Last month, the Hackett Group, as part of its Procurement Executive Insight series, released its 2014 Procurement Key Issues report on Rethinking How Procurement Defines Its Value, Balances Risk, and Gets the Most from Technology Investments. It had some very interesting findings, including the fact that Procurement in 76% of companies surveyed indicated that a top priority was to expand procurement’s scope/influence. This is logical, but a little unexpected giving that the top Management priorities are to grow revenue and improve margins / profitability, at 66% and 61%, and most companies still see margin improvement in an uncertain market as cost reduction since limited or no-growth markets don’t generally take favourably to cost increases.
It seems that, as Hackett notes in its insight, we have the situation where many of the Procurement groups in Hackett’s survey stable have reached the upper limit of cost reductions possible in categories they actively source today and are interested in taking on new spend categories in an effort to unearth additional savings and meet the savings targets they are still being (implicitly) given for the organization to achieve it’s margin improvement.
While I applaud the long-needed alignment from this group of Procurement organizations that are obviously in the above-average and best-in-class categories — because savings are a thing of the past with (hyper)inflation returning to historical norms, raw materials in many categories become scarce (and supply barely meeting demand), and transportation costs continuing to increase — I worry that the finance organization is not yet aligned with the need and, when push comes to shove, will resort to a strong arm instead of a gentle hand, putting Marketing, Legal, and other non-physical product organizations on the defensive.
Somewhere two fists are pounding
And they don’t care what’s correct
Somewhere somebody’s walking the wire
Without a safety net …
This will not only result in a push-back from the internal departments that Procurement needs to help, but from the vendors and third-parties that the Marketing, Legal, and other non-physical product departments rely on to keep the organization running. The disdain dripping from the forced smiles on all sides will be visible across the room …
Somewhere some buyer’s crazy
And some Rep’s half out of her head
Now the CPO’s fearless
And hopes they won’t wind up dead
You have to remember these are vendors who are used to doing deals with a wink and a smile in the back room or skybox of their favourite entertainment venue and sealing them with a firm handshake. Terms? Conditions? Agreed Upon Rates? Performance Requirements? Contracts? This is a whole new ballgame to a vendor used to doing the work and sending a one-line invoice when it’s done.
Where the rubber meets the road
Welcome to Procurement mode
Used to be deals were a firm handshake
Now the rubber meets the road
The vendors are going to try and bypass Procurement at every opportunity …
Rep in the front seat
Lawyer in the back seat
Gettin’ it on the dotted line
Got a snake in the bed
Lord, hissin’ on the headboard
Trying to lure you offside
… and if the Marketing, Legal, and other affected internal departments aren’t onside with the new process 100%, any chance of savings and spend control are going to fly out the window. Not only will a side-stepped process result in a deal that is at least as expensive as last year’s deal (and probably more as the incumbent preferred vendor will probably cry poor due to inflation), but nothing will be done to reduce the demand side volatility, threat of competition (which often requires true partners and not just preferred vendors), and supply volatility that are the top three business drivers that Procurement has identified as needing to be addressed.
In summary, the fundamental Procurement focus is right, but has the rest of the organization caught up? And does Procurement really have a firm handle on what it needs to do to extend its reach and deal with all of the external business drivers that are hitting it hard, which also include the need for more (trained) talent and the skills gap, the increasing regulatory risk around the globe, and risk of a truly global economic crisis? Looking at the technology priorities, SI is not certain that it does.
In closing, the 2014 Procurement Key Issues report on Rethinking How Procurement Defines Its Value, Balances Risk, and Gets the Most from Technology Investments is an interesting and thought-provoking read and you should add it to the top of your reading stack.