8 December 2011 | Rebecca Ellinor
With ever-increasing demands to produce savings in a fast-changing corporate environment, Royal Mail Group’s procurement team started a journey to become world class. Rebecca Ellinor talks to group procurement director Kath Harmeston about its transformation.
Delivering on the promises it made has earned the Royal Mail Group’s procurement team the reputation and profile to get involved in bigger and better things in the business.
“Doing what we said we would do created a whole lot of kudos,” says group procurement director Kath Harmeston. “This is a high-tuned, commercial department that can help the organisation in more ways than just price – be careful what you ask for would be one thing I’ve learned from that.”
Harmeston joined the organisation in January 2009, when the purchasing department was going through
the final year of predecessor Ninian Wilson’s ‘three
in three’ transformation project. That achieved at
least £300 million savings and that figure has been doubled recently as a result of a cost management programme. And now a second transformation
project is well underway.
It comes at a key time for the organisation, which
faces regulatory constraints as well as a challenging political environment.
Royal Mail delivers 62 million mail items to 29 million homes and businesses every working day. It operates in a rapidly changing market with increased competition and revenues declining at 5 per cent a year. It has a large fixed cost base and has had a negative free cash flow for past four years – pension payments being a major factor.
It faces potential privatisation and the 2010 Hooper report repeated the need for Royal Mail to get up to best-in-class as rapidly as possible.
Procurement, meanwhile, is under tight public procurement law, compliance and regulatory demands. It must respond to a moving modernisation agenda and cope with downward pressure on headcount. There are also ever-increasing demands to deliver savings and other benefits in a changing corporate environment, with a new CEO and a CFO joining in 2010 and a new CIO in 2011.
In addition to managing procurement, Harmeston also reorganised the facilities management department and managed property into what she described as a “steady state environment”.
Here, we take a look at how her team went from a cost-saving department to a team of change agents – and the journey they’re still on to become world class.
Back to the start
When SM interviewed then CPO Wilson in 2006,
he said the ambition was to be “in the top three procurement departments in Europe, in three years”.
He left before that was realised and Harmeston
inherited the plan.
Royal Mail’s procurement function had previously scored poorly in the AT Kearney purchasing benchmarking survey of around 500 firms around the world. Harmeston said she interpreted ‘top three in three’ to mean it would be placed in the top quartile of these firms at the end of the three-year period, which, following a delay in the assessment caused by industrial action, it was.
“By early 2010, we had acquired the three in three status, we had survived and supported an industrial action [buyers had to help deliver the mail] and came in on our budgeted targets for cost improvement for the year, so not bad going.
“So what do you do next? The world changes and moves on and high-performing organisations continue to raise the bar and we have to raise ours. So we launched a new campaign called ‘journey to world class’.
This second transformation overlapped the first. Harmeston says some great work was done for the three in three programme, but there had been a heavy focus on cost reduction. Procurement now needed to move away from that label.
“What should a procurement organisation be renowned for? Managing great change, information, being proactive and innovative, adding strategic value, and having great customer representation and leading edge practices. Those are themes and that’s what we set our transformation programme against.”
Her vision was for procurement to become a strategic advisory function, to be seen as the ‘go-to’ team invited in at the start of big spends and able to highlight issues and opportunities concerning new ventures, outsourcing and make versus buy.
Harmeston now has an 88-strong team, which influences £1.7 billion of the organisation’s £2.3 billion spend. It buys everything from complex IT outsourcing to rubber bands. The organisation has 746 contracted suppliers – 35 of whom are regarded as critical – and 80 per cent of spend with the top 200 suppliers.
As part of the next phase of transformation, Harmeston reorganised procurement into five ‘master category strategies’: vehicles and operations; business services; facilities management and property; IT and telecoms; and tactical sourcing and demand management.
“Master category strategies mean we have three- to five-year opportunity plans laid out, done in consultation with the business and suppliers. It’s a pipeline of activities that are short, medium and long-term, like an order book.”
The department has a long list of plans that is constantly refreshed and all projects that go ahead are first signed off by the relevant stakeholders.
The procurement head of each of these master categories runs their team like its own business unit. They write a three-year business plan that includes the skills, resources, recruitment and any investment they need to realise plans. Harmeston aggregates these into one procurement strategy that she presents to the board. She says the set-up added more strategic emphasis on planning, stakeholder management and supplier and market intelligence.
“Often the business doesn’t allow you to plan adequately and can only give you a window of
12-18 months, but I push people to think and have
a shopping list of ideas to bring to the table so I can position them with the executive. There is a sales element to a strategic procurement person – they’re constantly enforcing messages, looking for strategic angles in the business and planning ahead.”
To ensure her team is up to speed, there is a huge emphasis on training and sharing information. This includes ‘learning Thursdays’, where, for example, a master category lead presents something they’ve done and that information is stored in a databank. These events might also cover new processes and practices that come in, such as the Bribery Act. Royal Mail also runs ‘town halls’ every four to six weeks to bring people together to share information. There’s an online training and education programme to cover skills gaps and Harmeston chairs monthly ‘all hands’ calls to share business updates. These take up to an hour and the whole team can dial-in or listen back over the following week. In addition to this, weekly newsletters are produced and the team gets together several times a year off-site for announcements and awards to recognise excellence.
In addition to keeping itself up to speed, it set up a number of ways of communicating with the business and suppliers. It markets itself internally and externally. It sends regular newsletters around the business, noting papers are prepared, three-second ‘lift messages’ are arranged and staff are rotated in and out of different programmes and departments.
More cost management
But as with all journeys, sometimes diversions are necessary. “We started the journey to world class programme in 2009. We describe it as a plane journey – we get on the plane to fly to Barbados, but we may dip off to Beirut for a while, which is what we did.”
While this transformation was underway, Royal Mail got a new CEO. Moya Greene arrived in July 2010 and set Harmeston and her team a significant new challenge.
“It became apparent that she was going to be very hands on and interested in what we were doing and how. She is one of the biggest sponsors of procurement I’ve ever come across as a CEO and she understands it. It was clear she wanted to streamline the organisation and make it a lean, mean, fighting machine. She wanted to reduce costs and overheads and gave me a fairly radical number: to take 20 per cent out in six months. My response was ‘I want a strategic programme’. No hatchet jobs, we had to maintain relationships and the integrity of public procurement law. I had to have her backing.”
The two made a personal contract in which Greene agreed to Harmeston’s request for “teeth and visibility”. And the ‘managing our costs’ programme was launched.
“This wasn’t a procurement programme, but a business programme I happened to lead. It touched payment terms, supplier payment frequency, demand management, forecasting, rebates, innovative ideas, processes and practices for the business.”
Harmeston gathered her team and said: “You might think I’m crazy, but I’ve done it before and it can work. Here’s what we’re going to do and how. I said it will feel horrible at times and exhilarating at times.”
She put a training and support team in place to ensure the mental and emotional stability of staff was looked after as much as the technical aspects. “Some people love the thrill of a challenge, some love the ambiguity, others are scared to death of it and we had to accommodate that. It’s very easy for a procurement director and the immediate team to focus on technical stuff, but you can’t hammer people into oblivion if you want them to survive and see a big request as positive.”
Next, Harmeston and Greene gathered Royal Mail’s top suppliers. Two conferences were held: one with the top 23, the second with those placed 24-200. “We invited suppliers to take part in a strategic process that captured their ideas for cost improvement within four weeks through Memorandum of Understanding. We gave
them the 20 per cent target [around £300 million] and the plan was to have ideas not only for the six months, but going forward.
“It was a compelling double act between Moya and I that said ‘we have a transformational journey to go on. If we privatise we have to improve our costs to be a viable organisation in the future and we need you to help us’. We had more than 500 ideas come in.”
Weekly meetings were held to assess which proposals would work and if so, get stakeholder and executive agreement. The team spent October to December 2010 talking to suppliers and getting the ideas, then had until the end of March this year to deliver them. “It may have seemed like a six-month programme, but we had to get the money out within three months.”
At the end of this, the team had delivered £304 million (some of which was deferred to the next financial year), and changed its relationship with finance. “What was different about this programme was the way we recorded the benefits and how it forced an alliance within the finance community. I think it’s one of the best examples in industry at the minute.”
Procurement reported to the finance director once a week in a manner that was fully auditable and connected to the bottom line and balance sheet. Once procurement makes a saving for a department, it’s removed from the budget and added to profit.
“It [finance] agreed to it because Moya said, ‘show
me the money. It has to be real’ and I said ‘allow me to work in a way that gives us that transparency and
proves you can trust us’.”
And it worked. “We did what we said we’d do with decorum and stakeholder and supplier involvement. We had traceable, auditable results and did it at a time when the business was going through change.”
Harmeston now hosts a monthly forum with the finance directors
and they discuss all forms of cost improvement and monitor how their budgets are going to be affected.
“A lot of the time people say to procurement departments, ‘You
saved the money, but where is it?’ because procurement struggles to get
a position at the right level in the business and get the right message
out about what it can do against what
is perceived.
“It struggles to translate its achievements and get them connected to the P&L and balance sheet – if you crack that, you’ve cracked it. And I believe we’ve cracked it here.”
She says if procurement heads can align their
language with the CFO and interpret what
procurement can do in terms of cash, working capital, recurring OPEX, one off OPEX and exceptionals
“you’ve got them”.
“Their biggest agenda item is cash, not necessarily P&L, it’s the balance sheet, so how can you help
them optimise this? That’s what we’ve done, we’ve re-prioritised and re-calibrated our vocabulary and finally the lights have gone on.”
And now the business has accepted procurement as agents of change. “We were invited to a different position within the business as a consequence of doing this. Our profile has raised considerably.”
Procurement now has a slot on the agenda at quarterly business reviews to see how the business is doing against budget. It is also involved in projects that affect processes and demand management. “In the last two quarters, we’ve taken £17 million discretionary spend out of the business and improved working capital by £24 million. These are big numbers and that’s only
the first six months.
“We’re not just ‘procurement’ anymore, we’re regarded as business efficiencies and change. We’ve taken on the development of joint ventures, subsidiaries and issues concerning anything from temporary staff through to different revenue propositions.
“We’ve really grown some teeth since July last year. Procurement isn’t pushing its wares anymore, now there’s a pull.
“We created visibility, a strategic profile, we do what is it says on the tin. We’ve got trust and a new MO with the finance community. Now we’ve got to deliver on that and raise the bar even more.”
Secrets of success
Kath Harmeston’s three tips for procurement success:
1. People. Procurement in the future is about recognising that
you are change agents, sales
agents for the business. Once
people have a blend of highly technical introvert as well as highly extrovert characteristics, procurement will
get noticed.
2. Appropriate sponsorship is essential and the
CPO has to fight
for that. Become the change agent, find that burning platform and translate it into getting noticed.
3. Transparency. Prove you do what you say you do. Don’t be frightened of transparency –it
pays off.
Seasonal workload
This time of year
is particularly busy
for the Royal Mail
as it delivers 2 billion items across the UK.
The increase in workload inevitably means more for the purchasing department to do, including more demand for vehicles, staff, spares, uniforms
and gritting.
The seasonal increase in activity means purchasing has to be ahead of schedule on its savings targets before December approaches.
All Royal Mail managers (around 3,000 of them) are expected to give five days of their time in its busiest period of the year to sort or deliver mail.
