Procurement Myths Debunked! Part I

Over on spendmatters.com/cpo, the maverick has been doing a great job knocking out Procurement myths one by one, with twenty (20) down and five (5) to go. While the doctor did not co-author this series, as per a post this spring, he did consult on them and believes that all of these are myths that you need to be aware of.

The first 10 myths are:

  • Hit Your Metrics
  • Pay No Heed to Cost Avoidance
  • Stay Away from Maverick Spending
  • Surveys are Silly
  • The Shared Services Model is Bad
  • PMOs and CoEs are Bad
  • Spend Should Always Decrease
  • Category Management is Best
  • Take Negotiated Savings Out of Budgets
  • Sourcing and P2P Definitions are Set in Stone

Of these, the doctor‘s favourites are:

  • Stay Away from Maverick Spending,
  • Spend Should Always Decrease, and
  • Take Negotiated Savings Out of Budgets.

While avoiding maverick spend is generally a best practice, sweeping it under the rug, even if it is small, is not a best practice — nor is mandating a stop until you understand why there is maverick spend. Is it because the buyer doesn’t know, doesn’t care, or thinks he has found a better deal? If the buyer didn’t know, then there is an issue with the process (of communication) somewhere, and fixing it will prevent future maverick spend. If the buyer doesn’t care, then there is a personnel issue that needs to be dealt with. If the buyer thinks he has a better deal, why? Lower cost, higher quality, quicker acquisition, or false perception. In the first three cases, the Procurement pro needs to investigate to see if there is a new opportunity she was not aware of, in the last case, an education program is probably required.

While spend is important, it is not the most important thing. Organizations exist to make profit for their shareholders. Profit is revenue minus expenses. That means that profit is increased when spend is decreased, or revenue is increased faster than spend is increased. The best way to to increase revenue faster than spend is to increase value. That’s why value creation, and not spend reduction, is the most important thing.

Savings are not a means to cut budgets — they are a means to find additional revenue for investment into opportunities for future value creation. These days, no department has enough money, and no one has enough money, or time, for training. If budget is freed up, it should be used to invest in training and new technologies, not to blindly increase shareholder dividends.

But these are just a few of the myths. More to come!

Has The Role of Procurement Really Changed?

This spring, Xchanging, one of the four largest Procurement Outsourcing Providers and a provider of Procurement and Sourcing technology (through MM4) released the initial results of its 2015 Global Procurement Study. According to the study, the role of Procurement has changed. It has evolved from a cost saving function to an invaluable strategic partner.

Based on the results of the study, the doctor doesn’t agree. If Procurement is an invaluable strategic partner, the kind that generates value for the organization, then why are the top 4 most important KPIs that Procurement is measured against cost related? And, more specifically, why is cost-savings realized, at 47%, 2.5 times as important as the next most important metric of revenue impact, at a mere 19%. If Procurement was really strategic, should not revenue impact be (almost) as important as cost-savings realized? And, more importantly, why is ROI only the 8th most important metric at 8%?

A truly strategic Procurement function generates value, and value is measured not just as savings (realized), not just (additional) revenue (impact), but overall profit margin, captured in an ROI metric. And not just one that captures savings from outsourcing/technology partners.

Moreover, the rest of the results are not that impressive either.

  • The most common reason for missed objectives is lack of internal engagement.
  • The most important skill set with the greatest perceived skills gap is relationship management.
  • The most common challenge is time pressure, faced by 79% of operations.
  • 59% consider talent shortage a challenge and 13% consider it an extreme challenge.

Procurement is on its way to becoming strategic. The realization that relationship management is key, that skills are needed, that new talent will be required, and that there is never enough time will push the organization to adapt better practices, processes, and technology, and this means that Procurement will evolve and get more strategic over time. However, it’s strategic and value to the overall organization will be limited until the organization measures Procurement more strategically. If a CPO’s bonus, and more importantly, a CPO’s job, depends on hitting an ill-defined cost-savings measure, than that is where the CPO is going to focus, and while doing so, miss out on a number of mid-term and long-term value generation activities that could, over time, take the organization from average to best in class. (There’s a reason that it’s the Hackett Group top 8%, and that’s because very, very few organizations realize what it takes to truly take Procurement to the next level.)

Regardless of the results, Xchanging should be applauded for undertaking this study across 830 Procurement professionals across the US and the EU. Until the C-Suite puts their measurements where their mouth is, the reality must continue to be documented.

A CoE in a CoE? Are we going too far?

SI is all for Centres of Excellence, CoEs, but when he read the recent post over on Spend Matters on “Why Your Procurement Organization Needs a Market Intelligence Centre of Excellence”, one has to wonder if we are taking the CoE concept a bit too far.

Now, the post is not really advocating for a CoE in a CoE, as it is advocating a Market Intelligence Centre of Excellence (a MI CoE) in any organization with over 2 Billion of spend, which is a reasonable suggestion given the importance of market intelligence in Sourcing endeavours, but one has to ask, where is this CoE going to live? Presumably it will live in Procurement. But managing a CoE is no small endeavour. A CoE requires good management practices, and good management practices generally stem from a CoE. In particular, a Procurement CoE should manage the MI CoE. And the net result is we have a MI CoE within the Procurement CoE.

A Procurement CoE should have functional excellence in all of the functional areas relevant to Procurement. It should have excellence in market intelligence, spend analysis, should-cost modelling, sourcing best practices, optimization, contract negotiation and management, order and inventory management, payment management, and procurement project management. But these should not be individual centres of excellence, as many of these activities overlap and support each other and market intelligence supports all, and is supported by all, of them.

The Procurement organization Centre of Excellence should definitely build its Market Intelligence competence up to the level of functional excellence, as that will improve all of its Sourcing and Procurement activities and enable it to realize better results, but it shouldn’t take the CoE concept too far. A CoE in a CoE just gets a little redundant.

What Does it Take to Be CPO?

The short answer is, fulfill the CPO Job Description, even though the order is as tall as it is wide. Use their skills, education, and experience to execute the primary responsibilities efficiently and effectively.

However, this doesn’t help you understand how to

  • define the organizational Procurement strategy
  • create and manage short, mid, and long-term goals and objectives
  • create and leverage on-going value from the supply base
  • manage BPO activities
  • identify, realize, and maintain cost-saving and cost-reduction opportunities
  • etc.

So what do you do?

First of all, become A Procurement Leader.

Then, understand the primary responsibilities.

Support these responsibilities with the right procurement technology.

Use your leadership skills and technology platforms to both manage staff and develop staff.

Then, be sure to practice good budget management and align procurement with the other business functions.

And, finally, don’t forget to focus on continual learning and self-improvement. While the maverick and the doctor covered a lot in our series on the CPO job description and what it takes to succeed as a CPO, one thing we didn’t spend a lot of time on was the importance of continual learning. Nothing about Procurement and Supply Management is static. Everything changes, and everyday provides a new challenge that must be death with. New disruptions. New innovations. New opportunities. New threats. That’s why SI and the new spendmatters.com/cpo site exist. To help you identify new practices, process, technologies, and ideas that will help you deal with all of the change to come but yet get through it.