As we navigate an already turbulent start to 2023, it’s undeniable that an economic storm is gathering. Behind the official statistics, economies such as the UK are already in a recession in all but name. Other major economies will likely follow this path in 2023. Even though we may see some green shoots, living and trading conditions are tough and will remain so for some time.
In business, this has brought about a renewed focus on cost, an area that CPOs will be very familiar with. In 2023, the task for CPOs is to balance short-term cost improvement needs with the long-term benefits of spending smart in a downturn. Indeed, research from Bain & Company conducted on businesses during downturns concluded that businesses that bought better in downturns recovered faster than their peers and enjoyed better long-term health.
Reduction, Optimization, or Transformation? Or all three?
What does this mean in practice? It means that, even though short-term cost reduction might be front of mind for many business leaders, a hap hazardous approach could do more harm than good in the mid to long term. It could lower productivity, stifle innovation, damage key supplier relationships, or see skills and know-how leave the business, to name but a few likely outcomes, making mid-term recovery slower and harder.
But that doesn’t mean that we shouldn’t ruthlessly hunt out waste. Needs change, markets move, and not every role or relationship will be optimized or deliver value for money. We have to be realistic, too; there are businesses that need to cut aggressively now to survive. But for those that are not in such a perilous state, how they navigate the next 12 months could have a significant impact on how fast and how well they emerge.
So how do you find the balance?
Our 2020 reprisal of the State of Spend looked at the cost bases of some of the world’s largest companies and found that external costs hover at around 75% of total costs for the average large business. And therefore, optimizing these external costs will have a far greater effect on now and next. Suppliers are key to sustainable EBITDA improvement.
And in our Getting Recession Ready, we highlighted some of the approaches being taken in businesses today to buy well in a downturn, notwithstanding the fact that there is no cookie-cutter approach for a CPO to draw on. Every procurement leader will face a different challenge depending on the organization they are in. The right approach will be to tailor to circumstance, sector, and a unique ‘organizational context.’
That said, the fundamentals normally come back to understanding the needs, risks, and opportunities that align with business strategy and then figuring out how what you spend or could spend powers business priorities like risk, growth, purpose, productivity, cash, etc.
Our 2023 CPO Report also highlighted three themes that experienced CPOs returned to;
1. View every procurement challenge through a business lens
When seeking value, the best way to look at every challenge is through a business lens. This means understanding the why (you spend), testing it against organizational contexts, and then applying procurement thinking and approaches to get to the value. What is the business value behind each new and current supplier relationship? What do you expect to achieve from every purchase order or contract lifecycle? Why spend it now, like this, and how to gauge success?
2. The CPO is an influencer and a team player
Optimizing costs goes far beyond procurement. It’s not just negotiating or focussing on what the supplier does; that’s one part of it. The bigger picture is aligning the internal and external enterprise, and that gets into how and why we do things. The best results cannot and do not come from procurement in isolation. It’s a team sport.
One of the roles of the CPO is to create a ‘cost conscious’ mindset across the entire organization. With hundreds, if not thousands, of people in every organization buying from or working with suppliers to do their day’s work, “corporate commerciality” is something that needs wide understanding and buy-in.
3. Procurement is for the bold
And what of bigger, bolder transformation? You might think that a recession is a bad time to pitch cost transformation ideas, but even though there may be more scrutiny on investment projects, the desire to transform and pressure to change are both high in the c-suite.
The best ideas are punching through, and we are observing a stream of executives accepting that they can do bigger and bolder things with suppliers. This, in turn, helps CPOs to elevate themselves and to assert further the value that procurement can deliver as an instigator and a changemaker.
Read more in our 2023 CPO Report
Procurement basics have always been about creating value across the organization, not just saving costs. But we sometimes lose sight of this in the complexities of the day-to-day and our desire to punch up and out. As costs rise back to the top of the agenda in 2023, CPOs can play a real leadership role across their company in the year ahead.
If you want to find out more about how Proxima can help your business spend smartly and more efficiently in 2023 or read the thoughts of five CPOs of world-leading companies heading into 2023, take a look at our CPO Report.