Procurement: Delivering Value Beyond Savings
How can CPOs overcome the challenges of delivering value beyond savings?
Palambrige co-founder Philip Ideson discusses not only how to face current challenges, but also how to safeguard against future risks.
What challenges are procurement leaders currently facing that make it difficult to deliver value beyond savings?
“Having objectives that aren’t aligned with the people we are trying influence and collaborate with can create unnecessary problems. It’s not uncommon for a procurement function to condition stakeholders to view value simply in terms of savings, meaning that our objectives tend to be savings-focused. This approach can lead to conflict with stakeholders; if we take a silo’d approach simply focusing on savings, we may not be aware that, for example, our stakeholders are more concerned about the benefit than the cost.
Another challenge is a lack of intelligent information. We’re surrounded by data, but we’re only scratching the surface in terms of how we use it. I’m often surprised by how many organisations don’t have spend analytics or have it at such a rudimentary level that it is difficult to understand and non-categorised. Whilst there are market intelligence reports that procurement leaders can buy to obtain data from the outside, most of them are high level and generic. They’re not contextualised for the situation, and as a result we are hamstrung by how we use the information.
Process can also hamper innovation, especially when we become reliant on it. By our nature, processes guide what we do and help us scale consistently as an organisation. When you consider the activities that are process-oriented, they are mainly transactional. There are exceptions to this of course; not everything that is process driven is a transaction. But we don’t typically create value by running sourcing events for a second or a third time simply to extract another percentage point or two of savings. That’s not what the business is looking for from procurement. We bring value by collaborating with our suppliers, developing win-win relationships that are greater than the sum of our parts, and identifying how we can bring innovation across from the outside.
Many procurement organisations experience a constant transformation cycle that can hinder long term growth. For example, if there’s a need to save money, a CPO may be brought in who is cost/savings driven. After a few years, savings will have been increased, but eventually the savings always start to run out. There are only so many times you can take categories through an aggressive spend reduction process before you’re squeezing such small percentage points out of it that the savings don’t cover the effort invested.
As the savings begins to run out, there’s always someone who observes that the company should focus more on collaboration. Old management is replaced and a leadership team is introduced that is focused on relationship building. They build relationships with suppliers, leaving savings on the table, recognising that this is a long-term strategy. In time, however, the business strategy may change again as the company needs more money, so savings become the priority once more, and it starts the cycle again.
This cycle is inevitable, particularly when beginning a transformation focused on strategic procurement for the first time, but we need to focus on the long-term.
Take your supply base for example. By segmenting your supply base, you can identify those that are commoditised products or services and don’t need specific attention. We also need to recognise the more strategic suppliers who will provide more value over the long term and treat them accordingly. In my experience, whilst we perform supplier segmentation as one of the basics of strategic procurement, we don’t necessarily act on the results, approaching all suppliers (strategic and otherwise) in the same way when we have a need for cost savings.
We are also inhibited by a fundamental difficulty in accessing the expertise and intelligence needed. We frequently discuss the reported talent shortages, whether arguing that there is a talent shortage, or that there isn’t a shortage, it’s more how you think about talent. I believe much of this comes down to the fact that the required skill set is changing, and supply is not catching up with demand for the business acumen-related, commercial skills that we need in procurement.
Few CPOs can afford specialists across all their major purchases, meaning they will mainly be hiring generalists. In my career as a practitioner I aimed to be the generalist, applying the basics to every category; I didn’t necessarily know every market in detail. As a result, we used the RFP process to obtain data, and relied on the market to dictate our success or failure.”
What alternative approaches can be taken to overcome these difficulties?
“Some of the more successful CPOs I’ve spoken to have opened their minds to the fact that you don’t need to fill a procurement role with a procurement professional. This may mean hiring a business manager who is strong in relationships, who has worked within the company and understands the stakeholders and dynamics. I’m a big proponent of bringing people into procurement from other areas of your organisation. People who have the trust and respect of their peers may not have a procurement mind-set, but you can teach that. By making this a career stop for them, they can move on to another department and become an advocate for procurement.
Another alternative is accessing talent from the outside, professionals who already have a thorough understanding of the market, not just procurement fundamentals. For those CPOs who don’t have the scale to employ specialists in every category, using third parties can be hugely beneficial.
I suspect that the procurement team of the future will mostly be made of commercial, relationship, and project managers and data scientists. People who are skilled at bringing in individuals from different parties or areas of the business and can make it feel seamless in terms of the service that we as a procurement function deliver will build the influence of the function.
In the future, I predict we’ll be accessing more subject matter expertise from the outside on an on-demand basis. It is a way of accessing the intelligence, experience, and know-how for categories where you only need that expertise once every six months or every two years. Why invest in that level of expertise on an ongoing basis unless you have the luxury of being able to afford it and that category is particularly material to you? It’s not cost effective to keep it in-house.
By accessing subject matter expertise on-demand for one part of the sourcing or one part of the category management process, you can bring expertise in when you need it, use it for a bit of time, gain the necessary intelligence and insights, and apply it to your internal generalists. There’s less risk and cost associated with this approach, and you’re making your own team more informed.
Returning to the issue of misaligned objectives, it is essential to have shared measurements and processes. I’ve also found that having shared governance within your business can be highly effective. For example, by bringing together a cross-functional steering team at the top of the business to guide the procurement function, you can ensure that the leaders who set the corporate strategy are aligned on business and procurement strategies.
I’ve seen this group of people act as a procurement investment committee as such, taking decisions holistically on procurement investment. It’s too easy to focus on what we think procurement should look like as opposed to what the business needs from us. Having that governance helps you build shared objectives, and they can also act as a resolution committee when there are conflicts.
Looking lastly at process being a major challenge for CPOs, we need to be more flexible, allowing sourcing teams to be creative in how they work with their business units. Each category manager is essentially managing a small business. Let them manage and encourage them to be as entrepreneurial as possible.
In a previous company I worked for, we were setting up a supplier management function, and as part of it we were all given checklists. One point was that we had to have a 30 minute coffee meeting every month with every stakeholder. If we didn’t have this meeting with our stakeholder we’d be punished in our performance appraisal. The outcome was, predictably, a lot of uncomfortable, time wasting conversations that weren’t needed, not to mention the jitters from all that coffee. With more freedom, we could have had these conversations when we felt they were needed and used our time to better advantage.”
When considering the use of a third party within their procurement function, what challenges should an organisation be aware of, and how can they mitigate risk?
“There’s no doubt that the expertise, intelligence, and data that third parties bring can propel your results and enable you to deliver value beyond savings. But if it’s poorly scoped or not the right fit, these relationships can be doomed from the start.
Some of these challenges come from a lack of executive buy-in; you need the support of the entire organisation if you plan to bring in external talent. There needs to be a commitment to fostering a positive culture. Too often those inside a company will look at those outside and either recognise that they have experience that they can benefit from, or think ‘Why should I listen to an outsider?’ You need to be cognisant of the change that may be necessary when using third party support.
A key point is not to outsource the relationship management; that’s where most engagements have the biggest problem. You may bring in third party help, then take a step back and think ‘I have my contract in place, the fault lies with them if they don’t meet their metrics or make the savings’. Taking that step back and allowing the service provider to be the direct point of contact with the stakeholder can be dangerous. There may come a time when you want to change your outsourcing model; you don’t want to be starting from scratch again, which is often what happens when you haven’t been actively involved in relationship management.
Flexibility is crucial; I can’t think of one example where the needs of a client didn’t change within the first two years of a contract, even within the first 90 days. You need to ensure that any potential changes are built in to the contract; opt for a flexible model that evolves with you. If you’re in an engagement that you’re not happy with, the next few years are going to be difficult. I’ve seen relationships end in a lot of problems because there wasn’t any flexibility built in.
That’s on the upside, but a lot of contracts miss the downside flexibility too. I’ve experienced this as an outsourcing buyer; I inherited a contract from a former company that was focused solely on growth. They put in place huge outsourcing contracts, seven or eight year deals, that only considered what would happen if there was upside, with no protection should there be a downside.
Be sure to consider cultural fit. My philosophy has always been that once a contract has been signed, I never want to go back and look at it again. It’s all about the relationship that you build and the cultural fit. If a client wants something different, then I want to do everything I can to make that possible.
It’s difficult to spot cultural fit, it’s more subjective than it is objective. I would recommend scenario-planning with conversations: ‘What would happen if…’. Think of some doomsday situations, see how they would respond, and see how much of that you can build into contractual language to protect yourself. It’ll also give you an idea of how flexible the model really is.
Lastly, where possible, pay only for what you need. We’re currently building a menu pricing based approach at Palambridge so that companies don’t have to bring in a team of contractors, for example, for a whole project. What if you don’t need that? What if you just need someone with specific expertise? It may only be 5% of a project that brings the ROI that supports all other activities. Look at what you truly need and how you can pay for just that.”
Rather than solely safeguarding against the future, how can organisations and professionals actively embrace new trends and delivery models?
“Firstly, stay informed. We can all project the impact of technologies and different delivery models, but in reality, we don’t have a crystal ball to know when change is going to happen.
Secondly, be curious. Seek out innovations in your space. This could be product innovations that impact what you end up building into the products and services that you sell. It could also be innovations in a delivery model: how are factors such as the future of work impacting what you buy? How is buying outcomes rather than time and material going to change what you buy? Does it change the access to what you thought was possible? Does an on-demand delivery model change the value you can get out of a marketplace?
When I consider how you can be prepared for the future, I think about my own experience in outsourcing. I worked for a year in India, managing and growing a shared services centre, and when I discussed roles or activities that we would want to outsource or have in a different location, I would get two types of responses. One would be the person saying, ‘No one can outsource my job or do what I do better than me, the company would never replace me’. Then there would be the person who would say ‘What can I do to facilitate this, because this is in the best interest of the company, makes us more efficient, and helps me and my colleagues to focus on more value-added activities’.
The latter is the approach I took; if it ended in me outsourcing my own job, there would be other companies who would value and cherish that skill set. I think that’s where we are with technology right now. You can fear these innovative delivery models, and you can think that it’s not going to impact you, or you can embrace them and consider how you can take advantage of them. I would encourage anyone to look at how you can use the developments that are coming your way to your advantage, and the advantage of your clients to make the procurement value proposition stronger, versus putting up the walls and trying to do the same thing that we’ve always done.
It can be scary, this constant evolution, and although there is a lot of conjecture around what’s coming next, the only thing we know is that we are going to be impacted either way. You can ignore it or you can try to understand and embrace it.
Be aware of the talent skillsets that are required in procurement now; you need an understanding and perspective on the future of procurement. Once you start to model what the future will look like, you can start to see what skillsets will be necessary, giving you an idea of where to focus your growth and development. If you have subject matter expertise, you may be valuable to more than one company, working on a smaller basis, rather than working for one employer. Look at what that could mean for you from a career perspective.
When I started out in procurement around 17 years ago, we were starting to think about category management and strategic sourcing. I thought that if I knew the basics and how to read markets, I could work from one category to another. I’m now starting to think that it was good for the time, but really the value from a sourcing and category management perspective is in expertise and knowledge of markets. There will be people who will be able to bring that together, the program managers, but there will be far fewer procurement generalists.
Going forward, you could be an expert in a specific area and sell that niche expertise to clients based on the value you create rather than the time that you work. To me that’s where the future of sourcing category management expertise is going; that connection between subject matter experts and companies who only need their services now and then.
It will be interesting to see if more people embrace specialisation, if they take the risk. I do wonder if these trends we talk about will remain niche, or if most companies will continue as they’ve always done. Is this really a revolution in the way that people access talent, and everything that comes with it? Time will tell.”
Philip Ideson is Co-Founder and MD of Palambridge, a virtual platform of procurement experts, technology, and intelligence created to provide a broad range of solutions on-demand.