What Boards Don’t Know About Procurement Could Cost Them

procurementIt’s time for CPOs to take a seat at the big table. With the burgeoning of Big Data buzz into wholesale digital transformation, IT and security leaders moved to the center of strategy and innovation. Now that mastery of data analytics and process automation are critical to staying in the game across virtually every industry, the same dynamic is reshaping the role of Procurement leaders. Boards had to play catch up when it came to learning about cybersecurity risks, and now they are doing the same with Procurement, third party risk management and supply chain optimization.

Balancing Risks and Rewards

When it comes to managing the multifaceted risks introduced by rapid cycles of innovation, economic uncertainty, extended supply chains, geopolitical unrest, and global competition, boards are starting to realize it’s an all-hands-on-deck kind of challenge. Procurement leaders are uniquely positioned to effectively identify and mitigate potential exposure, loss, and damage that arise from shifting regulations, cyber crime threats, data breaches, and reliance on complex global supply chains. They’re equally well placed to drive value and growth across the enterprise through meaningful cost reductions, process automation, third party oversight, supply chain relationship management, and optimized cash flow.

As they strive to systematize an agile balancing act between the risks and rewards of digital transformation, Procurement teams will play an increasingly vital role in innovation by supporting new product introductions (NPI), leveraging the innovation potential of supply chain partners. Through strategic collaboration with suppliers and partners, Procurement can enhance and extend the IP and critical skills so crucial to surviving and thriving in tight, dynamic global markets. Historically, the aerospace and automotive industries have succeeded with this approach, but now it is spreading across industries.

“Strong Procurement teams should be looked upon to balance multiple key objectives.”

Prioritizing Third Party Management

The rising dependence on third parties enables the production of increasingly complex products (everything is smart and connected), the extension of services, and the customization that customers demand. But reliance on third parties also reduces control and increases risk. In the social media era, the impact of negative events comes faster and costs more. Government agencies and the public are more focused on data breaches (especially after Equifax), product failures (Takata air bags, Galaxy Note 7, Abbott pacemakers, processed food recalls), and corporate malfeasance. Accordingly, regulators have turned the spotlight on risk management with a growing emphasis on third parties. In turn, boards must empower their Procurement teams to leverage their existing capabilities, relationships, and insights into more intelligent and integrated governance, risk management and compliance programs.

Procurement’s Juggling Act

Strong Procurement teams should be looked upon to balance multiple key objectives, including:

  • Managing costs, ensuring negotiated discounts are realized
  • Nurturing supplier relationships to unleash innovation for new products and services
  • Managing risk by maintaining 360 degree visibility of suppliers and markets, leveraging both internal and external data
  • Ensuring compliance with evolving regulations and security frameworks, including GDPR, NIST, HITECH, HIPAA, NY DFS, and many more
  • Improving cash flow by understanding cash objectives, negotiating appropriate payment terms into contracts and establishing processes/systems that provide AP with visibility and ability to pay in support of company objectives

The 2018 CPO Agenda report from the Hackett Group outlines the challenges that Procurement departments face as they strive to keep all these balls in the air and grow into their more central strategic role. For starters, they are trying to do more with less: on average, their operating budgets have been reduced by 0.3% in 2018. They are also facing critical talent shortages, which impacts their ability to manage risks like cyber security (topping the CPOs’ list of concerns), intensified competition, and disruptive innovators. High quality master data and unification of data across systems are essential to the successful implementation of new procurement technologies that involve AI to support more informed decisions.

The Hackett Group report highlights that the percentage of Procurement organizations with a formal strategy for digital transformation doubled from last year’s survey (32 to 66 percent). Those that indicated they had the necessary resources in place for managing the changes also went up, from 25 to 46 percent. While the trajectory is promising, there is a gap between aspiration and implementation — boards should work to close it by supporting investments in key capabilities, including human resources, comprehensive performance measurements, and extracting more value from suppliers.

Recommendations for the Board

Specifically, boards should be mindful of some new recommendations when it comes to empowering Procurement. Avoid setting MBOs based solely or primarily on cost. Likewise, don’t set arbitrary cost targets assuming progressive year-over-year declines. Failing to account for market dynamics and demanding incessant price reductions can damage supplier relationships, lead to shifting spend to less engaged and innovative suppliers and ultimately ties Procurement’s hands.

On the proactive side, be sure to include the CPO in board discussions on company strategy; an informed CPO can better rally the function to support company goals. Establish meaningful objectives: innovation targets based on number of product innovations or revenue impact; cash flow and WCM targets; profitability targets that allow the flexibility to develop an optimal mix of cost reduction and revenue generation; and realistic risk limits.