As the credit crisis evolves into the new normal, credit has become tighter and one outcome investors and regulators will almost certainly demand is more transparency into the strategy and crucially, the underlying operating and financial performance of companies.
Investors are increasingly aware of the impact that procurement and the supply chain can have on overall company performance in supporting growth, managing risk and increasing earnings and are therefore looking for company executives to demonstrate how they are addressing these issues in their business plans.
With CPO’s such as Siemens, Barbara Kux, DP DHL’s Dr Hugo Eckseler and Carlesbergs Bengt Erlandsson leading the way, is it time for more CPO’s to follow in their footsteps and should they go further still?
The goal of successful investor relations is to maximise the share price by developing relationships between the organisation and the investment community that are based on credibility, consistency and trust. Toyota will no doubt be planning how to best restore these qualities with the media and capital markets alike in the wake of their current crisis.
So, in today’s economy where uncertainty is greater than ever, there will be an even greater demand to satisfy the transparency requirements of the investment community. This is likely to mean:
- There will be more demand for pro-activity and responsiveness to investors
- The growing power and influence of investors will put pressure on companies to manage their investor relations efforts more effectively
- The more credible the information presented, the more confident the investment community, due to reduced exposure to risks
Investors will penalise those companies they perceive as:
- presenting poor quality of information by driving up the cost of capital in the form of a higher risk premium, reducing the company’s share price
- having poor investor relations, corporate governance and communications who threaten shareholder value
- failing to execute credible strategies in key business performance areas
Investors will pay a premium for:
- proactive investor relations
- open communications with organized factual materials in a presentable format
- demonstrated expertise in executing key areas impacting overall company performance
The problem with many IR departments are not dissimilar to that of many procurement functions 15 years or so ago. They are focused on transactional and compliance task rather than value creation. I would argue there is a case for investors to be regarded as strategic suppliers, suppliers of capital, and managed upon proven supplier relationship management principals to become the “customer of choice”.
Procurement has made great strides in becoming both efficient and effective in recent years and is skilled and accustomed to managing relationships. Whilst this may seem a little ambitious for many, there is a growing trend for more involvement with capital markets by procurement.
So what does this mean for the CEO and CFO?
Well, if your organisations purchases represent more than 50% of your total cost base then you can be certain that the investment community will regard procurement as a core competency in your organisation. In recent years the capability to effectively manage input cost volatility, extended more complex supply chains, supply shortages and risk of supply chain disruption have proved to be key performance differentiators between companies competing in the same sector. Further, the ability to capture innovation from external suppliers has also proved to be a key differentiator.
For the CEO and CFO they must ask themselves if their organisation has world class capabilities to manage these performance differentiators and how do they compare against competitors in these areas?
For investors, procurement is likely to be regarded as a key business process, fundamental to operational excellence. Those organisations that demonstrate committed resources, equipped with the required skills, capable of executing well planned strategies in procurement and supply chain are likely to appear more attractive investment propositions than those who’s resources are fragmented and lack decisive strategies. The existence of a CPO with clear responsibility to drive procurement and supply chain strategy is a clear performance outcome indicator.
The CPO on Capital markets Day:
The CPO must ensure they understand fully the objective of the investor relations strategy. Is it to manage existing investors, attract new investors or to control damage? Either way, communication is key so the CPO must spell out clear messages for what investors want to know to help them make better, more informed investment decisions. The CPO also needs to elaborate on the strategy designed to achieve its procurement objectives and how this is aligned with the corporate strategy. Key issues are likely to include:
d) Critical success factors
2. Procurement Strategy
a) Organisation design
b) Governance and alignment
c) Building capability
e) Enabling technologies
3. Procurement Challenges
a) Internal & External
b) Input cost management
c) Risk Management
4. Management Quality
a) Management credibility
b) Management’s ability to generate sustained value
5. Performance Management
d) Benefits capture
The benefit of the CPO’s presence in investor relations can only be fully realised when firstly, it is clearly identified how procurement secures competitive advantage, and secondly, how it plans and executes it’s strategies as a strategic management function. When this is done procurement fulfills four essential IR roles:
- Ensure that the investment community has a timely and accurate picture of the company’s supply side activities
- Help the investment community comprehend how supply markets impact senior management’s strategic decisions and activities
- Delivering shareholder value by maximising opportunities and minimising risk in supply markets
- Support senior management in making strategic decisions based on valuable feedback from the supply markets
The supply chain is the engine for company growth. So given the highly competitive environment in which companies must compete for the supply of investment funds, adding the CPO to your Investor Relations team could prove critical in distinguishing yourself from the pack of other organisations.
The CPO must be capable of translating procurement and supply chain activities into meaningful metrics such as EBITDA, Cash Flows and EPS etc and demonstrate how they support expansion into new markets, managing supply chain risk, and leading the organisation’s corporate social responsibility agendas.
Encouragingly, we are now seeing Brave CPO’s at many leading organisations taking up the challenge.
Nuff said …