The Move from Direct to Indirect CPO
The chief procurement officer (CPO) could be characterized as a high-risk role with short tenure potential where success is based more on cultural alignment than on the technical attributes of knowing procurement strategies. What contributes to this risk? How can the risk be avoided? One of the core issues can be lack of cultural and business alignment between the CPO organization and the company’s business units (BUs). Many times this is evidenced by CPOs that have moved from the direct to the indirect side of the business. Is moving a CPO from direct to the indirect side too risky?
The difference between direct and indirect CPO roles
The CPO role and procurement organization have long been a core function for manufacturing companies with focus on direct materials. In these organizations, the CPO has direct alignment with the manufacturing BUs – and thus has a focused and similar set of relationships and expectations to maintain. The procurement role here is typically to source quality parts, commodities and services at the best price while ensuring delivery timeframes. Process methodologies, such as Six Sigma, are commonly employed. Many processes and controls are in place, both automated and manual, thus minimizing non-controlled spend. There is not a significant amount of additional influencing internally the CPO needs to do.
More recently, the broader impacts of procurement have become understood – indirect spend is large and can be influenced. Many companies are now laying out high expectations and performance metrics for it. This is a large step from the prior role of transactional procurement which was to process requests, POs and payments. The expectations and results from procurement prior were neither highly impactful nor visible in this type of role. The newer CPO roles are more senior positions and are tied to financial metrics such as spend managed, transaction costs of source-to-pay (S2P), and the IT costs for running the procurement organization. There are also expectations on cost reduction and savings.
The challenge of handling multiple stakeholder alignments
One of the challenges for the CPO to achieve these goals is to effectively manage multiple stakeholder alignments and relationships with diverse personalities and objectives. This is essential for the CPO, because success depends on the cooperation of multiple business units. In many cases these BUs have operated under their own procurement direction and any potential changes are perceived to be an impact on their authority. CPO’s efforts to develop the best procurement approaches including IT, process changes and procedures will fail without effective change management. The CPO has to demonstrate alignment and build partnerships to be successful. Unfortunately this doesn’t happen often enough.
With the increased focus on indirect spend and the demand for experienced leadership, many CPOs have been moved to this role from the direct side of the organization. In most cases these are seasoned individuals who have demonstrated success in the direct environment and may have also supported some indirect materials (many times as a secondary focus). Many of these CPOs attempt to employ the same process rigor, methodologies, controls and communication styles that were used in supporting the direct side. Most who try this approach find it does not work well, as the internal business unit cultures are different from the direct environment and require a customer or partner type of relationship development.
Requisites of a successful transition from direct to indirect CPO
Are the risks are too high in moving a CPO from the direct side to the indirect side? Where does one look to find CPO leadership talent from if excluding the direct side (is there enough out there?) As the expectations are increasing on indirect CPO world – is the legacy indirect talent ready to engage more as a partner?
A successful transition requires understanding key differences in managing direct and indirect procurement. Understanding and appreciating the roles of various stakeholders is essential.
Understanding the breadth of personalities in the indirect side
There is an array of personalities in the indirect side including the IT/CIO organization, marketing operations, HR operations, sales, facilities, service centers and general administration. Too often a CPO may not understand the breadth of personalities involved or the localized authority that some of these organizations can employ, thus making any change or new spend influence difficult.
Understanding the two categories of indirect procurement management
Indirect procurement management can fall into two categories – goods and services primarily “owned” by a BU (such as IT or marketing) or those used by many but owned by none (such as office supplies and temp labor). Each of these, and their sub-categories, needs a unique relationship and business approach. This is different than on the direct side of procurement. The CPO needs to prioritize where to focus and find allies, where procurement influence is accepted, and where quick wins can be demonstrated easily. The CPO that pushes too hard to “mandate” or force a process will find that they are continually on the outside and being viewed as a disruption by the business unit instead of as an effective partner.
Cultural clashes a major cause of change in CPO leadership
There are success stories of CPOs who have made the move from the direct side to the indirect or service industries. However there are more examples demonstrating the cultural failures of treating the indirect side with a similar approach. Many organizations realize this cultural clash quickly and thus change leadership in the CPO role. This change or restart frequently makes the next CPO face a more difficult start as they need to overcome their predecessor’s legacy. Many of these problems can be avoided by recognizing and appreciating the differences between direct and indirect procurement from the outset.
A good understanding of the key differences in managing direct and indirect procurement is an essential qualification for a CPO moving to indirect procurement. GEP’s procurement transformation services help CPOs develop and implement effective indirect procurement strategies by optimizing their people, processes and technology.