components of this plan is replacing the current laggards with superstars and elevating the performance of the entire team. Lets evaluate how. Here is a typical manufacturer. Revenue: $8 Billion Controllable Spend: $4 Billion Net Income: $500 million P/E: 20 Size of Procurement organization: 50 people We will use cost savings as the only metric for success. Obviously, this is nave and cost savings in a lot of companies isnt even the most important metric. However, to keep this example manageable, we will use this metric as the key for success. Also, remember that these numbers will vary by industry. I am sure in some industries and companies 5% annual savings looks paltry, while in other industries 5% is simply unattainable. However, the concepts 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 are average to good performers and 10 need improvement. Lets also assume that superstars deliver 7% cost savings, average performers 5%, and laggards deliver 3% (See Chart below).
Headcount Spend Managed 10 $800 million 30 $2.4 billion 10 $800 million 50 $4 billion Annual Cost Savings % 3% 5% 7% 5% Annual Cost Savings $24 million $120 million $56 million $200 million

Needs Improvement Average & Good Performers Superstars Total

From the Chart, you can see that the superstars delivered $32 million more in savings than the laggards. By replacing laggards with superstars, you increase your savings by 16% ($32 million/$200 million). However, the benefits dont stop there. If you ever watch sports, there are 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, you should 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 organization that performance is required. Second, you have changed the perception of what average is. There is an old clich that is very true: Birds of a feather flock together. It means if you have a group of underachievers and you bring in an average performer, they inevitably will be an underachiever. 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

regress to the mean. For those people, it is your job to move the mean and they will follow. If youre average savings is 5%, several people will gravitate to the mean because they feel that is all they can accomplish. However, if a good portion of your people produce savings that is 7%, their internal compass will move up, and with it, their performance. For this example, I assume that the average and good performers savings will go from 5% to 6% just by improving the people around them. This adds another $24 million in savings bringing the total improvement to $56 million or 28%. More importantly, making this strategic change adds over $1 billion in market value.

Needs Improvement Average & Good Performers Superstars Total

Headcount Spend Managed 10 $800 million 30 $2.4 billion 10 $800 million 50 $4 billion

Annual Cost Savings % 3% 5% 7% 5%

Annual Cost Savings $24 million $120 million $56 million $200 million

Replacing Laggards with Superstars Improving Average Performers Less Recruiting & Restructuring Costs Net Incremental Savings

Incremental Savings $32 million $24 million $56 million $1 million

$55 million
20

Stock P/E Increase in Shareholder Value

$1.1 Billion

Explaining how to implement this strategy in detail would take another full article. However, at a 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 in place 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 improving your laggards. I still recommend you underestimate the benefits when selling to senior management. For the costs, there are three main components: severance costs, recruiting costs, and increases in compensation. If you are hiring superstars, expect to pay them significantly more than your laggards. However, the payoff will be quite large. If you need help

estimating these costs, contact a recruiter in the field that can help you get a pulse on the market. 3. Sell Senior Management As with any change, it is very important that you get senior managements 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. Not many organizations can remove 20% of their staff and not expect significant disruptions. It is better to fill your pipeline of candidates before you pull the trigger and make some changes. In addition, communication will be very important to the organization when the changes are made. This whole process can take anywhere from six months to a year, from idea inception to full implementation. In closing, I encourage you to stop reacting to change and personnel issues and start designing the organization you want, not the one that was given to you. The payoff to this strategy 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 chain organization, send an email to sales@teldargroup.com or call us at (720) 493-0200.