February 2013 |

What CFOs can learn from Einstein

“?If you always do what you always did, you will always get what you always got?” – Albert Einstein. Time and time again organizations launch into programs with the aim of reducing costs from the supplier base. It?’s a perfectly rational thing to do. Who wouldn?’t want to get the cost base in a fitter state?

The trouble is, before long, finance realizes that what they were promised isn’?t being seen on the bottom line, and pressure starts to mount on the team ?- and they eventually get divested in (i.e. moved on).  Time passes -? and before long, the same process starts again.

So what?’s wrong?  Why is this happening?  Why is finance not getting what it wants, and what it needs?

The answer lies in what the expectations are at the outset.  The standard response is to think – “What we need to do is invest in the procurement department.”?  Right?  Wrong.  Procurement is too narrow an area to effectively deliver what is needed.

It typically focuses on only part of the process, which is unfortunate in two ways:
1) it?’s the part that adds the least value, and 2) it?’s at the back end of the process.  It forgets the most important aspect of managing the cost base.  It misses the upfront area of understanding what is the business need, challenging internal behaviors for how they are being serviced, and the cultural and behavioral change that is needed to bring it all together.

You can do the greatest sourcing exercise ever done by mankind, but if you are not meeting the business need, and aligning activities with corporate objectives, then its set up to fail.  It also ignores what is needed at the back end of the process: on-going active management to ensure the evolving business need is continuously served by the evolving supplier base.

What’?s needed is a paradigm shift to understand that a much wider remit is required to successfully manage an organization’s cost base.  To mobilize the supplier base in your favor.  To provide the span of control needed.  To manage the inherent risks in the supplier base (as the recent horse meat scandal has very elegantly exposed).  What seems to be overlooked is that for most large corporates, the total amount of money spent with suppliers outweighs labor costs by a factor of 3-5 times.  Similar to the boiling frogs metaphor*, management practice it seems has not kept up with the fact that over the last 50 years, the cost base has been externalized.

The reality is that businesses spend on average two thirds of their revenue on non-labor costs.  And these third party costs often drive the value created by the labor which sits within the business.  They therefore offer the greatest opportunities for driving productivity, and ultimately profitability.

So what?’s needed?  Well, it certainly “?isn?t doing what you always did?.”  And we know the reason why.

* The premise is that if a frog is placed in boiling water, it will jump out, but if it is placed in cold water that is slowly heated, it will not perceive the danger and will be cooked to death. The story is often used as a metaphor for the inability of people to react to significant changes that occur gradually.