Procurement Study Points to New Value Proposition

Will this be the year procurement finally evolves from its “cost center” image to one that will gladden the hearts of corporate CFOs worldwide?

Researchers at the IBM Institute for Business Value (IBV) think so, and present a compelling argument that change in perception is well underway.

In “The journey to value - Transforming procurement to drive the enterprise agenda,” IBM reveals how it worked with The Economist Intelligence Unit (EIU) to obtain management feedback on the current state of procurement. While most of the answers were hardly startling, a new pattern is clearly emerging in the global marketplace.

When Doug Macdonald, Procurement Product Marketing Leader for IBM, wrote about IBV’s first CPO study in SCMR last year, he observed that the goal at that time was to understand the links between procurement and business performance.

By way of contrast, the most recent study has a new objective: to identify common attributes that separate procurement role models from the pack.

Researchers found a trio of common denominators. First, leaders focus on improving enterprise success…not just procurement performance. Then they engage with stakeholders to understand and anticipate their needs and values. Finally, they embrace progressive procurement practices and tools to drive results.

Charting the Proper Course
IBV defined procurement role models as those select few organizations that, relative to their peers, were in the top 20 percent in revenue growth and in the top 15 percent in profit improvement. This exclusive group – approximately 10 percent of the organizations they surveyed – is clearly adding significant value to the companies they serve. They provide rich insights for the rest of the procurement community.

According to researchers, role models think about procurement in broader terms than their peers; they are more likely to embrace priorities that serve more strategic enterprise objectives; they seek to extend procurement’s value through collaboration; and they adopt leading-edge, procurement-related technologies and solutions to further simplify the mundane – albeit vital – aspects of transaction support.

Conversely, underperforming procurement organizations chart a very different course.

Although they focus more on traditional procurement priorities and basic capabilities, they do not often stretch beyond these basics. These organizations concentrate more on spend savings and corporate profitability and getting involved in purchasing decisions early - representing the table stakes of procurement - but do not place a high priority on more strategic priorities or innovative initiatives.

Predictibly, these “table stakes” are also important priorities for procurement role models, but underperformers are stuck trying to perfect the basic mechanics of procurement. Role models, on the other hand, have mastered the basics and lead the charge into the more strategic aspects of the broader business.

Enterprise Success
Robert A. Rudzki, President, Greybeard Advisors LLC, who is the former SVP and CPO of Bayer Corp. and a prominent SCMR blogger, is impressed, but maintains that IBV should curb its enthusiasm.

“I am happy that the study has reinforced themes which leading practitioners and authors have previously identified and shared with the procurement profession,” he says, adding that upper management still needs to be brought on board.

Yet, IBV seems to tacitly agree, noting that procurement role models must elevate their Board Room profile.

“It comes as no surprise that procurement role models have a seat at the corporate leadership table within the companies they serve,” observe IBV researchers. “They are more apt to adopt enterprise-level priorities that are more collaborative with internal and external stakeholders and blaze a path toward new and beneficial procurement solutions. Even more, they have a track record of delivering meaningful results to the company as measured by both profit improvement and revenue growth.”

Excelling at traditional procurement capabilities is important, say researchers, but the hope of most CPOs is to influence and improve the way the business operates. In this regard, priorities seem to matter, as procurement role models have a very different focus than their under performing peers. Fully 38 percent of respondents from top-performing organizations say that introducing innovation into the enterprise from suppliers and other sources is among their top three priorities. This compares to just half as many (20 percent) of procurement under performers.

Similarly, 42 percent of procurement role models say revenue growth and increased competitive advantage are among their top three priorities, while only 28 percent of laggards share this view

Nurturing Relationships
What notably differentiates the two groups is that procurement role models have a more holistic view of the enterprise - in part because of the close connections they form with its various constituents. These models meet more frequently with stakeholders in multiple arenas, and they value, and in some cases act on, the suggestions these interactions produce.

This helps them to deeply embrace the objectives of those they serve, which, in turn, makes it easier for them to deliver against shared enterprise objectives. Procurement role models also adopt the perspective of their key stakeholders.

Like most other departments in an enterprise, procurement tends to thrive when it is well-connected to the rest of the company. Compared to underperformers, which are likely to have a more “silo-oriented” outlook on the role, procurement’s winning models believe internal interactions add value to procurement. Indeed, 93 percent of procurement leaders hold this view, compared to only 72 percent of underperformers.

Similarly, procurement role models are more likely to value interactions beyond corporate boundaries, as evidenced by the 92 percent who say they value interactions with external stakeholders, compared to only 68 percent of underperformers.

Role models also strive to understand the needs of the ultimate enterprise stakeholder: the end customer. While role models and under performers are both likely to believe procurement is effectively hearing the voice of the end customer, 94 percent of role models are confident of this point, versus only 74 percent of their disappointing colleagues.

The driver of this perception among procurement role models likely relates to the frequency of strategic interactions senior procurement leaders have with key stakeholders. Fully 39 percent of procurement role models report having weekly strategic meetings with suppliers, and 62 percent have weekly or monthly strategic meetings with the line-of-business leaders to whom procurement reports.

“The relative importance procurement role models place on stakeholder interactions and frequent strategic engagement with key leaders, provide powerful and important links to the value procurement delivers to the enterprise,” conclude researchers. “Procurement role models also value innovation, which is why they embrace structures likely to bring innovation into the company.”

On a global basis, it is worth noting that thirty-three percent of procurement role models believe procurement should suggest new products, solutions and extensions to the company, compared to only 20 percent of those who fail to achieve stated goals. Similarly, 55 percent have successfully convinced their leaders to enter new markets or lines of business. In contrast, this is true for only 36 percent of under performing procurement organizations.

Finally, no procurement organization succeeds on its own; partnerships are an essential ingredient to achieving desired results, concludes the IBV survey. This is irrespective of where in the world they may evolve.

Related: Leading Organizations Produce Superior Results from Procurement, Others Are Lagging