Procurement Services. white paper. Top ten challenges facing CPOs today. Indy Ghosh VP, Business Development, Marketing and Advisor Relations

Transcription

1 Procurement Services white paper Top ten challenges facing CPOs today Indy Ghosh VP, Business Development, Marketing and Advisor Relations

2 1 Heading Xchanging

3 Introduction As 2012 draws to a close, it is five years since a small mortgage lender in the UK, Northern Rock, became the first victim in what would become a long list of once-great financial institutions that were brought to their knees. The list of victims would ultimately include Bear Stearns, Lehman Brothers, AIG, Citigroup and Wachovia in the US, among others. However, despite half a decade having elapsed since that time when the entire global financial system was on the precipice of oblivion, strong signs of recovery are few and far between. Business the world over is concerned with stubborn unemployment figures in the US, the inability of the Eurozone to shake off the debt crisis, slowing growth in the BRIC economies and continued negative growth in the UK. Any thoughts that the world economy might bounce back from the credit crunch within a year or two are dead in the water. The good days of bumper profits, high margins and free-spending are over business needs to change. The good days of bumper profits, high margins and free-spending are over business needs to change. Given a scarcity of customers, increasing competition from overseas and raw material prices that continue to creep upwards, executives are looking at ways to reduce the cost base without reducing quality and to retain or increase margins in the face of falling demand. Inevitably, the Chief Procurement Officer (CPO) is an easy target. Successfully addressing the sourcing and procurement of indirect products and services can contribute a material amount to achieving those executive goals of managing cost and protecting margins Xchanging 1

4 Solving the CPO s struggles The challenges faced by CPOs In the spotlight, life as a CPO can be tough. Here is a summary of ten key challenges we consistently hear from procurement executives during our engagements: 1. Spend creep and cost containment Managing a budget is often a challenging task. For CPOs, they need to have a strong team across the end-to-end sourcing and procurement process to ensure costs are contained. Without a dedicated team to run a quality sourcing event, requirements are often not accurately captured or scrutinized and money is wasted on unnecessarily high-specification products and services. Without a dedicated team at the other end of the source-to-manage process, to manage supplier adherence to contract, scope creep becomes an issue. Finally, without the people, process or technology to measure and track current spend, there is an overspend lag, meaning that by the time anyone notices spend is going over-budget, it is too late. 2. Visibility of realized savings A common complaint among CPOs is that savings that have been negotiated or forecast mean nothing to their CFO. They care about savings that have been realized and assert that pressure on the CPO. Not only do they want savings to be realized, they want them to be measured and tracked to the P&L, aligning sourcing successes to business outcomes such as earnings per share, working capital and operating profit. In the same way a marketing professional measures how many hits their website gets after their latest commercial aired so they can validate its success, a CPO needs to know how much has been purchased off their new contract so their success can be measured. Only when real savings can be measured and audited can the sourcing and procurement function truly become a fundamental part of the finance team s annual budget planning process. 3. Compliance to contracts An all-too-often overlooked responsibility of the sourcing and procurement function is to ensure compliance to contracts. CPOs know the importance, but ensuring that this message is delivered to the rest of the business, never mind that it is acted upon, is never easy. A most frustrating discovery for a sourcing professional is that the contract they sourced and implemented being ignored in favor of another supplier that is delivering less value than the chosen supplier. As well as the direct forfeiture of savings, CPOs know they are also losing potential volume-based incentives from the preferred supplier and diluting their buying power in the market. 4. Leveraging technology effectively As with everything in the world today, technology is crucial to best practice sourcing and procurement and the majority of CPOs we speak to appreciate this. Sourcing methodologies have been greatly enhanced in the last decade by developments in sourcing and procurement technology such as in the areas of spend analytics, esourcing, contract management software, sourcing document workflow (e-signature and online approval), supplier management (interactive SLA / scorecard dashboards), spot-buy and tail-end spend management (automation / reverse auction), savings tracking, budget planning and more. Collectively, these tools allow for greater efficiency, improved processes, better visibility, detailed audit, more accurate tracking and measurement of savings. This trend will only continue. The challenge faced by the CPO is finding the up-front capital to invest in these technologies and justifying the increased cost to better enable cost reduction Xchanging

5 Solving the CPO s struggles 5. Effective utilization of sourcing Our next CPO challenge is simply that they want their sourcing and procurement function to be utilized more and recognized as a value-generating shared resource by the enterprise. There is nothing more frustrating to them than having a well-oiled process, a team with deep sourcing expertise and world-class technology, only to find rogue sourcing occurring about the business. Almost the same is to be involved only at the last minute to negotiate the final contract once a supplier has been all-but selected. A CPO needs the authority and support from other executives to mandate the use of the sourcing and procurement function by the entire enterprise. In the same way that the Google algorithm evolves and improves every time you enter a new search, a sourcing operation will actually improve with higher utilization as greater spend volume, more market information, better collaboration and increased benchmark data take effect. 6. Lack of capital investment Rightly or wrongly, the sourcing and procurement function tends to not receive the same level of strategic exposure as other shared services, such as Finance, IT or HR. As sourcing and procurement professionals, we believe that this domain should be elevated to a position of strategic importance within all organizations, with sourcing success being linked to business outcomes and possibly making the boardroom agenda. At the very least, we expect the investment in this area to be counter-cyclical to the organization s requirement to reduce the cost base. What we find is that there is often a counter-intuitive tendency to under-resource the sourcing and procurement department during times of financial contraction. We often speak with CPOs who have been assigned ambitious savings targets but lack the budget to invest in the skilled professionals required to deliver against those targets and uplift spend under procurement influence within each business unit and functional area. 7. Inability to manage suppliers effectively A best-in-class sourcing operation does not just focus on sourcing excellence; it will concentrate on ensuring there is compliance in the business to contracts and preferred suppliers and, key to this point, they will manage those suppliers to drive performance improvement. Suppliers should have reviews on at least a quarterly basis, measuring qualitative and quantitative performance against SLAs and KPIs and working with the supplier in a collaborative nature to find innovative ways to continuously improve performance and drive value. In mission-critical areas there is an importance to manage supplier risk through this process also, ensuring that business continuity is not impacted by supplier under- or non-performance. From our conversations with CPOs, it seems like this is important element of success can often be neglected because they lack the appropriately skilled resource. 8. Insufficiently skilled resources Sometimes we speak with a CPO who has a good strategic vision of where they want to take their operation, but they have inherited a team that lacks the deep sourcing or industry expertise they need to execute such a vision. This doesn t mean their team is not talented or experienced, but often this talent has been channeled the wrong way and results in experience that might not be applicable to strategic sourcing. For example, a person may have been operating in a reactive nature, negotiating contract extensions with incumbent suppliers, fire-fighting as supplier performance issues crop up and catering to ad hoc spot buy requests. Consequently, the CPO does not have the adequate skill-level in their organization to elevate the sourcing and procurement function to the next level of maturity Xchanging 3

6 Solving the CPO s struggles 9. Applying sustainable sourcing practices With myriad mandatory regulations from authorities and implicit, or even explicit, pressure from key stakeholder groups, such as shareholders, customers and communities, executives are increasingly operating in an environment where they must adhere to socially responsible sourcing practices. This often means ensuring they are socially inclusive, engaging with organizations for the handicapped, awarding a prescribed amount of business to companies of minority-ownership, supporting small and / or local businesses and complying with fair trade regulations. Failure in any of these areas can have ramifications ranging from reputational damage to financial penalty and, as the person responsible for all supplier relationships, this pressure falls on the shoulders of the CPO. We know from our engagements that complying to these regulations and expectations poses a challenge to the CPO, who might not have the required experience within their organization. 10. Delivering market intelligence Market knowledge, awareness of industry trends and ability to benchmark suppliers are all key to running a successful sourcing organization. But when an organization only has one contract in any given area of spend and when they will only source that contract once every two or three years (if that), how can they be expected to be an expert in that commodity? The answer is that they can t and they aren t. We constantly see the topic of market intelligence emerging in discussions with CPOs because, when they want to run a sourcing initiative, they have to effectively start from scratch and learn the business drivers in that market, who the suppliers are, what the offerings are or the consumption models and, most importantly, how much should they expect to pay. How can Xchanging help the CPO? Although the catalog of challenges contained within this paper does not promise to be comprehensive, it is a good summary of the landscape facing many CPOs today. Rewind twenty years and many organizations were faced with similar challenges relating to provision of other back-office processes, such as IT, HR and Finance & Accounting. The answer then was outsourcing. So when we encounter a CPO who talks of the challenges they face each day, we talk about a possible risk-free sourcing and procurement transformation that will turn a cost-center into a value-generator. But this isn t IT, is a common response to that type of statement. Sourcing and procurement is a more integral part of an organization s operations, so the argument goes, requiring a higher-touch engagement. It can t just be lifted and shifted to a third-party provider the way that a finance back-office function can, for example. So we ask whether the fundamentals drivers for outsourcing access to technology and expert resource can be realized without the perceived risk, cost and upheaval associated with outsourcing. At Xchanging, we feel like we have the answer; we call it Co-Sourcing, or collaborative sourcing. So when we encounter a CPO who talks of the challenges they face each day, we talk about a possible risk-free sourcing and procurement transformation that will turn a cost-center into a value-generator Xchanging

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