July 12, 2022 | Procurement Strategy
Despite their lofty ambitions to expand procurement's remit into wider areas such as sustainability and growth, most new chief procurement officers (CPOs) arrive in their new roles with a big savings agenda.
Could it be that the admirable efforts to focus on social good may be a luxury of those procurement teams with scale, status, and large budgets?
As a new CPO, it’s exciting to be the catalyst at the heart of a large spend base. But how do you pick the right flavor for your savings transformation?
One option is to bang the advocacy drum around procurement's value proposition beyond cost savings. Seek to educate the board on the excellent risk mitigation, ESG and sustainability and other value add areas that the procurement team touches.
But this can take a long time and procurement’s reputation as a blunt instrument may remain well-entrenched.
The other option is to knuckle down and revert to being the traditional ‘type’. As a seasoned CPO coming into the organization to deliver this target, it’s easy to assume that a successful program in your last organization can be replicated in your new role. But there’s a danger.
There are four flavors of savings transformation, and their appropriateness is determined by two key parameters:
If the target is loosely defined in terms of what counts, this gives procurement teams and their budget-holders more scope to apply a range of levers to the spend base to extract value and savings. Where the only saving that is recognized is a budget cut or a direct profit and loss impact, a focus on operating expenses and ‘same-for-less’ tactics will apply and more time will be spent baselining, tracking, and gaining sign-off for saves.
If it’s an enterprise-wide imperative to reduce costs, with all leaders delegated a target that procurement enables and facilitates, it provides a collaborative environment to explore creative routes to achieving the goal.
Alternatively, if the target is held centrally by procurement, a more sales-oriented mindset is required to persuade and cajole budget-holders to play the game.
Based on these two dimensions, the four potential approaches to savings transformation can be identified. Beware of applying the wrong approach by misjudging the circumstances.
Source: Graham Copeland
Procurement in this environment has a tricky balancing act here. Its mandate is limited, and it is constrained to where the value it brings will be recognized. Here, lining up with ‘friendly’ functional leaders and building momentum is the best initial approach combined with a program of stakeholder relationship building where resistance is likely. Constructively challenging specifications, supplier choices, highlighting spend patterns and the benefits of behaving federally/in a common way by using facts and data is key.
Where procurement is enabled and rewarded to focus on a range of value creation levers, category management really comes to the fore. And by applying the cross-functional ethos and pipeline and long-term planning approach, stakeholder relationships can be built successfully despite not sharing a savings goal. The healthy tension of supporting a budget holder with non-savings-related project A can be traded skillfully with savings-oriented project B in a prioritization discussion if relationships are strong enough.
This is the ideal place for an incoming CPO: backing and support from the powerful. Plus, an ability for contributions to be recognized whichever value lever is pulled.
Here, procurement can lead or be active on decision-making forums that fundamentally change the cost base of the business, look at ‘make-vs.-buy’ decisions and challenge sacred cows. Adopting strategic business partnering principles may work in large spend areas.
Here the emphasis will be on tactical negotiations, RFPs getting ‘same for less’. Typically, it’s a hit-squad approach to drive prices down in short order. Speed and gut will trump data sometimes in this quadrant. Some demand challenges may be possible and recognized but here, the focus is price and budget cuts, auctions, supplier switching, and offering long-term incentives to suppliers to provide savings now. It can be an exhilarating ride when the C-Suite is behind this approach. But with a narrow recognition of savings, it’s a blunt instrument. There are downside risks related to damage to supplier and middle-management relationships, but this has been a well-trodden path by many CPOs to make their names and reinforce the profession’s cost-cutting reputation.