The past few years were marked by often severe macroeconomic stresses—COVID outbreaks, fragile supply chains exacerbated by geopolitical tensions and war, commodity inflation—that sent companies scrambling to secure essential raw materials and services necessary to meet fluctuating demand. Constrained supply and available transportation modes shifted the balance of power to suppliers, allowing them to choose who to serve and sending costs skyward.

Perhaps more than ever before, C-suites needed procurement to go to extraordinary lengths to secure essential supply and thus keep companies in business.

And that is precisely what procurement did. A Kearney survey conducted late in 2021 found that 92 percent of CFOs feel that procurement has met or exceeded expectations for controlling costs under these historically challenging circumstances, and 85 percent say they are confident in procurement’s reported benefits—a staggering increase from 33 percent in 2017 and a clear indication of how well procurement performed in a time of crisis.

Eighty percent of CXOs surveyed report that procurement has made strategically valuable contributions. Yet only 31 percent of CFOs and CXOs say procurement proactively drives their strategic agendas. What does that mean? C-suites recognize and appreciate procurement’s firefighting efforts over the past few years. But the core perception of procurement is unchanged.

The results of these executive surveys are consistent with Kearney’s global benchmarking study: the Assessment of Excellence in Procurement (AEP). Over the course of 2021 and into 2022, we analyzed more than 600 companies worldwide, all with at least $2 billion in annual revenues.

The lessons gleaned from the latest AEP have particular relevance in light of the conflict in Ukraine, the latest in a series of events (including the challenge to liberal democracies, the rise of nationalism, and an ever-more powerful China) that shattered decades of globalization and unleashed the biggest remaking of the operating environment in our lifetimes. Our findings show that a relative few leaders strategically leverage third-party spend to nimbly adapt to major crises, fulfill top leadership’s strategic agendas, and tangibly improve the bottom line (see sidebar: 3PE is key to crisis economics).

3PE is key to crisis economics

On average, third-party spend consumes 50 percent of revenue in manufacturing companies and 30 percent in service companies. Just 6 percent of companies participating in our 2022 global study qualified as leaders in optimizing third-party spend for competitive advantage via a strategic approach we call third-party economics (3PE).

Kearney’s Assessment of Excellence in Procurement (AEP), launched in 1992, shows companies where they stand compared with their peers:

Leaders (6 percent of our sample in 2022)
Excellence in team, category, and supplier management delivers high financial impact and contributes a broad spectrum of clear strategic value (for example, innovation, growth, risk mitigation, sustainability, and social impact)

Aspirants (10 percent of sample)
Solid results and making significant strides toward becoming leaders

The Pack (50 percent of sample)
Meeting expectations but not delivering competitive advantage

Strugglers (34 percent of sample)
Barely covering procurement costs

3PE is all the more essential as companies navigate multiple crises, including climate change, the pandemic, China trade wars, social unrest, and the war in Ukraine.

Extraordinary value

The leaders in our global sample—just 6 percent of participating companies—blend strong procurement teams, innovative approaches, and close partnerships with the C-suite, the supply chain, and business functions to deliver extraordinary value.

Compared with their industry peers, AEP leaders:

Generate nearly 2x more total shareholder return
Rebounded 3x stronger through COVID, with some reaching all-time highs across key performance metrics
Contributed 200 basis points more to EBITDA from their third-party spend

Broad impact

Importantly, leaders generate high impact across a broad spectrum—from managing cost and navigating shocks:

Seventy-six percent of leaders report having a high impact in mitigating supply risk versus just 31 percent of all others.
Fifty-nine percent of leaders say their innovations significantly enhance growth and margins compared with just 10 percent of all other companies in the latest study.
Fifty-nine percent of leaders report having a high impact on their company’s sustainability agendas versus 23 percent of the rest of our sample. The corresponding figures for supplier diversity are 41 percent and 6 percent, respectively.

Suppliers that are true partners

In a constrained crisis environment, many suppliers effectively have the upper hand. Yet companies need suppliers to be true partners that help them meet rapidly rising customer expectations and shift procurement from optimizing costs to creating broader strategic value—taking into account factors such as supply assurance, risk mitigation, sustainability, and innovation.

A hallmark of AEP leaders is their commitment to being a customer of choice for their key suppliers, especially in times of crisis, by effectively reducing their suppliers’ frustrations and improving their experiences. AEP leaders are markedly more comprehensive in suppliers experience management than is the norm, and their relations with strategic suppliers are more tightly interlinked to category and end product or service strategies. The greatest improvement opportunity for leaders is developing a more immediate and granular shared digital experience with suppliers.

In an era that demands ongoing adaptation, leaders integrate suppliers into their enterprise innovation efforts while maintaining competitive tension. They proactively define how supplier-led innovation can contribute to the company’s competitive advantage, then track and report supplier innovation metrics while nurturing other suppliers to be challengers.

Leaders also engage suppliers in risk management. Suppliers help the company see and rapidly adapt to developments upstream in the supply chain, regularly reassess risks, and model potential scenarios across the value chain.

Investments in comprehensive, multiyear supplier relationships accelerate leaders’ progress toward jointly held sustainability and supplier diversity targets. Supplier information is audited by third parties, and AEP leaders regularly benchmark supplier performance via systematic reviews of certifications and capabilities related to environmental, social, and governance (ESG).

The results have benefits. Suppliers that share in and actively support the company’s innovation, risk management, and ESG initiatives are strategically favored over others, including lower-cost alternatives.

Technology leadership

AEP leaders tend to be far ahead in applying digital technologies to drive greater efficiency, effectiveness, and enhanced user and supplier experience management, which is not surprising given how instrumental technology is to the performance that sets leaders apart.

In the most technologically advanced organizations, procurement, finance, and business stakeholders have ready access to a comprehensive breadth and depth of accurate and timely data sets, enriched with data from internal and external sources showing 360-degree view of procurement activity. This single source of truth facilitates coordinated responses to changing demands and operating conditions.

Toward that end, procurement technology is evaluated through a “whole of business” lens rather than just a procurement lens.

Procurement actively scans the market for disruptive new point-solution technologies and service providers, as part of a platform-based approach, and often invests in partnerships with digital innovators to develop and tailor new solutions, gaining a firstmover advantage and keeping close to technology’s leading edge.

AEP leaders report successful application of technology in a wide range of activities, reaching or approaching full automation across requisition management, spend analytics, sourcing, supplier information management, and procurement master data management. As a result, they have largely freed their teams from repetitive transactional tasks and chasing data and have connected them to timely information and insights.

Talent shift

This shift in what people do is fundamental to the future of procurement. With automation quickly making today’s skills irrelevant, the days of procurement staff serving as order takers are numbered. To deliver procurement’s full value, CPOs need to be more ambitious, take more risks, and communicate the value they can bring. And they need CEOs who encourage and nurture their role. This is clearly happening among AEP leaders, who consistently report that between 60 and 70 percent of their procurement team’s focus is now on strategic pursuits such as strategic sourcing, demand management, value engineering, supplier segmentation, stakeholder management, and supply risk management.

Aspirational procurement strategy requires an aspirational talent strategy that is highly attuned to what the best talent wants and expects. “You have to tell them why,” said the CPO of a major consumer goods corporation at a Kearney-sponsored CPO Exchange event. “We say, ‘Think about the benefits to you. We are here to solve complex problems, to grow your career as well as further the purpose of the company.’” In that spirit, AEP leaders report that they are pursuing carefully defined action plans across the full talent life cycle (attraction, development, retention, and rotation).

Inflation fighters

Consumer price inflation hit a 40-year high in March 2022 and is expected to remain elevated for the rest of this year. We anticipate that the strengths that set AEP leaders apart will prove invaluable in the months immediately ahead. Why? Our executive roundtables with CPOs, CFOs, CXOs, and COOs (among others) have surfaced several inflation fighting keys that AEP leaders are uniquely prepared to pursue.

In an inflationary environment, companies typically think in terms of how much cost they can pass on to customers versus what they must absorb as margin reduction. But AEP leaders can use their more fully developed strategic capacity and unique insights to apply more nuanced inflation-fighting levers, such as design-to-cost analyses, design-to-value portfolio optimization, platforming, demand management, and vertical integration.

Leaders’ strategic investments in supplier relationship management should pay substantial dividends as the frameworks are already in place to pursue collaborative efforts with preferred partners at an executive level. Inflation will further accelerate the trend toward improved supplier experience management, shared forecasting, improved planning, resource sharing, and joint cost-reduction strategies.

Invite comparison

How competitive is your third-party spend as you navigate through multiple crises? Invite comparison. Benchmark against your peers by participating in the Assessment of Excellence in Procurement. There’s no charge for taking part in the survey, which takes about two hours to complete, and each participating organization receives a customized benchmark report, including recommended areas on which to focus. The AEP is open to companies with $2 billion-plus in annual revenues. Many companies participate annually to gauge their progress and understand how to better leverage third-party economics.