Feature Article

The Ariba Global Services Organization recently spoke with Ron Carcamo, Chief Procurement Officer at Yahoo!, to get his thoughts on organizational transformation as it relates to the value of strategic sourcing methodologies and change management best practices in the technology industry.

A Look Back at Yahoo! Procurement
Like many other companies in the dot-com environment, the Yahoo! Procurement organization had traditionally been focused on supporting top line growth and SG&A expansion. With a historical growth rate ranging between 20 and 30 percent, business units were allowed to pursue a decentralized procurement operating model to accommodate the rapid growth and “first mover” advantage.

As the company began to reach a more mature operating state about three or four years ago, Yahoo! began developing a more traditional Procurement function. The primary focus was on establishing basic transactional enablement systems, structured contract support, and putting fundamental procurement policies and procedures into place.

That was, until 18 months ago when Ron Carcamo joined Yahoo! to transform the existing Procurement organization. Ron had a vision for Procurement—to move the nascent function up the value chain and to change the purchasing culture into a center-led procurement environment. He immediately established goals to gain more alignment across the company by partnering around strategic sourcing and vendor management to ensure that his team could significantly increase their value-add.

We asked Ron the following questions to gain an understanding of his thoughts on strategic sourcing in the technology industry and to learn more about the steps he took to facilitate change management within Yahoo!.

What were some of the most effective levers used to accomplish change management in the organization?

Ron Carcamo: There are two sides to the change management process, with one side focused on the Procurement organization and the other side being internal business partners my team supports. From the Procurement side, the most significant tool in painting the vision is to portray the potential impact the team could have on the broader organization in a relatively short period as well as how the department activities support the company’s key strategic initiatives for growth and profitability. It is critical to be transparent with the existing personnel about what the department will be like, what opportunities will exist, and the competencies that will be required. Being upfront provides folks with the opportunity to decide if Procurement is still the right fit for them or not. I need to recognize my leadership team in making this happen along with running the day-to-day operations.

The other side is the internal business partners. We had to prove ourselves to them before being able to obtain full buy-in around the strategic sourcing methodology. We communicated that our new mission was to essentially balance three principal goals with respect to acquiring goods and services—cost, quality, and efficiency. We first made sure to meet our baseline mission with the organization by providing them timely POs, contracting, and flawless execution on other tactical responsibilities. If you can’t get to that point, you can’t start to talk about the value-add services that you can provide, such as spend management opportunities.

Being credible is another important component, and the key to success is developing highly structured, fact-based analyses with robust data to gain insight on total cost of ownership. It is important to extract and perform analytics on the spend data to provide insights regarding: 1) how much is being spent; 2) on what; 3) by whom; and 4) with which vendors—as well as a market perspective on pricing and other factors. Once we started to spend time analyzing and managing the data, we caught people’s attention.

Providing insight into total cost of ownership has been eye-opening for many departments. For example, we looked at cell phones. Many personnel thought of cell phone costs as just the monthly quoted charge. But we looked further into the whole process—from how people actually requisition a phone to managing the monthly account—and found that the actual total cost of ownership was 70 percent higher than the quoted monthly charge. By identifying and communicating that 70 percent delta in cost, we were able to get people to listen.

The bottom line—analyzing the data for the departments and showing them how to bring those numbers back in line is something that they just cannot run away from.

What categories were relatively challenging and how did you penetrate them?

Ron Carcamo: A common fear associated with the Procurement department is that they are going to take control and manage vendors. Procurement’s role, in reality, is to provide a structure and a framework for how to achieve supplier goals. We don’t make the final decisions, but we help to facilitate the discussion and provide business partners with options.

Real estate and facilities was an area where we were providing purely transactional support. We wanted to provide an additional level of service to the team, so we led with a sourcing approach of how to help them attain their business objectives. The business partner needed more operating subject matter expertise around large-scale facilities management and wanted to reduce overall operating cost. The result was on-boarding a highly specialized facilities management company that reduced our cost by approximately 15 percent in the first 12 months.

Our strategy was to demonstrate to the business units, and to the CFO specifically, that the value-add that we provided was effective. We then picked a category like travel that was in our realm of accountability. We started with hotels and airlines, and brought in techniques that had tremendous benefits—with a 10 percent cost reduction right out of the gate.

We are very clear about assuring partners that they will be involved in the decision-making process. For example, in HR, we brought in a framework around negotiating long-term disability benefits. The team historically purchased without Procurement by running an RFP and selecting whoever came in lowest, but we brought in best practices to enhance the supplier evaluation process. The project wasn’t high risk and it didn’t cost the HR team much money, but when they saw the results, we found an advocate in them.

We purposely didn’t pick the most complex areas in the beginning. My recommended strategy is to leverage an advocate for the next category that you plan to approach. Proof of concept is a huge lever, so I suggest using it to your advantage to gain buy-in. Other teams were able to see the added value of having visibility into data provided to the HR team and began to gain interest themselves—including the CFO.

How did you achieve compliance throughout the organization?

Ron Carcamo: The culture in the high tech industry is different than some other environments in that there is a larger population of generation X & Y demographics that sometimes demands and/or expects faster response times or immediate fulfillment. Food service, shuttle programs, and travel were a few of the areas that were seen as benefits or retention initiatives used in the past to maintain employee satisfaction in the dot-com space.

Travel is what I would like to focus on here with the emphasis on cost and efficiency. Travel is a commodity that has a highly fragmented and frequent buyer base. Therefore, we knew that influencing people to comply would require us to drive all the key dimensions of influencing (Personal, Social, and Structural). Previously at Yahoo!, we did not have a consolidated travel agency, and booking travel was left to each country. We didn’t strictly enforce rules, and we used the word ‘should’ instead of ‘must’. Because of the online culture, people used various websites to source hotels and selected locations often times based on recommendations from friends or a desire to use their favorite travel website to book airline tickets.

We needed to acquire travel data and visibility across the organization, so we mandated that all countries consolidate under one travel agency. By doing so, we were able to achieve transparency and gain insight into any issues as well as the big-hit opportunities. For example, we found that 50 to 60 percent of employees were booking hotels outside of the system—either through a rewards program or from friends’ recommendations.

There were also issues with airline travel, as people decided to travel in business-class at will. While only certain grade levels were allowed to travel business-class, all that was needed was approval exception from a VP. People felt entitled and saw traveling business-class as a benefit while working at Yahoo!. Another challenge was that the amount of same-day travel—at least 25 percent—was much higher than anticipated and not something that could have been identified until all employees were under the same travel program roof.

Once we gained visibility into a few of these issues, we decided that we needed to change a few things around the way travel spend was managed. We knew that we had to make it easy for folks to book travel, so we did a great deal of work optimizing our online booking tool. We also produced an online video of our CFO talking about the opportunities for savings when complying with the new travel policy and sent out the video company-wide via e-mail. Our CFO related information regarding how we could save millions in business travel by reducing one-day trips and by implementing basic techniques for booking travel more cost-effectively. The video made a strong impact and allowed us to announce our new policy of moving from ‘should’ to ‘must’, which was now unambiguous about business-class eligibility and requirements around booking travel.

We also created a travel tip of the day that was to be posted every day on the home page of our intranet. Our goal is to keep employees engaged in travel and to stay top of mind—versus sending an e-mail out once per quarter. We also had to build the back-end work so that we could intercept bookings before they were ticketed. We created a system where an employee could not ticket a flight without booking the hotel at the same time. Since putting that process into place, hotel booking compliance is now at 80-90 percent.

I believe that most people will do the right thing if they are provided with tools and information. It’s your responsibility as the Procurement department to make them aware of the opportunities and challenges.

Can you share your experiences with IT Hardware/Software spend?

Ron Carcamo: IT Technology spend makes up a significant share of our overall spend. Building out and managing data centers is the lifeblood of Yahoo!, and the business partners were very protective of those resources.

This category continues to be a work-in-progress, but, nonetheless, we capitalized on a few immediate opportunities. While we realized that the team’s biggest pain point was speed/efficiency, we knew that we should start with delivering on the basics—getting contracts formalized—and then branch out from there. We decided to sequence our value-add delivery—first focus on quality, then efficiency, and then cost savings. While some cost savings were realized, the major benefit to the team was speed/efficiency.

We’ve learned that when trying to establish a working relationship with a business partner, look at what they are focused on and don’t lead only with savings. Identify their pain points and lead with that. If you can find savings, that is a bonus. But be sure to look at it from their perspective and help to provide solutions to their challenges. More and faster horsepower servers are what they needed, and we helped them to cost-effectively achieve those goals.

On the software side, we provided more of an educational role. All software purchases at Yahoo! are centrally managed and must be approved through the Software Review Committee (SRC). Procurement sits on the committee, and we helped formalize the information and documentation one needed to present to the (SRC). In addition, we educated the business partners about it being essential to follow the process of going before the Software Review Committee.

We also conducted a program around Procurement’s negotiating role and how to leverage the Yahoo! brand equity. As a result, we have seen significant, best-in-class cost benefits in addition to providing a substantial marketing benefit for our software vendors.

What are the critical success factors in your organization for better managing your indirect spend?

Ron Carcamo: One of the most critical success factors is having the ability to execute change management with respect to internal business partners. With so many inflationary pressures, I am seeing 60-70 percent of savings benefits coming from internal sourcing levers—such as process improvements or demand management—which take a tremendous amount of change management influencing skills. Because we know that we are not going to get any significant price relief from vendors, we are investing heavily in change management to enhance our demand management and compliance efforts.

Having a data repository and structure around management and reporting of data is also critical. Whether or not it is an Ariba solution, those pieces are essential for success.

Finally, better defining specific KPIs (Key Performance Indicators) is crucial for successful supplier management and something that we need to do a better job of.

Basic Change Management Principles
Procurement leaders may automatically assume that building a strategic sourcing organization will immediately start the value-add chain reaction throughout the organization. Ron, however, recommends that organizations follow a few basic principles as they build influence and effectiveness across the company.

Foundational Execution – Ensure that Procurement is flawlessly delivering on the basic enablement system and control processes (i.e. procure-to-pay).  This means fast cycle times, friendly system interfaces, reliable vendor payment schedules, and appropriate levels of authority.

Organizational Design – Create a Procurement organizational structure that balances business unit alignment and procurement needs.

Build Credibility – Do not scare your business partners with audacious projects. Start with small, low-risk initiatives and gradually move into more-complex sourcing projects.

Prioritize Change Management – In most cases, change management competencies are essential to influence your business partners versus relying too heavily on procurement RFP savings potential.

Listen and Modulate Approach – Balance the value delivery with the needs of your business partner. One way of thinking about value delivery is to look for ways to balance quality improvements, efficiency gains, and cost reductions.

Influence Requirements – Understand the influence dimensions for a given initiative (personal, structural and social) before climbing the mountain.

For more information on how Ariba can help your organization with its strategic sourcing or change management initiatives, please visit http://www.ariba.com/services/sourcingservices.cfm. In addition, if someone in your organization would like to contribute to Ariba SupplyWatch in the future, please let Ariba know by sending an e-mail to SupplyWatchReport@ariba.com.