By Alex Klein, COO at Efficio Consulting
Ongoing economic pressure over the last year has highlighted the need for greater business efficiency – particularly when it comes to business spend. Not only has urgent cost-cutting risen high up on the C-Suite agenda, but it has also now become increasingly evident that an effective procurement function could indeed hold the keys to future profitability.
According to Efficio’s experts and authors of recently released PROFIT FROM PROCUREMENT, companies that break down the silos between departments and effectively optimise the procurement function can expect to add 30% to their bottom line.
But how exactly do businesses get from where they are today to a place where procurement is optimised to deliver significant benefits to the business year-on-year? For the Chief Procurement Officer (CPO), Chief Financial Officer (CFO), and Chief Executive Officer (CEO), once procurement’s profit potential has been realised, optimisation and investment are a no-brainer. Knowing where to begin, however, can be enough to stop the C-Suite in its tracks.
In order to successfully embark on a roadmap to profitability, a concrete and realistic plan must be put in place – one that has clear objectives and actions agreed amongst all involved. Unfortunately, this is not something that can be achieved overnight. As with anything worth having, this involves a program of gradual transformation and is likely to take no less than 18 months to really drive an impact. With a long lead time to success, the CPO must ensure that the program makes the desired splash – proving its value and keeping internal stakeholders engaged throughout. This requires a plan that will have a high impact, high visibility, cross-functionality, and be fully resourced. Only then can procurement’s profit potential be truly unleashed.
The first step – talk to people, or rather listen
When embarking on a procurement transformation mission, getting to know the key stakeholders involved will be a crucial first step to getting the project off the ground. Whether that be the CEO, CFO, functional heads, or business unit heads – the CPO must take the time to listen and understand their expectations, needs, and requirements before a vision for the road ahead can be formed.
Suppliers are often forgotten in this mix, yet they are equally as crucial. Questions need to be asked, such as – what improvement options do they see? How could they help us to reduce cost? And how can we help them in return? What each stakeholder wants from procurement, and where they see value will likely differ, so it is important to have all cards on the table upfront. Not only should these considerations sit at the heart of your plan, but they can actually assist in making it a reality.
Establishing a vision
Next up, and at the top of the pyramid that comprises your plan, needs to be a clear vision. Whilst the outcome of your efforts may seem pre-defined – such as, to cut costs and release profitability – the scope of this can span as wide or as narrow as you’d like. Now is the time to consider how far you want to stretch this outcome, and the only way to determine this is to ask yourself, “what does the next level of procurement look like in my organisation”?
This procurement vision, of course needs to link back to the businesses overall corporate strategy. For example, if the business is looking towards aggressive growth, procurement should help facilitate this by aiming for scalability. If the strategy is to rapidly digitise, procurement can play a part in digitising the supply chain.
As part of this vision, the CPO must also consider their desired role and remit. For example, how do you see procurement’s way of working changing? How do you see your procurement people interacting with the rest of the business? What do you want your suppliers to say about you? Once defined, a clear ambition can keep Procurement Transformation on track and aligned. Without it, and with every stakeholder having varying needs, the desired outcome can quickly become lost.
Drawing up a functional improvement plan
So, you now have a solid vision – you’ve spent time listening to your internal customers – surely, you’re now ready to focus on getting there? Not so fast – you now need to think about the various facets of the function, including the organisation, people, and processes to establish where you currently stand. This will act as a baseline, in which a roadmap can then be developed and will require set objectives along the way to keep the journey on track. “House of Procurement tools” can be particularly effective here – these frameworks break down the procurement function in terms of strategy, organisation, people, processes, and systems – marking them against a benchmark of bad, average, and good. By plotting against this framework, you can tackle transformation in chunks, setting concreate objectives as a sub-factor level.
Once the ‘where we are today’ is established, the ambition can be added to other end of the roadmap alongside the activities needed to get there. The CPO should review which activities matter, what people are doing currently, and whether these tasks having a meaningful impact. This may require upgrading the capability of the team, reorganising the current structure, or investment in additional strategic procurement resources.
Remember, this plan must be granular, and it must be actionable. You can have great ambition, but it is no good unless you know exactly how you are going to get there. As previously mentioned, transformation will not happen overnight, so make sure to break down your roadmap into smaller chunks. Rather than one end goal 18 months down the line, ensure you have milestones to aim for after 3 months, 6 months, and so on that contribute to the overall picture. Assembling such a plan is no easy task, but it is the very foundation needed for procurement teams to kick-start transformation.
So, what comes next? Buy in from the rest of the business of course. After all, a plan can only be successful once it has board level approval and sufficient investment. In part two of this series, Alex Klein will explore the stages that follow, including: developing a savings execution plan, building a business case for procurement investment, and ensuring program structure and governance.
Alex Klein is author of PROFIT FROM PROCUREMENT: How to add 30% to Your Bottom Line by Breaking Down Silos with Efficio colleagues Simon Whatson and Jose Oliveira, published in 2021 by Wiley.