You’ve made it to CFO and you’ve added procurement to your responsibilities. You want a refresh; here are the six things you need to know to ensure maximum impact from procurement and five questions you might want to ask your CPO to see what you’ve got.
Get the data and get it cleaned and analyzed.
Though it’s obvious that saying this to a finance professional appeals to your basic instincts, most accounts payable platforms categorize spend by cost center relatively well, while cost code rarely corresponds usefully to how things are bought (eg: utilities constitute different markets for gas, water, and electricity which do not correlate). As an example, the data will need to be cleaned to remove duplication of suppliers under different spelling and then often needs to be re-categorized to make it insightful.
Cover 95% of spend – that is enough. Now you know who spends the money, with whom, and roughly on what. Then you can start asking questions. Be prepared that if you want to know precisely what you buy, service levels, etc., then the answer is to ask the supplier – ultimately, their sales data is much better than your procurement data.
The data will inevitably tell you that you spend a lot of money with suppliers. The average FTSE 350 spends 69% of turnover on suppliers and just 13% on people. The data for United States, France and Germany is no different to within a percent or so. So the data you now have in your hands not only represents a large part of your organization, but also represents a fast route to profit improvement.
It’s natural to want a quick view of total spend, and certainly not unrealistic. Be careful though, that you do not spend too much time looking backwards – while data around wallet share, compliance, actual vs. budget will help shape the future, don’t get too hung up on the past but do let it start your trek on to a more strategic path. Looking forwards is key to what your function will do, the necessary suppliers, and how you’ll measure your procurement team.
You get what you measure.
If you seek savings, you will get them, but you will regret it if you only seek them. The easiest savings to measure are reductions in the cost of what is done today, but don’t lose sight that perhaps 5/6 of your operating activity is carried out by suppliers. If you over-squeeze a supplier on price, service may falter and they are unlikely to put you at the front of the line of customers wanting their latest great idea.
Consider other measures, such as contribution to P&L, net promoter scores, percentage of spend influenced, and speed of execution. These are critical. For context think about the objectives of the team buying the goods and services. Marketing for example, is rarely measured purely on savings, and so why should the procurement effort to find a great marketing supplier be measured on savings alone? It shouldn’t. Similarly, the other internal consulting function is legal and I do not remember a single legal function being measured on their contribution to profitability.
Expand this – and stating the obvious – suppliers are critical to handling risk (cyber, operating), all things digital, and bringing innovation (how many new products need supplier ideas to launch them?).
Align stakeholders with procurement upfront
Be clear – the primary purpose of your procurement function is to help get better value from the money you spend with suppliers – to spend it smarter and improve performance of the business.
Of course, there are times when there is waste and a ‘same for less strategy’ of squeezing suppliers to the appropriate market-matching price is a first step to unlocking benefits. But, there is much more money in ‘different for less’, which means changing demand and changing specification. This is harder and more skilled than simply ’using a bigger bat’, or running more tenders.
It also means that Procurement must be persuasive, because your fellow budget holders are the decision-makers who determine specification and many of the usage policies. The best time to be persuasive is at the very beginning of any sourcing exercise when everything is up for grabs. The later procurement is involved, the less value they add other than ask for it cheaper – this is contrary to the image many have of procurement as the arch-negotiators.
Procurement teams are internal consultants, not the police.
Like finance, their job is not to be popular – it is to bring the best of the external market place into the business, and this may involve challenging stable jobs. It is sometimes better for finance to cut budgets first (ideally with some evidence for the scale of cuts provided through some review by procurement or others) and then the business will be incentivized to engage procurement for help to meet their new budget.
Finance often default to P2P as a key solution. Whilst this is an important piece of financial discipline, the benefits of doing this are dwarfed by the benefits of sorting out the contracts, demand, and specification linked to the millions you spend with suppliers. A good P2P helps enforce this, but putting it in before sorting the supply base rarely generates new promised returns, but it will give you some nice KPI’s and it can help protect what is delivered.
After price increases, the best return on investment you can get comes from better procurement.
Procurement gets better results than almost anything else, provided you invest in capability and systems, and appropriate disciplines capture benefits. Most functions are under-resourced, particularly in United States, to deliver the greatest return. That is not the same as ROI – if you want a high ROI, then shrink the function to one or two people who selectively do the high ROI projects, but boy are you leaving a lot of money on the table!
Manage your suppliers, and manage them well
Assume that unmanaged suppliers will seek to disguise price rises and change / deteriorate operating performance. Perhaps this is cynical, but it means you need to understand who is defending the business and/or driving supplier relationships. It is very rare, outside of manufacturing, that suppliers are consistently managed operationally or commercially. Procurement can commercially manage suppliers to protect you from predatory on-selling, but the business must step up to operationally manage suppliers, and someone needs to set this up and make sure it operates.
Five questions you should ask yourself or your CPO on arrival to gauge procurement’s condition:
- Can you show me how much we spend, and the data we track??
Hint: If they don’t have up to date data and insights – you should worry.
- What mechanisms prevent ‘savings’ or P&L benefits being spent or disappearing in deteriorating terms after a deal is done?
Hint: In most businesses, ‘savings’ are only prospective at the date of doing the deal, and frequently they do not turn into P&L reality. Having no mechanism in place may also be a sign that budgetary discipline should be tightened up, as benefits may be being squandered.
- When is procurement engaged by the business? At the beginning (good sign), or to do contracts (bad sign)?
Hint: A subsidiary question is whether procurement is part of the budgeting process. Yes = good. No = they are not going to have visibility of what is coming down the tracks, and therefore will be late to the party.
- Who manages suppliers operationally and who manages them commercially?
Hint: If procurement does not have a continuing relationship with suppliers after the deal is done, then it is a reasonable guess that there are many suppliers making hay at your expense. If the business is not consistently managing suppliers, you should start to worry about where the risks sit in your supply chain, and whether or not you are getting value for money.
- Would you – as CFO – use Procurement to run the tender of your audit?
Hint: Yes = good. No – you must ask yourself why not.
If you don’t get satisfactory answers or lack confidence in Procurement’s ability to deliver, it’s time to do something different to drive the returns, which are certainly available.