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What's in a name?
The profile of indirect spend has grown considerably in recent years, but it is currently receiving more attention than ever before. There are two principal factors behind this rise.
Businesses are struggling to grow their top-line revenues. While forecasts do predict growth, this is weighted heavily towards 2013 and beyond. The outlook for the next two years is very sluggish. Therefore, to increase shareholder value, organisations are focusing on the bottom line, and on cost management.
Procurement is making headlines. Three recent government reports – Sir Philip Green’s efficiency review, the Strategic Defence and Security Review and the Comprehensive Spending Review – have turned the spotlight firmly on procurement and the consequences of not managing it effectively.
Procurement has come a long way in the past 20 years. However, the journey is far from complete. The renewed focus presents us with an opportunity to redefine procurement as a key strategic support function at the very heart of business. Yet indirect procurement’s value is frequently misunderstood, and this ambiguity leads to business leaders undervaluing it.
There are several fundamental questions which, as a profession, procurement simply does not provide consistent answers to. If we are unable to clarify these issues ourselves, it’s no wonder ambiguity occurs elsewhere.
It’s all in the name. First, perhaps surprisingly, is the terminology that we use – indirects, overheads, goods not for resale (GNFR), and non-core. All these words are both negative and imprecise. Indirects are simply the opposite of directs. The same goes for non-core and core, GNFR and GFR. Using only negative terms immediately relegates them to the second division, where they are perceived as secondary and unimportant, if not irrelevant, when in fact the complete opposite is true. Procurement is crucial. Without it, an organisation simply cannot function.
We need to shift fundamental perceptions, replacing the perception of procurement as a cost to one where it is valued as a business-essential activity. And it might be time to adopt a new name for this activity – one that reflects its importance and which will help to change mindsets. At Proxima, we have been using the term ‘Enabling Spend’ for several months.
If you look at text books or read market research to answer the question ‘what is procurement?’, you will find much around the source-to-pay process (eg, supplier relationship management, contract management, strategic and tactical sourcing, spend analysis, etc.). All of which is true and accurate. But business engagement – a key ingredient for successful procurement and an essential catalyst, in fact – is almost completely ignored. Procurement’s potential is released when it looks not only outwards to the supplier community, but at its own organisation, acting as an internal consultant or analyst, challenging and influencing behaviours, business rules and ways of working.
Beyond an almost cursory acknowledgement of the need for change management, business engagement is ignored by most textbooks and research and, to be quite frank, by many procurement functions. Procurement will only ever be viewed as a function to secure the best deal if that is all it focuses on, or all that it is tasked to achieve.
There is no common or industry-wide understanding of the areas that make up Enabling Spend. In some organisations, professional services such as audit fees or bank charges, for example, fall outside the remit of procurement. In almost all of the organisations we work with, there are areas of spend over which procurement has little influence, and these can include large spend marketing and IT.
The function may be engaged by the business to negotiate a deal, but all too frequently buyers are not trusted with any further involvement. The root cause of this attitude is the ongoing lack of understanding, even among the CFO community, of how procurement’s principles should be applied to all areas of spend. This is a missed opportunity.
What works for direct procurement doesn’t necessarily work for Enabling Spend. Enabling Spend contains hundreds of diverse categories, with thousands of suppliers serving a very wide range of stakeholders, all of whom have different needs. In comparison, directs has far fewer areas of expertise, suppliers and stakeholders. So a totally different approach is needed – yet many organisations apply their directs approach to Enabling Spend.
The range and depth of skill sets that Enabling Spend requires, – such as commerciality, change management, communication, procurement and deep category knowledge – are vast. ‘Best in class’ is a misleading concept. What is right for one organisation is not necessarily right for another. Procurement must be tailored according to an individual organisation’s culture, structure, profile and strategic aims to deliver the best results. Rather than ‘best in class’, a more useful question to ask is: “What do I need?”
Which brings us to procurement outsourcing. Even here there is confusion. Procurement outsourcing has come to mean different things. To many people, it involves shifting work wholesale to low-cost countries using technology and streamlining processes, running the same processes for less money. It’s all about efficiency. Yet true procurement outsourcing – and where multiples of the value achievable through efficiency are possible – is about how to do procurement better. The benefits are all about effectiveness.
Given all the above, it should come as no surprise that business leaders remain unaware of what is achievable by getting this right, and are therefore failing to prioritise it above other initiatives.
Finally, organisations are simply not investing enough in the management of their Enabling Spend. This is certainly preventing large elements of the above from improving, and is possibly the root cause of much of it. In our experience, procurement can and should be generating a return on investment of between 8 and 15 times. This is a huge benefit and one that substantially outperforms the ROI generated by most other investment decisions. Moreover, it goes straight to the bottom line. We see time and time again that the opportunities to improve shareholder value and operational performance are great – and way beyond the expectations of the senior executives.
The value that most procurement functions deliver is simply not good enough. Yes, much of this is due to the lack of investment in procurement. Yet we, as a community, must shoulder our fair share of the blame.
If procurement is to take its rightful place as a key strategic support function and be recognised as one, it’s time for us to address some of these fundamental issues. In doing so, we can continue to push procurement to front-of-business leaders’ minds as a powerful strategic asset that can deliver real business improvements.
The time has come for us to raise our game and, in doing so, release procurement’s true potential.
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*This article first appeared in the winter edition of CPO Agenda magazine. Visit the website at www.cpoagenda.com