How does procurement rebrand itself from ‘cost saver’ to ‘strategic partner’?
Is procurement considered a strategic partner within your organisation? Unfortunately, for many, the answer is still “no”.
Despite the now wide ranging responsibilities of procurement decision makers, our recent Xchanging 2015 Global Procurement Study of more than 800 procurement decision-makers in Europe and North America revealed that 47% name “cost savings realised” as their number one KPI. The top four KPIs named were all cost related; cost savings realised, revenue impact, cost savings identified and cost avoidance. CSR and sustainability impact, by comparison, were ranked as the least important at just 1%.
These results strongly indicate that there is a problem with the current KPI structure. Procurement teams are responsible for many business-critical functions. From risk management to sustainability impact, procurement is engaged in activities that far surpass its cost-cutter legacy.
The metrics against which organisations track procurement’s performance do not line up with what procurement actually delivers.
Other business functions, such as HR, Marketing, Finance, and Operations, are measured against hard KPIs like attrition or market share but they’re also recognised for providing value beyond that single dimension. They are recognised for their strategic contribution to the business. Procurement on the other hand, is really only measured against one main metric: savings.
Despite things like balance scorecards, risk and the CSR agenda being in place – all things that in most other departments would be the focus of performance measurement – more often than not, savings is the only metric used to measure the success of the CPO. This, unsurprisingly, causes procurement professionals some angst.
In our study, 80% of procurement decision-makers identified “procurement team time pressures” as a challenge, and 20% as a major challenge. As the procurement team’s role within the organisation expands, its resources are stretched thinner. Not comprehending all that procurement does means companies are not providing the right level of resource.
Lack of internal engagement
The crux of the problem is a lack of internal engagement. Our research revealed that 63% of procurement decision-makers globally identify ‘internal stakeholder engagement’ as a challenge, with 14% claiming it is as an extreme challenge.
Procurement’s strategic capability isn’t being understood and because of that, it isn’t appropriately valued. Not only is this causing problems for procurement performance, it is also restricting business success; by not engaging with the procurement team and fully understanding what it can deliver as a strategic partner, companies are limiting their potential for growth.
The general feeling among purchasing teams and procurement departments is that they provide a strategic function and should thus be recognised as a strategic partner. Yes, they deliver cost savings – an extraordinary amount of savings if you speak to some of our customers – but the value they provide is far greater. Unfortunately, to date, very few industries have taken steps to recognise procurement for that additional value. Either they agree but don’t know how to enact the change required or they disagree and feel procurement isn’t a core function and thus non-strategic.
Assuming your company does believe in procurement’s contributions beyond savings, how can you measure performance of procurement so that it moves up that value chain and is recognised as a strategic function?
A good procurement department can change the way your business thinks about money. With training programs for all employees and incentives for good behaviour, procurement can persuade stakeholders to think about spending money differently – to think about company money as if it were their very own. To self-question projects and suppliers before committing funds and to treat those funds with the discipline they deserve. Creating a cost-conscious culture within a business is a strategic function; the extent to which a procurement team can achieve that is a metric they could be measured on.
Coverage of competitive practices
A good procurement department can change the way your business selects suppliers. Clearly, in every business there are preferred suppliers – relationships built over years with people they trust. Unfortunately, supplier selection based on past dealings or gut feelings makes it impossible to know whether or not you’re being taken advantage of or if competitor pressure is being applied. A strict competitive process for supplier selection ensures value for money on every transaction and yields insight around the true worth of a relationship. The extent to which a competitive process is adhered to is a strategic metric procurement performance could be measured against.
A good procurement department can change the way your business innovates. Historically, companies have been very good at telling suppliers what to do rather than listening to what they have to say. Now, more and more companies are relying on suppliers to provide them with insight on business activities. Integrating suppliers into the business – with regular dialogue between key suppliers and top management or by inviting suppliers to forums, workshops or other idea-sharing activities – can lead to better product development, better campaign and sale activity, more operational efficiencies and so on. Engaging suppliers for their ideas, innovation and input is a strategic procurement function and the extent to which it’s achieved is a performance metric that could be used.
Be better communicators
It is also crucial that CPOs become better communicators within an organisation in order to gain access to additional resources. To improve internal engagement, and properly communicate the value of procurement, procurement departments need to consider tactics such as introducing governance boards, using scorecards to track deliverables, leveraging analytics and reporting tools to demonstrate results and even re-labelling team members with non-cost-centric job titles that relate to their roles, for example ‘Risk Manager’ or ‘International Consultant’.
About the Author
Graham Copeland is Head of Sales & Marketing EMEA, Xchanging Procurement. He has been with Xchanging since 2006. Starting as Procurement Development Director Graham has now been Head of Sales for Europe since February 2011. Graham is responsible for a wide remit within Xchanging including implementation, solutions and sales. Prior to Xchanging Graham worked with other industry leaders such as Accenture and Schlumberger where his role spanned purchasing manager and procurement consultant.