Understanding the Basics: What Is Strategic Sourcing?

As many companies begin welcoming employees back to the office and ushering in a new era of hybrid working, they’re turning to one group of often unsung heroes to help guide them in the next normal: their strategic sourcing teams. 

Typically operating behind the scenes, sourcing and procurement teams are vital to the success of the business. Supply chain disruptions caused by the pandemic, however, have propelled procurement into the spotlight, highlighting its importance in maintaining strong supplier relationships and mitigating risk for the business.  

When businesses can tap into the power of sourcing and procurement, they have a better understanding of their complete back-office operations including budgeting, financial forecasting, and project prioritization. Sourcing teams that are empowered to be strategic partners can help their companies keep up with evolving consumer demands, ensure supplier compliance, and support the business as it scales.

This article takes an in-depth look at strategic sourcing, defining what it is, how companies rely on it, and how business leaders can elevate its role within companies.  

What Is Strategic Sourcing in 2022?

Strategic sourcing is the collection of processes by which sourcing and procurement teams secure critical goods and services for the business. From office chairs and laptops to software subscriptions and janitorial services, these teams work tirelessly in the background to ensure the business not only functions, but thrives. 

Over the last 20-plus years, sourcing and procurement have undergone a radical transformation. Beginning as purely tactical functions, sourcing and procurement teams were tasked with basic duties such as keeping the lights on and maintaining a steady stream of office supplies. The rise of technology, however, changed the business landscape and introduced new challenges for companies, including how to better handle global risk and compliance, navigating increasingly complex value chains, and adapting to evolving consumer behaviors. 

In response to these challenges, sourcing teams evolved into strategic advisors to the business, leveraging their deep market knowledge to negotiate more favorable contract terms, drive cost savings, and build strong supplier relationships. The global pandemic has only accelerated this shift, with businesses relying heavily on their strategic sourcing teams to manage vendor partners, help protect the business from risk, and ensure continuity amid volatile supply chains, new compliance regulations, and rapidly changing demand. 

Our recent report with Harvard Business Review Analytic Services found that a staggering 95% of businesses reported some form of pandemic-related disruption in their sourcing and supplier activities. Those with strategic sourcing teams in place were able to right the ship quickly and support the overnight transition into remote or hybrid working. 

What’s the Difference Between Strategic Sourcing and Procurement?

While sourcing and procurement are both essential for a holistic spend management strategy, the two terms are not interchangeable. Sourcing refers to what are typically known as the upstream processes involved in procuring goods or services. These include sending out requests for proposals (RFPs), evaluating supplier bids, selecting vendor partners, negotiating contracts, and then managing supplier relationships once a partner has been selected.

Procurement, on the other hand, involves downstream processes such as creating requisitions, initiating purchase orders, and ultimately paying the vendor for the agreed-on goods or services. When sourcing and procurement are combined, they make up the overall source-to-pay (S2P) process, which is how your laptop (as well as the software on it) gets from the supplier to your fingertips. 

How Are Companies Using Strategic Sourcing? 

Let’s consider a hypothetical example to better demonstrate strategic sourcing in action. 

Imagine leaders from Company A are in the market for a new financial management software solution that can help them automate their processes and gain deeper insight from their finance data. Company A’s strategic sourcing team would first meet with key stakeholders—in this case the company’s finance leaders—to understand what they need from the new software. With these requirements in mind, the team may then draft and distribute an RFP to multiple software vendors.

Once the vendors have responded, Company A’s sourcing team would likely get to work comparing these responses, or bids, to determine which supplier would best fit their needs within their budget. After identifying their financials software provider, the team would then enter into contract negotiations, deciding on the length of service, the payment terms, and if/when the contract will be renewed. 

The role of strategic sourcing doesn’t end once the contracts are signed, however. This team is also instrumental in evaluating and driving supplier performance, and ensuring the chosen vendor delivers on its contractual obligations. This requires a comprehensive supplier management strategy. 

Often, when sourcing goods and services, strategic sourcing teams will work with their key stakeholders to develop evaluation categories such as compliance, cybersecurity, financials, and more. They will then score potential suppliers based on these categories and select their vendor of choice. After partnering with the supplier, strategic sourcing teams will conduct regular evaluations to ensure the vendor continues to meet the company’s requirements and to identify any gaps in supplier performance. Strategic supplier management is critical for sourcing teams to understand which partnerships are delivering on their contractual obligations and which are not.

What Makes Strategic Sourcing and Procurement Professionals Effective?

As the bridge between a business and its suppliers, strategic sourcing and procurement teams must be master collaborators. Not only do they need to align tightly with stakeholders to understand business needs, they must also partner closely with their suppliers to ensure those needs are met. 

Effective sourcing and procurement professionals must be able to lead what are sometimes tough conversations. From negotiating with suppliers to leading performance evaluations and occasionally terminating partnerships that are no longer beneficial, it’s important that strategic sourcing and procurement leaders can clearly communicate business needs in a professional way. 

What other skills are necessary for effective sourcing professionals? We’re so glad you asked. Here are the top skills that sourcing and procurement team members flex every day to help strengthen supplier partnerships, increase cost savings, and drive bottom-line impact:

• High EQ: Not to be confused with its cousin IQ, EQ refers to emotional intelligence or the ability to identify and understand both your emotions and those of others. Strategic sourcing professionals must be experts in navigating complex conversations and the emotions of others. High EQ helps these team members remain focused while being empathetic to their stakeholders and suppliers, allowing them to find the most mutually beneficial solutions possible. 

• Deep product knowledge: Effective sourcing and procurement professionals need to know the ins and outs of the business and its products or services in order to find the best suppliers for its needs. Additionally, sourcing teams with deep product knowledge can better partner with suppliers to drive innovation and increase product speed to market. 

• Creative problem-solving: Because these teams work with many departments, they are uniquely positioned to solve cross-functional challenges. Their knowledge of the business’s supplier ecosystem helps them make connections across the business and provide solutions that other teams may not have considered. 

• Metrics oriented: Strategic sourcing leaders that prioritize data and metrics are able to clearly demonstrate sourcing’s greater impact in the business. This insight is essential for winning over stakeholders, identifying savings opportunities, and keeping ahead of contract renewals and deadlines. By leveraging their sourcing data, teams can better prioritize strategic initiatives and resource allocations. 

• Forward thinking: The best strategic sourcing teams base their decisions not only on current business needs, but also anticipate how those needs will evolve as the business scales. Sourcing and procurement professionals that can stay one step ahead of the business can help position their companies for growth by partnering with strategic suppliers and managing total spend. 

Why Is Collaboration Between Sourcing and Finance Essential?

As gatekeepers of the business’s resources, finance and strategic sourcing leaders must stay in lockstep to ensure they meet critical savings targets, resource allocation requests, and growth projections. Too often, strategic sourcing leaders struggle to get a seat at the proverbial table. As companies scale and grapple with new challenges, however, businesses can no longer afford to overlook their sourcing and procurement organizations.

By working with their finance counterparts, strategic sourcing and procurement can give the business much-needed insight into overall enterprise spend. They can help identify savings opportunities by either expanding or terminating supplier partnerships, and they can pinpoint maverick or unplanned spending. Together, these finance powerhouses can gain deeper insight into a business’s back-office operations, and can leverage this knowledge to plan strategically for the future. 

When strategic sourcing and finance work together proactively, they are better able to adapt to change and maintain continuity for the business. Their combined knowledge of upcoming projects and current contract obligations can help balance business budgets and drive impact to the bottom line. Strategic sourcing teams that work successfully with their finance counterparts can also gain more visibility from the C-suite, and ultimately get their seat at the executive table. 

How Can You Elevate Strategic Sourcing in Your Business?

In organizations of all sizes, it can be difficult to grow sourcing from a purely behind-the-scenes function to a strategic partner to the business. Establishing trust and credibility with cross-functional stakeholders is essential for those leaders who are looking to elevate strategic sourcing’s role in the business. Strategic sourcing and procurement teams may find themselves struggling against an outdated belief: that they slow down processes and can be inconvenient to work with.

To reverse these misconceptions, Ralph Lauren global procurement leader Juan Ahmad advises sourcing teams to start with quick wins.

If you’re a strategic sourcing leader, once you’ve established your team as an asset to your cross-functional partners, you can then go on to tackle more strategic initiatives such as project prioritization, reducing or eliminating rogue spending, meeting environmental, social, and governance (ESG) goals, and leveraging supplier relationships across multiple areas of the business.

Another way you can grow your influence in the business is to ensure it’s as easy as possible to partner with the team. Some strategic sourcing leaders like to set up weekly office hours to give other teams a chance to ask questions and present upcoming projects. By keeping lines of communication open between sourcing and the business, your team will have better insight into cross-functional needs and can more easily demonstrate the benefits of partnering with your team. 

Lastly, you can elevate your team by ensuring it has time to tackle more pressing business initiatives. To give time back to the team, Workday customer Hyland Software made sourcing and procurement simple for its stakeholders by creating a self-service portal that automated common tasks such as ordering office supplies and requesting purchase orders. Not only did this portal empower business users to complete their own requests, it also enabled the sourcing team to spend less time on simple tasks and more time on strategic projects such as auditing contracts and managing suppliers. 

Are Digital Technologies Critical to Strategic Sourcing?

Juggling strategic sourcing responsibilities is no small feat, but it’s not uncommon for these teams to operate mostly manually via emails and spreadsheets. Even some of the largest enterprises still execute sourcing activities using a clunky combination of legacy systems, spreadsheets, email, and manual processes. These outdated and overly complicated workflows block effective collaboration among stakeholders and make performance metrics difficult to measure. 

The pandemic has only intensified the need for strategic sourcing systems. In our report with Harvard Business Review Analytic Services, 92% of respondents classified their sourcing technology as less than best in class going into the shift to remote work. As a result, many companies were left scrambling to shore up disrupted supply chains, ensure their employees could work effectively in a remote environment, and manage their contractual obligations with little insight into their sourcing data.

Without a digitized sourcing process, companies may be leaving critical dollars on the table. Technology can give strategic sourcing teams deeper insight into supplier relationships and help them better leverage their business for increased cost savings.

As supply chains become more complex, strategic sourcing leaders must also be able to drill down into their tier one, tier two (their suppliers’ suppliers), and beyond suppliers to better understand how resources are being allocated and ensure their entire value chains are operating in compliance with company policies and regional regulations. Digital technologies also help teams easily track savings, monitor projects, and reduce procurement cycle times. 

As the rate of business increases, companies must empower their strategic sourcing teams to not only keep pace with a changing world, but anticipate needs before they happen. Businesses must understand that it’s no longer possible to overlook sourcing and procurement when it comes to tech investment. By equipping these teams with digital technologies, companies can maintain business continuity and adapt to evolving market conditions. 

What Are the Key Benefits of a Strategic Sourcing Solution?

With intuitive solutions on their side, strategic sourcing teams can better demonstrate their direct impact on the bottom line and further elevate their role in the business. In addition to helping gain more visibility from the C-suite, strategic sourcing solutions can benefit the business in the following ways: 

• Increased efficiency and savings. Every dollar saved via sourcing and procurement goes directly to the bottom line. Saving isn’t just about driving a hard bargain—it also comes from increasing efficiency via proactive engagement with stakeholders and suppliers. Sourcing automation also helps boost team efficiency by offloading manual tasks such as data migration and reporting, giving teams more time to act strategically.

• Complete visibility. Strategic sourcing platforms enable a one-stop shop to plan, initiate, and complete sourcing events while tracking supplier performance. With this data in one place, enterprises track sourcing from the point of initiation through closed agreements. Instead of misplaced contracts and supplier overlaps, there’s a seamless, collaborative process that is fully visible to all impacted parties, enabling compliance and increasing cost savings.

• Better outcomes. Sourcing and procurement professionals are able to bring deep market insight and expertise in negotiating and managing enterprise needs and supplier agreements. Teams that utilize a strategic sourcing system can consistently negotiate more favorable payment terms to improve their company’s bottom line, and also contribute to operational improvements that boost cash efficiency—for example, by arranging with a supplier to deliver goods on a just-in-time basis while holding inventory in the supplier’s facilities. With a bird’s-eye view into supplier relationships across business lines, sourcing and procurement teams can also make connections throughout various parts of the business to enable better outcomes.

• Improve product speed to market. Sourcing and procurement organizations gain a deep understanding of business requirements and the supply base to find innovative ways to tackle business challenges. This creativity can be particularly important in fast-growing organizations that need to move quickly to find creative solutions for a scaling business’s needs. 

• Supplier risk mitigation. Sourcing and procurement teams are able to contribute enterprise wide value by providing real-time insight into supplier risk. With the ability to drill down into their tier one, tier two, and other suppliers, sourcing organizations can ensure compliance with local and regional laws such as the General Data Protection Regulation (GDPR), human rights legislation, and data protection policies.

Delivering Superior Value With Strategic Sourcing

Businesses that empower their strategic sourcing teams with the right technology are reaping rewards such as tighter alignment across teams, increased compliance among suppliers, and deeper insight into upcoming projects and resources. As companies continue to grow, they must rely on their strategic sourcing teams to anticipate risks and empower the business with scalable supplier relationships. 

The pandemic has shown us that strategic sourcing is absolutely essential for companies looking to build resilient supply chains and maintain business continuity through even the most challenging times. When businesses partner closely with their sourcing teams, they can maximize supplier performance while driving bottom-line impact—a win-win for the enterprise.