Steve Wilson and Jamie Bolton explain why using local partners to invest in the world’s new economic powerhouse will pay dividends.

With foreign direct investment into China growing at 25.4 per cent annually and exports growing at 16.5 per cent, the country is becoming an economic powerhouse. It’s the fourth largest exporter in the world. China has quickly become an essential element in every head of procurement’s sourcing strategy.

A key question for senior executives embarking on a global sourcing strategy is whether the investment of time and effort needed to establish a function using an International Procurement Organisation (IPO) in China will provide the expected returns. The short answer is yes.

Among those whose organisations have established China IPOs, more than 70 per cent feel that the ventures have met or exceeded their expectations. Surveys of procurement executives also show how executives see high-performance procurement organisations in China as a fundamental part of a global sourcing strategy. Many organisations plan to double their expenditure in low-cost countries over the next three years and expect savings to increase.

Global sourcing is a key initiative by which organisations try to reduce total costs. China is the low-cost country of choice at the moment, with Eastern Europe and South America forming a significant second tier for organisations in Europe and the US respectively.

Specific issues must be understood in order to set up a successful China sourcing strategy. Organisations must clearly define the role of the IPO, have effective governance, strong integration with the head office, a local presence and executive management leadership with buy-in from across the organisation. A complete strategic sourcing plan should also be in place with talent management as part of the scope. High-performing organisations are establishing IPOs as an effective means of maximising the value from China sourcing and overcoming the tactical challenges. Chinese IPOs are meeting or exceeding initial performance expectations. However, simply establishing an IPO is not sufficient. High-performing organisations use IPOs as a component of a well-designed global sourcing strategy.

Many executives, however, believe that global sourcing requires collaboration through the supply chain and that it cannot be a procurement-led initiative. There are some clear factors that organisations must get right for their IPOs to be successful.

Clear role definition for IPOs

To achieve greatest value IPOs in China must develop a comprehensive portfolio of capabilities to ensure that the best Total Landed Cost solutions are developed.

While more than 70 per cent of organisations are focusing on the development of fundamental capabilities such as supplier market research, supplier identification and qualification, supplier development and product quality inspections, there is a need also to focus on transactional capabilities such as the execution of bidding, logistics management and procurement transactions.

Without these capabilities being included in the role definition of the IPO, the value which can be created is limited.

A key challenge is to ensure the effective implementation of corporate strategy, policy, ethics, process and standards while the China IPO operates far from head office – usually managed by a group of local recruits from a range of different professional backgrounds. To meet this challenge, it’s essential that companies put in place an effective governance structure. This should include the flexibility to allow the China IPO to engage with the local supplier market based on head office approved practices.

Taking different approaches to your IPO

The nature of different industries will mean taking different approaches. However, the implementation of an effective governance structure is strongly related to the successful application of the following criteria within a China IPO environment:

• Using a corporate lead from the head office to set the practice and direction in China locally as this helps establish effective workingrelations between the IPO and the head office.
• Open communication between the China IPO and head office based on a clear understanding of the roles and responsibilities of each of the parties.
• Transparent operations with regular process assurance assessments to ensure that the IPO is operating within a mandate firmly established by head office.
• The establishment of achievable targets within a reasonable timeframe to minimise unapproved expenditure and execution.
• Continuous training of all IPO staff to reinforce corporate expectations.

Integration with the home office

Being far away from the head office and in a very different time zone, the China IPO team may be unable to access critical information and communicate with the product lead effectively. Without information and communication, the China IPO will be treated as a standalone business unit – deployed in China with an unclear corporate mandate.

Managing to successfully integrate the China IPO into the corporate family is likely to prove one of the key internal challenges. To help this process along, it is worth following a few critical steps.

Senior management needs to provide real “top down” support to ensure that business unit leads comply with the China IPO strategic approach and understand the value that the company is seeking to obtain from this strategy. Additionally, they should appoint a designated co-ordinator bridging all the communication and knowledge gaps between the China IPO, head office and product lead as creating this organisational role provides accountability for management of communication.

The China IPO should communicate the value that has been created at regular frequent intervals. This reinforces the perception of value back in the head office and across the various product leads. These approaches will help the China IPO integrate with head office operations smoothly.

Senior executive leadership

Our research has suggested that installing senior executive management talent in an IPO is a fundamental requirement for success. Fully 66 per cent of China IPOs are managed by senior executives. These executives have typically been charged with both the initial establishment of the IPO and its ongoing management. There are several reasons for this.

Senior executives who recognise the strategic value that China IPOs can deliver can provide the appropriate level of experience which is necessary to build a new organisation in a complex environment. They can also ensure effective integration and communication between the IPO and head office management and can develop an effective and efficient China IPO strategy, reinforcing its value to head office management.

Rigorous talent management

Securing and retaining key talent is another critical element that must be addressed for the China IPO to generate immediate returns and ensure ongoing success. Given that future success will be directly dependent on the quality of staff, this will soon become the primary issue for China IPOs to manage. A talent management plan should be put in place to address the trend toward more competition for talent. Addressing this essential talent management issue will require a comprehensive approach to human resource management, specifically focusing on recruitment, retention and training of staff.

The recruitment plan should include a clear understanding of the kind of talent the company is looking for and the channels that will be used to source this talent. It also requires a strong image plan, promoting the organisation as an employer of choice in China. Decisions should be taken by experienced local and global managers to ensure that the right people are hired.

To retain the best people, it is important that the China IPO management properly position staff in the organisation and extend their responsibilities to quicken their development. With the need to ramp the organisation up to full capacity as quickly as possible, this will often prove one of the crucial steps you can take. When the best talent is sourced, it is essential to do everything to retain that talent by allotting the proper level of investment. There should also be a clear and fair performance measurement process with rewards for good performance.

Finally, training is also a crucial part of a talent management plan. Business strategy must be aligned with the training curriculum to ensure employees are developing skills in line with their roles. The training program should be well defined and developed with a clear relationship to career advancement.

Steve Wilson is a partner at Accenture based in London. Jamie Bolton is an Accenture partner based in Shanghai. Both are part of Accenture’s supply chain practice. www.accenture.com