Procurement – Time to Slay the Beast?
Astute leaders of companies large enough to have a central Procurement function (as opposed to a purchasing team) should be asking themselves if they will ever see sufficient returns to justify the investment. There is no doubt that businesses need procurement skills but it’s unclear if business leaders are seeing sufficient bottom-line value to seriously consider inviting Procurement to a seat at the top table, although this seems to be the objective of many CPOs.
Now this may sound like I’m biting the hand that feeds me, but as CEO of a business providing a technology for simplifying purchasing for business users, I need to bet on the right horse. And from what we see out in the marketplace, it might be time for the procurement horse to be put out to grass.
The need for a formal procurement function is a myth
Arguably, this myth has been created by analysts and management consultants, and funded by large procurement technology providers – the long term impact on businesses has been bloated procurement functions with unclear remits. Like a subscription to Netflix, procurement has lots of content & initiatives but doesn’t deliver the blockbuster when you want it.
As a business leader, ask yourself why do you have a procurement function? – you’ll be told by peers and trusted advisors that it is needed for negotiating strategic deals with suppliers, unlocking value in the supply chain, and implementing procurement technology. However the average CEO stays in the job for 10 years and in that time they will churn through 3 CPOs. This is typically because Procurement is often judged by short-term tactical measures and when it doesn’t deliver the in-year cost savings and efficiency targets promised to the board and shareholders, then someone gets held accountable.
You don’t need a Procurement department to achieve these results. In fact, Procurement often muddies the waters and wastes the company’s time and money. Ask yourself how many times Central Procurement has presented massive ‘cost savings’, derived from sophisticated strategic sourcing initiatives and supplier negotiation activities. And how many times did these efficiencies turn out to be merely ‘potential’, and not actually delivered to the bottom line in a reasonable time-frame?
Because of the central procurement team’s distance from operational teams, and their over-reliance on input from external consultants, their cost saving initiatives often lead to expensive and under-utilised procurement technologies. Rather than delivering bottom line value, the result is a weakened relationship with suppliers, and a bunch of de-motivated front-line teams.
Surely procurement are best-placed to improve supplier collaboration & innovation?
Not true. Suppliers dislike dealing with central procurement functions as they are too far removed from the operational teams and don’t hold the purse-strings. They typically don’t understand the nuances of the spend-category, and talk a lot about strategic relations when, in reality, they are looking for in-year cost savings because that’s how they achieve their bonus. In fact, cost reduction is the top priority of 74% of CPOs * Deloitte Global CPO Survey 2016
Your sharpest negotiators are nearly always working within a category, either at the front-end or in a tight category management team. They have deep category knowledge and a level of empathy which genuinely encourages supplier collaboration, particularly if the category in question is directly-important to what you ultimately sell.
While you don’t need a procurement function you definitely need procurement skills and best-practise. Articulate what you want from strategic procurement activities and then ensure that these objectives are included in the job descriptions of category teams and operational teams, and then measure & reward based on actual results.
According to Deloitte’s 2016 survey, 62% of CPOs believe their procurement teams do not have the skills and capabilities to deliver their procurement strategy. So why not give operational teams the tools and training, and ensure procurement best-practise is embedded where you will extract most value? This is where investing in a talented technology team becomes essential and negates the need for a central procurement function (you can contract-in these skills as and when required) – you know that your business has been, and will be, transformed by technology and that’s where you can make a genuine difference to your company’s performance.