Profit from Procurement. Jose Oliveira Valentede
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Procurement to new heights in those organizations. On the surface, all the ingredients were there for this new CPO to aim to take Procurement to “the next level” straight away: that is to say, beyond savings. But this particular CPO didn't make that mistake. Rather, he was realistic about his starting point.
The reality was that Procurement was not involved in any of the important business discussions because it was not fully trusted. Key decisions around which drugs to bring to market, commercial viability of those drugs, which suppliers to invest in, and managing supply chain risk were not yet within their remit. Crucially, the savings they achieved were either not believed or not visible to the people in the business who mattered. The CPO knew this, and knew it before he had taken on the job. So, his first priority was to make the Procurement function known for simply delivering a cost benefit. From there he would build credibility.
Within the first two years, as well as cleaning up some of the administrative processes and reinvigorating his team and how it interacts with the business, he had delivered a program of savings that most of the company was behind and could see the benefits of. From there, the remit and mandate had expanded organically, as peers had seen how the approach that had helped to deliver cost benefit could also be used to help better manage supply chain risk with key suppliers—something that has a direct impact on revenue.
This is an example of a CPO who was confident and humble enough to understand the starting point of Procurement in his business and set the correct priorities and ambition. Had he tried to impose his function on other areas immediately, I'm certain his function would not be delivering as much value as it is today.
The function with traction
A FinTech company founded two decades earlier had never professionalized its Procurement until two years ago, when they hired some consultants to strategically address their largest buckets of spend. The one-year program was a big success and, as a follow-on, the company decided to build capability inhouse by hiring a permanent CPO and a team around her. After one year, that Procurement team has made a valuable and recognizable contribution to de-risking the business plan, which had been put at risk due to a drop in revenues in a major business unit due to consumer trends.
In the early days of the first program, almost no one in the company had confidence that Procurement could deliver anything, but by now the value Procurement could bring in professionalizing supplier relationships and driving cost out was becoming clear to all.
I spoke to the CPO recently, after a year in the role, and she was pretty clear on where she wanted to go. She told me that, ultimately, she sees Procurement's biggest contribution as being in product development. With products that are driven almost entirely by technological advancements that happen very quickly in a market full of start-ups with very low barriers to entry, she believes Procurement is ideally placed to be the ones on top of where the next innovation is coming from and which suppliers to invest in.
Product managers in different functions do this role today but there is so much Procurement can contribute to this, she thinks. But while Procurement has driven significant cost benefits for a couple of years, there is more to be done on that front, and the business expects it. That is why, for the next year at least, cost remains her number one priority, albeit from a different angle. Her view is that a lot of the pre-contracting processes around spend visibility, contract renewals, sourcing process, and pipeline development are working well and are embedded in the organization to the extent that they will continue to deliver cost benefit with less attention from her team. She believes the biggest cost benefits to be had now are post-contract supplier management. And this is where the immediate focus of her team will be.
Cleverly, she also thinks that by proving her team's credentials in this area—gaining trust for managing some of the company's most critical supplier relationships—she will find it easier to position her function to support the product teams later and their work identifying the next innovation in the market. It's worth noting that this area would itself have been out of bounds just two years prior.
Procurement has earned the right to set up and join performance reviews with business-critical suppliers at this company through the analytics, change management, and commercial skills it has shown in the pre-contracting space.
So again, we have a CPO with a refreshingly realistic view of her starting point, who eventually will move the Procurement function further up the value chain to add yet more value to the business. Her priority now is continuing to earn the credibility to do that.
The mature function
There is one company I've had the pleasure of working with that has created a well-oiled Strategic Sourcing engine at the core of its function that has been the guardian of cost competitiveness for the organization for almost a decade. If you speak to the CPO, there is more to be done, but he knows how the Procurement function is perceived—a competent, if occasionally over-zealous function that has contributed significant and unprecedented commercial firepower to the organization.
The CPO is an influencer at board level and has the ear of the CFO. So, what now for this Procurement function?
It goes without saying that keeping on top of cost is a key priority, but arguably they are much further on than the Fintech company in the previous example. That means that the machine can run itself with just a little fine-tuning here and there. People in the wider organization are looking to and indeed expecting Procurement to raise its game yet again, such is the success of the function so far.
So, what is the ambition of this function? Well, they are numerous, but they definitely include maintaining cost competitiveness. The second is refining their demand forecasting tool to further reduce maintenance costs across the business and even start to generate revenue.
By analyzing and modeling data as to where failures are likely to occur, the Procurement function has worked closely with the supply chain and the maintenance function to make it many times more efficient. This is a sophisticated tool and methodology the CPO has the ambition to sell to other companies in the industry and generate revenue.
The company, being publicly regulated, is also under pressure to demonstrate its credentials in sustainability. Again, Procurement has ambitions and permission to take the lead here and has begun to weave sustainability requirements into the sourcing and supplier performance management processes which it then reports on. This in turn strengthens the hand of the company in its periodic negotiations with the regulator.
These sorts of value contributions from Procurement are hugely significant, and it's because of the trust and credibility Procurement has built up over many years that it has had the ability to have this type of ambition and deliver these results.
Getting Buy-In
If setting the right ambition is important, then getting buy-in to that ambition from others is arguably even more so. That is because, as we say throughout this book, Procurement—almost more than any other department—must work cross-functionally in any organization to be successful. If you take the simple ambition of cost reduction, it's easy to see why.
Procurement hardly owns any of the third party spend in an organization, yet if it wants to have a serious impact on spend it must address a significant portion of it. And the ownership of that spend will likely sit across several functions, geographies, or business units. If Procurement wants to make any progress, it will need the buy-in from the key people in each of those areas. In addition, C-Suite buy-in and sponsorship is required to break down possible roadblocks along the way.
So, what do we mean by buy-in?
Unfortunately, it's more complicated than simply socializing your ambition or talking through it during a kick-off meeting. In many companies, and due to the reputation of Procurement working in a silo, we have found that other functions are generally suspicious of Procurement's ambition, even if it is the right one. Many times, Procurement has pursued initiatives that appear to only be focused on something narrow,