Does the organisation’s agenda for the CPO stifle procurement innovation – is there an inherent conflict?
I don’t know about you, but every quarter there is a CPO survey published which provides very useful insights into the current challenges facing our procurement leaders. However what troubles me is that procurement innovation rarely figures in the top five or in many cases not at all! So my point is – is there a major conflict here?
In this paper I am attempting to put the case forward for both sides, understand the conflicts and provide some answers as to how the two can work “hand in glove” as part of the procurement strategy.
In one of the most recent surveys, shown here, a conclusion that can be drawn is that innovation is not in the top 6 priorities and will struggle to move up over the next 3-5 years. In addition the maturity to drive this agenda is fairly low – an issue I will discuss further in this paper. Source: Roland Berger – CPO Agenda 2014
I will start with my, quite simple, definition of procurement innovation – It is the ability to work collaboratively with suppliers to bring new or enhanced ideas for their goods or services that, in turn, drives increased value and/or a differential position in your business.
The best way to analyse this conundrum is to use the main 5 dimensions of the procurement organisation;
- Cost reduction, performance management and targets
- Impact on stakeholders
Lets take the big one first – the number one priority for the CPO in all of the survey’s I have seen over the past few years have remained consistent around the performance of the team to reduce the cost from its suppliers and to drive efficiency savings internally, irrespective of the type of good and services procured and whether the focus is on direct or indirect. In a previous whitepaper – Realising spend savings can leave you wide of the mark – the Odesma team discussed the importance of measuring and capturing savings and this is absolutely key to justify the key objective of the procurement department – to reduce cost.
But what impact does driving procurement innovation with the appropriate supply base have on this? Would a procurement agent be rewarded and praised for using a more innovative supplier if the cost of the good and services increases?
This is a major challenge and, in my opinion, the answer is to look at the broader picture in terms of driving value for the organisation. With the right business case, measurement tools in place and a strong relationship with the business stakeholders, (more later); there can be a strong justification for the (initially) more expensive solution to be acquired if the value for the business is greater.
Hence a broader total cost of ownership approach is required including a detailed, value based, business case in which the whole of the business is aligned. If certain supplier’s are measured on their ability to create value to the organisation, (rather than simply to reduce cost), and this is included in the KPI’s for procurement then it can be accommodated in performance measurement and targets.
This will obviously not work for all of the supply base and typically in my experience works for, maybe, the top 10-15% of the suppliers. In turn the KPI’s and SLA’s in the contracts with these strategic suppliers need to be comprehensive and measurable to cover this “wider agenda” and the subsequent review meetings with these suppliers needs to cover the innovation agenda with the associated communication throughout the organisation.
In terms of people most procurement agents would like to be innovative but, in my opinion, I would say that many are not – even some of the senior executives – again because it conflicts with the current set of targets the business lay at the door of most CPO’s.
A few years ago I was working with a global bank on a procurement strategy and transformation program and they decided that they wanted to be more innovative. The answer they came up with was to hire a small (and expensive!) team of “funky west coast buyers” and dropped them into the organisation…it lasted nine months!
My point here is that buyers need to be trained and coached in the methods of supplier collaboration and development whereby they obtain the skills to develop supplier eco-systems or their portfolio. In addition they also need to be measured and compensated for their work in this area based on the value delivered to the organisation as discussed previously. I would challenge the amount of training that is provided to procurement staff on, (for example), value engineering and analysis, which could be invaluable in developing these programs in, say, the manufacturing sector.
This certainly will not happen overnight and for all members of the team, hence the CPO needs to understand what part of the procurement spend portfolio is appropriate for this activity and align the most relevant team members to this with the associated tools at their disposal.
This brings me to the third area, technology. There is a proliferation of e-sourcing solutions now available in the market ranging from broad enterprise approaches to “best of breed”/ niche/ cloud based/on demand based solutions. I am not going to attempt to discuss the merits of either approach in this paper but my view is that if the procurement team is moving to an innovation agenda for certain areas of spend then the ability to use market leading tools will, most definitely, be vital in succeeding in this from both the supplier and internal customer viewpoint.
At this point in time, I am seeing limited investment in procurement innovation tools. I do believe however that there will be a proliferation of them in the future. A great example of what I am suggesting is provided by the Market Dojo team where part of their “e-sourcing on demand suite” focuses on an innovation and collaboration solution.
In this environment either the buyer or supplier organisation can initiate an idea that is shared, tracked, evaluated and eventually approved by all of the stakeholders within both organisations without any use of email! Once an idea is approved it is then integrated into the sourcing methodology.
I do not see any conflict here with the current sourcing activities of leading edge companies. What I do see is neither investment nor penetration in these innovation solutions in most organisations, which in my view is attributed to investment budgets being focussed on the higher priorities of the CPO agenda.
Technology obviously underpins sourcing processes, and many organisations now adopt some type of structured methodology to manage the end-to-end source to pay processes supported by tools and templates.
However my argument here is that the majority of these processes are designed to find savings, get the money through negotiations and keep the savings through via a benefits capture process.
This is obviously essential to the operation of the procurement team, but, where there is a need and an appetite to move to a more TCO/value based innovative approach, (as discussed earlier), there is little room in most of the procurement processes to cater for this.
I am going to be slightly controversial here by saying that the vast majority of bidding and tendering is still about price – if it wasn’t then why tender? This is a little extreme but, in my opinion, many tendering processes can become “tick in the box” exercises to judge if a supplier is innovative. The public sector is making attempts to improve this via OJEU pre- market engagement, but it is still in its infancy.
I have seen little evidence of tender scoring documents being used where there is a comprehensive evaluation of the supplier’s ability to be truly innovative – which in turn stifles the decision. In addition if buyers are not trained in procurement innovation management, as discussed earlier, then how are they in a position to fully evaluate a potential innovative supply partner.
The final dimension is the impact on stakeholders – there is a major communication, relationship and change management challenge here if a procurement agent wishes to bring procurement innovation to the business.
I firmly believe that most CPO’s (including myself a few years ago) spend the majority of their time – up to 80% in my opinion – justifying their existence and costs to the rest of the business and have less time working to improve the development of their suppliers.
The common theme of many procurement speeches for the past 10 years is around how procurement can get a seat at the top table and provide broader commercial service.
This is a very sound ambition but on the other side of the fence, stakeholders are requesting more “value add” from their procurement organisations but at the same time are only concerned with cost reduction, or “more for less” which in turn drives most CPO agendas! This is a “downward procurement value spiral” which massively slaps in the face of a procurement innovation agenda.
My view of how to resolve this conflict is to build a strong enough relationship with the key stakeholders who have a true appetite to introduce innovation from suppliers into their business / department. The relationship needs to be strong enough to battle through the cost reduction/”more for less agenda” and into longer term benefits for the enterprise based on value based business cases.
The final twist here, however, is that once this concept is agreed by these stakeholders then procurement has to be in a position to deliver the program! The buck stops here guys, and if the CPO does not have the people, processes and tools in place to manage such a program then the result can be catastrophic in terms of credibility.
A completely separate argument, outside of the CPO agenda, is that is there a cultural dimension here as well? It is obvious that Japan, for example embraces procurement innovation more than some of us elsewhere! Hence are we in the west capable of doing this properly?
My conclusions are as follows; done right, procurement innovation programs can be extremely valuable to companies and drive true shareholder value improvement and market differentiation. In turn this places the procurement team in the strategic centre of the organisation providing a commercial value added service to the group. In order to make this happen the majority of CPO agendas need to broaden away from the current KPI’s for certain scenarios to cater for true innovation from some of the supply base.
But as they say in the movies…..be careful what you wish for!!!!!