The CFO's View of Procurement. Same Page, Different Language

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1 Same Page, Different Language November 2007

2 Page 2 Executive Summary The Chief Financial Officer (CFO) and the Chief Procurement Officer (CPO) share a common goal - improving the bottom line, but the approach that each take to achieve it, and as importantly, the language that each use differ greatly. While the average CFO is keenly aware of the strides the procurement department has taken in recent years to make itself more strategic to the enterprise, less than 20% view procurement's impact on overall competitiveness as very positive. The broad procurement transformation, that began a decade ago and has been chronicled by Aberdeen, still has a long way to go. Best-in-Class Performance This Aberdeen research effort captured over 500 survey responses of which slightly more than 170 came from the CFO or finance department. The set of responses from finance professionals was captured in October and November of 2007 and are the focus of this report. Aberdeen distinguished Best-in-Class enterprises by the percentage of enterprise spend under management. Best-in-Class enterprises in this study are notable for the level of engagement between procurement and finance and their rigorous approach to savings measurement and capture. They also book 24% more of the procurement department s projected savings rates. Competitive Maturity Assessment Survey results show that the firms enjoying Best-in-Class performance shared several common characteristics including their approach to calculating and implementing procurement savings. The Best-in-Class claim an advantage in the area of core procurement skill-sets and knowledge as viewed by the CFO including negotiation and contracting skills, supply base knowledge, and overall process innovation. Required Actions In addition to the specific recommendations in Chapter Three of this report, Best-in-Class performance starts with alignment and dialogue between procurement and finance. These brothers in arms should develop a platform that promotes open communication, visibility, and precise alignment on goals and objectives. Additionally, Aberdeen recommends that CPOs: 1. Move away from soft measures like cost avoidance that cannot be quantified in an absolutely unambiguous way 2. Hold itself accountable to a savings benefit that measures total cost over total cost 3. Above all else, procurement executives reading this report should challenge the current view that it is procurement s responsibility to negotiate budget reductions with the line of business Once savings have been achieved, it should not fall to procurement to establish how this real benefit should be allocated across the enterprise, but rather to the line of business and / or finance. Three Tiers of Savings Identified: Beyond simple identification of a savings opportunity, this tier of savings is characterized by sourcing activity and negotiated pricing, where savings potential is attainable. Implemented (or realized): After the contract has been executed, enterprises begin to realize the potential of previously identified savings opportunities. This tier is characterized by purchasing, receiving, invoicing, and settlement activity and ensured by contract compliance and strong end-user adoption. Booked: Once savings have been realized, they can be recognized or booked in operating budgets and other enterprise-level financial statements. This tier is characterized by close involvement with finance, procurement, and the budget holder.

3 Page 3 Table of Contents Executive Summary...2 Best-in-Class Performance...2 Competitive Maturity Assessment...2 Required Actions...2 Chapter One: Benchmarking the Best-in-Class...5 Not Your Father's CFO...5 Competitive Impact...5 Meander to the Bottom Line...6 How to Make Friends and Influence Finance...7 Credibility Gap...7 Lingua Procurement...8 The Maturity Class Framework...10 The Best-in-Class PACE Model...10 Best-in-Class Strategies...11 Chapter Two: Benchmarking Requirements for Success...12 Competitive Assessment...12 Capabilities and Enablers...13 Process...14 Organization...14 Knowledge Management...14 Technology...14 Performance Management...15 Chapter Three: Required Actions...16 CPO and CFO Joint Steps to Success...16 CFO Steps to Success...16 CPO Steps to Success...17 Appendix A: Research Methodology...18 Appendix B: Related Aberdeen Research...20 Figures Figure 1: What is Procurement's Impact on Competitiveness?...5 Figure 2: Savings Performance...6 Figure 3: Finance Department Involvement with Procurement...8 Figure 4: The CFO's Top Pressures...9 Figure 5: Procurement Actions to Assist the CFO...9 Tables Table 1: The CFO's View of Procurement Performance...10 Table 2: The Best-in-Class PACE Framework...10 Table 3: The Competitive Framework through the CFO's Eyes...13

4 Page 4 Table 4: Top 10 Procurement KPIs...15 Table 5: The PACE Framework Key...18 Table 6: The Competitive Framework Key...19 Table 7: The Relationship Between PACE and the Competitive Framework...19

5 Page 5 Chapter One: Benchmarking the Best-in-Class Not Your Father's CFO At the financial and operational hub of the enterprise sits its Chief Financial Officer (CFO), the person responsible for the finance and accounting operations of the enterprise. But for many enterprises, the role of CFO has moved well beyond traditional controller and treasury duties; strategic planning as well as people, client, and operational management are some of the now common responsibilities for a "renaissance" CFO. On the operations side, CFOs now regularly manage HR and 30% now have the Chief Procurement Officer (CPO) as a direct report. Yet, despite what one presumes would be easy access via a direct reporting relationship coupled with a widely shared view by 73% of CFOs that procurement has become more strategic over the last three years, getting on the CFO's agenda remains a significant challenge for most CPOs. With an everexpanding role, CFOs must choose their battles and guard their time wisely leaving CPOs to vie with their functional peers for the time and mindshare of the CFO. Fast Facts 73% of CFOs view procurement as more strategic over the past three years 37% of CFOs feel procurement has no impact or worse, a negative impact on competition, more than twice the view procurement has of itself Competitive Impact Since less than 20% of CFOs view procurement as having a very positive impact on competitiveness (Figure 1), it is not surprising that the financeprocurement dialogue is not frequent. Conversely, with 37% of CFO's judging procurement's impact on competitiveness to be neutral or negative, it is incumbent upon every CPO, no matter the reporting relationship, to acknowledge the likelihood of this view and set a deliberate course to change it. Figure 1: What is Procurement's Impact on Competitiveness? 17% 3% 9% 25% Very negative Slightly negative None Slightly positive Very positive "Our job is just to deliver the savings. We focus on price over price savings. We tell the business here s the savings. If the business wants to take their savings and use it to grow the business, we let finance decide how to track it down and measure it. 46% ~ CPO Fortune 50 Company

6 Page 6 Meander to the Bottom Line Fueled in large part by the claims of many e-sourcing solution providers and strategic sourcing consultancies during the internet boom, that they had "saved" their clients billions upon billions of dollars, it is too often taken for granted that the bids "identified" and / or "awarded" at the end of an e- sourcing event or strategic sourcing project are quickly implemented and that 100% of these savings estimates hit an enterprise's net income or "straight to the bottom line." The reality is far from that (Figure 2). Figure 2: Savings Performance 2.5% 11.9% 9.4% 8.7% Savings Leakage Lost or Reclaimed "What traditionally happens is procurement reduces costs and the business spends the benefit elsewhere." ~ Managing Director, Finance Multimedia Technology Conglomerate 3.2% Identified Implemented Booked As reported in the January 2007 Advanced Sourcing and Negotiation Benchmark Report, procurement by its own admission fails to implement 21% of the savings identified from its sourcing efforts. Of the 11.9% in average identified savings, procurement believes that only 9.4% is implemented. Based on an average sourcing event value of over $4.4 million, this means that more than $100,000 of potential savings is lost during the average sourcing project. By the time finance enters the equation to account for the booked savings, this number plummets to 3.2% or only 27% of what procurement and sourcing teams initially identified. The causes of this dramatic leakage are numerous and challenging - at times financial, at times operational, at times political, the inability to claw-back savings from an operating budget and impact, not solely the fault of procurement, has nevertheless had a dire effect on the view that CFOs have of procurement and their overall impact. The traditional view places blame for the gap between implemented and booked savings squarely on the shoulders of procurement. But this is a significant and fundamental issue that must be revisited and challenged. Procurement s role should be to deliver savings to the enterprise. If a line of business chooses to deploy the savings to drive other goals that does not "The impact to the bottom line of each business operation? How do you measure it without an army of financial analysts? In our industry, we forecast benefit which may or may not be fully realized because of (1) compliance / leakage (2) changing the product mix (e.g. using a chemical that costs 20% more but yields a 40% net benefit in operations) (3) adjustments in sales which could increase or decrease the benefit." ~ Director Strategic Sourcing and Supply, International Forest Products Co.

7 Page 7 make implemented savings any less real. Just as it would be absurd to expect the head of a business unit or general manager to defer to procurement s judgment above all else on the management of its business and key initiatives in the next 12 months, it makes little sense to involve the CPO in a protracted discussion around how to reallocate savings. An average of 9.4% savings per sourcing initiative is a real and significant number - CPOs need to work to with their CFO to redefine the measure of success. How to Make Friends and Influence Finance "Ways to make people like you - Rule 5: Talk in terms of the other man's business." - Dale Carnegie, 1936 The language of "Business 101," of revenues and expenses, of profits and losses is generally understood by the average professional in an operating enterprise. Yet, as you drill down into specific functional areas, the language becomes intricate, specialized, and nuanced, foreign to the occasional visitor. The CFO must be able to translate functional performance into enterprise operating performance and financial statements. For procurement executives who are deeply focused on their own department's main operating metrics, measures like the "percentage of spend under management" or "purchase price variance" and different levels of "cost reductions" or compliance in the "source-to-settle" process, one challenge is to translate the department's operating performance into meaningful and usable information for the CFO. Since 52% of CPOs have a background in finance, this would appear to be a reasonable and straightforward objective, according to findings from the November 2006 CPO s Strategic Agenda: Managing People, Managing Spend benchmark report. And while some have suggested that a CPO should translate everything the group measures into strict enterprise-level financial terms, besides being extremely time consuming, this misses the larger point of having a collaborative relationship and only partially addresses the primary issue facing procurement in its relationship with finance today: trust and credibility. Credibility Gap Certainly the CPO must place the department's performance in context for the CFO, but the dialogue with finance should not require a CFA designation and a team of analysts anymore than a dialogue with HR should require a Ph.D in organizational behavior. The fundamental issue for the CPO today is that what should be defined as an enterprise-level performance gap (Figure 2) is viewed by the CFO as primarily a procurement credibility gap. In reality, the CFO should be more vested than the CPO in resolving this issue, and in many ways has a much greater ability to do so. One of the fundamental challenges to bridging the gap is the level of engagement that currently exists between the two functions. As seen in Figure 3 (where respondents could select more than one option and those "We have been working towards the development of clearer goals and joined (bonus) objectives to ensure that finance and procurement have the same incentives. Purchasing people don't tend to understand financials and finance people sometimes are too far away from the purchasing dynamics." ~ CFO, European-based Software Provider "We are working to improve cooperation between finance and procurement. More specifically, our controller forms the budgets for different planning cycles and we know that procurement is able to achieve better than budgeted prices through negotiations, volume discounts, etc. Where we have not been able to complete the cycle yet is to actually see the benefit by removing the excess funds from the individual budgets." ~ Efficiency Program Manager Mid-market Enterprise

8 Page 8 options registering below 6% are not shown), finance's level of involvement with procurement is generally tepid and ad hoc by nature with just 30% of finance departments offering dedicated support to procurement operations. While Aberdeen has chronicled numerous Best-in-Class case studies where procurement has had an extraordinary impact on the enterprise, the net effect is muted without solid financial stewardship. Figure 3: Finance Department Involvement with Procurement Budgeting/Ad Hoc Limited or no support Core member of cross-functional team Dedicated resources assigned to procurement 6% 8% 24% 57% "In some companies, the CPO reports to the CFO. For some strange reason, I have usually found this to be sub-optimal. Perhaps it's because both are support functions, and the alignment does not enhance integration of procurement activities into the business. The focus of the discussion tends only to be about money and savings, with little regard on how best to achieve this as a reliable, sustainable engine of growth and innovation. ~ Executive Director, Global Procurement, Fortune 50 Enterprise The degree of interaction between procurement and finance is an issue for both functions to address. Finance has a fiduciary responsibility to support procurement and procurement needs a strong partner in finance if it is going to achieve its objectives. Today's business environment makes these two groups natural allies, yet only 6% of enterprises have a dedicated finance resource assigned to procurement. Lingua Procurement CPOs should certainly be able to communicate their department's performance details in terms that the larger enterprise can understand and use, but they should not have to get there alone. CPOs track a series of KPIs (Table 1) that focus on savings and departmental operating efficiency. Some can be placed into strict enterprise financial terms, while others like spend under management serve as leading indicators of procurement performance and can not. The CFO and the finance department should be engaged in a series of review sessions to explain and refine procurement's performance metrics. This exercise will both rationalize and validate procurement's performance metrics and move the opportunity for collaboration significantly forward. "We are working to improve cooperation between finance and procurement. More specifically, our Controller forms the budgets for different planning cycles and we know that procurement is able to achieve better than budgeted prices through negotiations, volume discounts, etc. Where we have not been able to complete the cycle yet is to actually see the benefit by removing the excess funds from the individual budgets." ~ Efficiency Program Manager Mid-market Enterprise

9 Page 9 Figure 4: The CFO's Top Pressures Enterprise growth 56% Increase profits 50% Reduce operating expenses Maintain or improve margins 37% 37% Expand into new markets 31% CFOs, like the enterprises that employ them, desire growth (56%) and profitability (50%) above all else (Figure 4). However, only 46% (not shown) of CFOs feel that the procurement team has contributed to enterprise growth, while 57% (not shown) feel that procurement contributes to enterprise profitability. Procurement ranks higher when it comes to impacting the management of expenses (65%) and the maintenance of margins (67%). Figure 5: Procurement Actions to Assist the CFO Improve collaboration of procurement with business stakeholders 30% Increase procurement automation 26% Gather, analyze, and distribute spend data 22% Improve visibility into processes 20% Improve collaboration between finance and procurement 20% CFOs feel that the things procurement should do to help it achieve the broader goals are to build better relationships with the lines of business that it supports, improve the level of procurement automation, and develop a spend analysis program that includes distribution of the key output to all key stakeholders (Figure 5).

10 Page 10 The Maturity Class Framework Aberdeen distinguished Best-in-Class enterprises by a common key procurement measure: percentage of spend under the management (see side panel for definition). Table 1 summarizes the average performance of enterprises within the different maturity classes for this study. Table 1: The CFO's View of Procurement Performance Definition of Maturity Class Best-in-Class: Top 20% of aggregate performers Industry Average: Middle 50% of aggregate performers Laggard: Bottom 30% of aggregate performers Mean Class Performance More than 70% of enterprise spend is under management 30% to 70% of enterprise spend is under management Less than 30% of enterprise spend is under management Spend Under Management The classic measure of procurement s impact upon an enterprise is the percentage of non-payroll-related spend that falls under management of this group, what is commonly referred to as spend under management. Aberdeen research has shown that enterprises have been able to achieve a 5% to 20% cost savings for each new dollar of spend brought under management. The Best-in-Class PACE Model Aberdeen has shown that there is a clear relationship between the pressures companies identify and the actions they take, and their subsequent competitive performance. All participants should examine their prioritized Pressures, Actions, Capabilities, and Enablers (PACE) selections and determine whether there are valuable perspectives to be gleaned by comparison with the PACE priorities of Best-in-Class companies (Table 2). Table 2: The Best-in-Class PACE Framework CFO Pressures Procurement Actions Enterprise growth Increase procurement automation Benchmark procurement performance Procurement Capabilities Supplier negotiation and contract management Spend management Process efficiency and standardization Managing contract compliance to supplier agreements Procurement Enablers Spend Analysis E-Procurement Corporate Performance Management (CPM) for procurement Single or integrated budgeting and general ledger application Supplier performance measurement

11 Page 11 Best-in-Class Strategies The degree of technology utilization and automation play significant roles in the advantages that Best-in-Class organizations enjoy. But Best-in-Class enterprises demonstrate that spend analysis can be leveraged to greatly improve business performance when the right technologies are matched with efficient processes. Astutely, the CFO feels that spend analysis is a real key to the underlying ability of procurement to achieve its objectives that then ultimately roll into the enterprise's main objectives. Aberdeen Insight - Measure Twice, Save More While procurement departments can deliver much more than savings, it remains the yardstick by which most are measured - to paraphrase Vince Lombardi Savings isn t everything, it s the only thing. Despite this importance: 34% of enterprises have no formal process to measure the savings generated by procurement Another 36% calculate these measures on a case-by-case instance In the CFO s eyes, less than 10% of procurement departments do a great job managing (projecting, implementing, and tracking) its savings measurements The current gap between the high importance of savings measures and their accuracy must be closed. The CFO and CPO should work together to develop an enterprise-wide set of savings definitions, procedures to calculate savings, and standard timelines for savings reporting. Aberdeen recommends applying these standards to the three tiers of savings: Identified. Beyond simple identification of a savings opportunity, this tier of savings is characterized by sourcing activity and negotiated pricing, where savings potential is attainable. Implemented (or realized). After the contract has been executed, enterprises begin to realize the potential of previously identified savings opportunities. This tier is characterized by purchasing, receiving, invoicing and settlement activity, and ensured by contract compliance and strong end-user adoption. Booked. Once savings have been realized, they can be recognized or booked in operating budgets and other enterprise-level financial statements. This tier is characterized by close involvement with finance, procurement, and the budget holder

12 Page 12 Chapter Two: Benchmarking Requirements for Success Benefits from operational excellence within the procurement function are constrained without a strong partner in finance to validate and help bring the fruits of their labor to bear. Likewise, leading finance departments cannot reasonably stake a claim to their own operational excellence if they leave an important function like procurement to its own devices in the achievement of its main objectives. Case Study - The Value of Activity Reports The CFO of a Dow Component receives a weekly report that tracks all e- sourcing activity from the procurement department. "We are a metricsdriven company, so I track sourcing volume against budgeted spend. I believe that if all of our major contracts are being negotiated by our best people, good things will happen," the CFO told us. "I also get a quarterly savings report that tracks the status of the implementation and final results." The level of trust between the two was not an accident as this was the third company where the CPO and CFO worked together in similar roles. The company would not share annual sourcing activity or final results other than to say the aggregate impact on the net income of the company is over $100 million. Assuming a conservative 15 price-to-earnings (P/E) ratio would mean that this team has improved the market capitalization of the company by more than $1.5 billion. Fast Facts Best-in-Class enterprises book 24% more of procurement's projected savings Best-in-Class enterprises are 25% more likely to have a formal methodology to measure procurement savings Best-in-Class enterprises are five-times more likely to remove procurement savings from budgets Competitive Assessment The aggregated performance of surveyed companies determined whether they ranked as Best-in-Class, Industry Average, or Laggard. In addition to having common performance levels, each class also shared characteristics in five key categories: (1) process (the ability to track procurement savings rates in a standardized way across the enterprise); (2) organization (the level of collaboration between procurement and finance); (3) knowledge management (the CFO's view of procurement's knowledge management); (4) technology (the level of procurement automation and the usage of corporate performance management solutions); and (5) performance management (the percent of procurement savings that are booked and impact the bottom line). These characteristics (identified in Table 3) serve as a guideline for best practices, and correlate directly with Best-in-Class performance across the key metrics. "My weekly sourcing report is a single page yet, provides great detail. The real benefit to the report however, is the fact that the entire company knows I am tracking this activity and fully supporting my CPO." ~ CFO, Dow Jones Industrial Component

13 Page 13 Table 3: The Competitive Framework through the CFO's Eyes Process Organization Knowledge Technology Performance Best-in-Class Average Laggards Excellent / good process efficiency and standardization 60% 38% 36% Superior process innovation aptitude 30% 15% 15% Superior negotiation and contracting skills 70% 45% 29% Dedicated finance resource assigned to procurement 7% 6% 6% Superior general business acumen 53% 33% 38% Superior supply market knowledge 63% 34% 29% Strong technology acumen 34% 19% 14% Procurement related solutions currently in use: 61% spend analysis 57% e- procurement 57% CPM for procurement 54% supplier performance measurement 52% spend analysis 38% e- procurement 20% CPM for procurement 36% supplier performance measurement 43% spend analysis 38% e- procurement 29% CPM for procurement 35% supplier performance measurement Use formal methodology to calculate procurement savings 76% 71% 48% High accuracy of savings projections, budgeting, and tracking 17% 13% 0% "I bring two reports to our quarterly executive meetings. The first is a year-to-date report of implemented savings sorted by business unit and by function. The second is a spend report (again sorted by business unit and by function) that shows what my group is currently managing and what my group is not managing. This has been a great lever to engage more stakeholders." ~ CPO and VP of Print Services, Financial Services Industry, and Best-in-Class Performer Capabilities and Enablers Enterprises that place more spend under management typically experience a host of other advantages as it relates to cost savings, process efficiency, and the ability of procurement departments to deliver greater strategic value across the enterprise. Some of those advantages include:

14 Page 14 Process The Best-in-Class are focused on developing efficient processes that are standardized across the enterprise. These leaders understand the benefits of process rigor and how it can serve to optimize overall performance. Their effectiveness on baseline processes also serves as the foundation to build upon and innovate. Best-in-Class are twice as likely to possess an aptitude for process innovation. Organization While the Best-in-Class fare no better in garnering dedicated finance department support, they absolutely shine when it comes to their core skill sets in supplier negotiation and contract management as 70% are noted for their superiority in these areas. These skills are crucial. While changes in demand factor into the equation, the controllable part of this leakage is caused by a failure to: Capture the negotiated bid terms into the final contract Fully implement the category with the stakeholders Actively manage contract compliance Knowledge Management According to the November 2006 CPO s Strategic Agenda, Best-in-Class CPOs focus their efforts on hiring, training, and retaining their best people above other objectives. Many CPOs prefer to recruit their staff from other, non-procurement or supply chain-related posts. It stands to reason that the leading organizations have skilled procurement professionals who have a deep understanding of the supply markets (63%) they manage. These professionals also bring superior business (53%) and technical skills (34%) to the table. Technology Best-in-Class enterprises have armed their procurement departments with spend analysis solutions at a higher rate than their peers (61%). These solutions enable procurement to drive the identification of critical savings opportunities and empower them to deliver on these cost savings targets through key sourcing decisions and the enhanced ability to monitor compliance based on increased visibility into enterprise spend. Additionally e-procurement applications are one of the most effective ways to engage the enterprise end-user and place more spend under management as a majority of the Best-in-Class understand (57%). Until more recently, CPM solutions for procurement were non-existent, yet this type of application has significant traction with the Best-in-Class who have adopted them on more than two-times the basis. Certainly procurement solutions capture key elements of performance and efficiency but these often don't travel the last leg of the journey and avoid looking at the budgetary impact of savings.

15 Page 15 Performance Management What gets measured gets done and in the often confusing world of cost savings, reductions, and avoidance, having clearly defined metrics (that are standardized across the larger enterprise) is critical to procurement execution. Procurement savings only impact the bottom line of the enterprise when they are booked and budgets are changed. While the superior negotiating skills possessed by the Best-in-Class may play some role in their ability to book a significantly higher percentage of identified savings, the alignment of their processes with their technology and their general prioritization of this measure allow them to excel. A list of the top ten KPIs used by procurement is included in Table 4. Table 4: Top 10 Procurement KPIs KPI Negotiated cost reduction savings Implemented / realized cost reduction savings Percentage of total spend under management Cost avoidance Procurement ROI (savings / operating costs) Percentage of suppliers = 80% of spend Supplier performance (price, delivery, quality, service, etc.) Contract compliance Requisition, PO, or invoice transaction volume Subjective feedback (structured, survey-based) Aberdeen Insight - Pay for the Right Performance CFOs and CPOs have a great opportunity to transform their working relationship from infrequent and tactical to proactive and strategic. Fortunately, both leaders have much to gain in achieving this and by also developing a standard set of goals and objectives. But how their staff members engage, and the focus that each member of the group takes, will continue to reflect their individual compensation plans. To ensure proper alignment between the two departments, the CFO and CPO should work to develop a compensation plan that focuses each department or group on the set of agreed upon goals and objectives. For the procurement team, a new level of focus and accountability should translate into performance against the right metrics.

16 Page 16 Chapter Three: Required Actions Finance and procurement are natural allies in the battle for bottom-line growth. They share many similar goals and face many similar challenges; their efforts should therefore, be aligned and coordinated. Whether a company is trying to move its performance from Laggard to Industry Average, or Industry Average to Best-in-Class, the following actions will help spur the necessary performance improvements: CPO and CFO Joint Steps to Success Develop a common language with clearly defined metrics. Procurement does not need to provide everything it does in strict enterprise-level financial terms, to do so would be an exercise in futility. Procurement does need to help the CFO and the larger finance department understand how its goals and objectives map to the broader enterprise objectives. Together the two groups should work together to develop common language with a set of metrics with standard definitions (and methodologies for calculation) and promote them across the enterprise. Align departmental performance objectives and bonus plans. The clearest driver of employee behavior is compensation. Aligning the two groups performance goals will go a long way towards driving engagement and dialogue and develop a clear mechanism to assign accountability. CFO Steps to Success Assign dedicated resources to support the procurement department. Best-in-Class procurement departments are more than three-times as likely to significantly impact the overall competitiveness of the enterprise than their peers. Help your CPO make an impact and show your support by assigning resources to support their operations. Credit and reward procurement for cost reductions that are retained by the business. Enterprise budgets are the responsibility of the business and of finance. Change the view that the only value that procurement can deliver is through an impact to budgets. Procurement s job is to deliver the highest value supplier for a specific requirement, not set or reallocate budgets. A CPO s involvement in budgetary impact discussions can place them in potential conflict with their internal customer. This is not the intended consequence. The line of business should view procurement as a vital resource to help them achieve its objectives. This does not provide a blank check to procurement, which must still prove the savings through the clearly defined language. Recommendations Challenge the enterprise view that procurement should be measured on booked savings The CPO and CFO should develop a common language that is part finance and part procurement that includes clear and quantifiable metrics Align finance and procurement performance objectives and metrics "Our job is just to deliver the savings. We focus on price over price savings. We tell the business here s the savings. If the business wants to take their savings and use it to grow the business, that s their call. We let finance decide how to track it down and measure it. ~ CPO, Keynote Address 2007 CPO Summit

17 Page 17 Engage the line of business directly for budgetary reductions. Validate cost reductions that the procurement department delivers but remove procurement from budgetary discussions with the business; if booked savings are the main goal of the enterprise, establish the dialogue with the business stakeholders. Case Study - If You Build It, Engage Your Partners The Procurement IT group of a global chemical manufacturer spent 15 months building a savings tracking tool for its procurement organization to track the benefits of their sourcing efforts. The global rollout included a formal training plan and over the first 12 months, the organization changed each commodity manager's comp plans to include their performance as tracked in the tool. Procurement failed to engage finance in the development of the system or in the validation of the savings numbers (which were input directly by the commodity managers). Bonuses skyrocketed initially, but after a four week audit by finance, the system and process was determined to be 'seriously flawed' - the system was turned off the next quarter. Epilogue: A budget for a spend analysis tool that enabled robust reporting across the source-to-settle process was approved the following year. The implementation was led by a cross-functional team that included two finance members and a senior sponsor from each major line of business. CPO Steps to Success Trust starts with visibility and dialogue and ends with accountability. Engage your CFO directly and often; set regular meetings while ensuring that the dialogue is valuable to both parties. Demand accountability from your CFO and require it from your staff. Focus on the total cost of ownership. Year-over-year cost reductions lose some of their glimmer and significance if the total cost of a new contract is not incorporated in the overall analysis. This will be increasingly important as the impact of global sourcing can drive lower part, component, or material costs but can be associated with greater shipping and holding costs, as an example. Procurement should not be responsible for booked savings. Challenge the current view that it is procurement s responsibility to negotiate budget reductions with the line of business. Once savings have been achieved, it should not fall to procurement to establish how this very real benefit should be allocated across the enterprise, but rather, to the line of business and / or finance.

18 Page 18 Appendix A: Research Methodology Between October and November 2007, Aberdeen examined the use, the experiences, and the intentions of more than 170 finance executives across a wide range of industries. Aberdeen supplemented this online survey effort with telephone and online interviews with select survey respondents, gathering additional information on the view that the CFO and finance have of procurement. Responding enterprises included the following: Job title / function: All of the survey respondents work in the finance organization of their enterprise. Industry: High technology (17%), financial services (14%), and a broad distribution across 31other industries. Geography: The majority of respondents (66%) were from North America. Remaining respondents were from the EMEA (20%), and Asia-Pacific (14%). Company size: Twenty-four percent (24%) of respondents were from large enterprises (annual revenues above US $1 billion); 42% were from midsize enterprises (annual revenues between $50 million and $1 billion); and 34% of respondents were from small businesses (annual revenues of $50 million or less). Solution providers recognized as sponsors of this report were solicited after the fact and had no substantive influence on the direction of this report. Their sponsorship has made it possible for Aberdeen Group to make these findings available to readers at no charge. Study Focus Responding finance executives completed an online survey that included questions designed to determine how the CFO (and other finance executives) view their procurement organization including its: People Process Technology Performance Strengths Weaknesses Opportunities to improve The study aims to identify best practices for the working relationship between the CFO and CPO and provide a framework by which readers may assess their own management capabilities. Table 5: The PACE Framework Key Overview Aberdeen applies a methodology to benchmark research that evaluates the business pressures, actions, capabilities, and enablers (PACE) that indicate corporate behavior in specific business processes. These terms are defined as follows: Pressures external forces that impact an organization s market position, competitiveness, or business operations (e.g., economic, political and regulatory, technology, changing customer preferences, competitive) Actions the strategic approaches that an organization takes in response to industry pressures (e.g., align the corporate business model to leverage industry opportunities, such as product / service strategy, target markets, financial strategy, go-to-market, and sales strategy) Capabilities the business process competencies required to execute corporate strategy (e.g., skilled people, brand, market positioning, viable products / services, ecosystem partners, financing) Enablers the key functionality of technology solutions required to support the organization s enabling business practices (e.g., development platform, applications, network connectivity, user interface, training and support, partner interfaces, data cleansing, and management)

19 Page 19 Table 6: The Competitive Framework Key Overview The Aberdeen Competitive Framework defines enterprises as falling into one of the following three levels of practices and performance: Best-in-Class (20%) Practices that are the best currently being employed and are significantly superior to the Industry Average, and result in the top industry performance. Industry Average (50%) Practices that represent the average or norm, and result in average industry performance. Laggards (30%) Practices that are significantly behind the average of the industry, and result in below average performance. In the following categories: Process What is the scope of process standardization? What is the efficiency and effectiveness of this process? Organization How is your company currently organized to manage and optimize this particular process? Knowledge What visibility do you have into key data and intelligence required to manage this process? Technology What level of automation have you used to support this process? How is this automation integrated and aligned? Performance What do you measure? How frequently? What s your actual performance? Table 7: The Relationship Between PACE and the Competitive Framework PACE and the Competitive Framework How They Interact Aberdeen research indicates that companies that identify the most impactful pressures and take the most transformational and effective actions are most likely to achieve superior performance. The level of competitive performance that a company achieves is strongly determined by the PACE choices that they make and how well they execute those decisions.

20 Page 20 Appendix B: Related Aberdeen Research Related Aberdeen research that forms a companion or reference to this report include: Spend Analysis Benchmark, August 2007 The Advanced Sourcing and Negotiation Benchmark Report: The Art and Science of the Deal, January 2007 E-Payables Solution Selection Report, September 2007 Direct Materials Sourcing: Living in a Material World, May 2007 The CPO s Strategic Agenda: Managing People, Managing Spend, November 2006 The E-Procurement Benchmark Report, August 2006 Source to Settle: Compliance Clues for the CFO, October 2006 CFO's View: Getting More to the Bottom Line, September 2005 Information on these and any other Aberdeen publications can be found at Aberdeen s 2008 Global Supply Management Research Agenda is also available. Subscribe to the Global Supply Management RSS FEED at: Author: Andrew Bartolini, Vice President, Global Supply Management Research (andrew.bartolini@aberdeen.com) Founded in 1988, Aberdeen Group is the technology- driven research destination of choice for the global business executive. Aberdeen Group has 400,000 research members in over 36 countries around the world that both participate in and direct the most comprehensive technology-driven value chain research in the market. Through its continued fact-based research, benchmarking, and actionable analysis, Aberdeen Group offers global business and technology executives a unique mix of actionable research, KPIs, tools, and services. This document is the result of primary research performed by Aberdeen Group. Aberdeen Group's methodologies provides for objective fact based research and represent the best analysis available at the time of publication. Unless otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc. and may not be reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by Aberdeen Group, Inc. As a Harte-Hanks Company, Aberdeen plays a key role of putting content in context for the global direct and targeted marketing company. Aberdeen's analytical and independent view of the "customer optimization" process of Harte- Hanks (Information Opportunity Insight Engagement Interaction) extends the client value and accentuates the strategic role Harte-Hanks brings to the market. For additional information, visit Aberdeen or call (617) , or to learn more about Harte-Hanks, call (800) or go to