Most CEO’s and CFO’s could only guess about how much their company spends on goods and services, and certainly could not express this in terms of meaningful supply market facing spend categories.

The reason for this is that it is not a requirement for financial statements or accounts, despite most companies spending between 30 – 80% of their turnover on externally sourced goods and services.

Why is this important?

Because if 30 – 80% of your turnover is managed by external suppliers, how well do you know them?

• Do they understand your needs and how well do they meet them?
• Can you trust them to act in your company’s best interest?
• Do they see you as a favoured customer or a customer to exploit?
• What risk do they expose your company to and how well is that risk managed?

Most organizations surprisingly still know very little about their suppliers and allocate inadequate resources, to manage both how they select them in the first place and subsequently manage their performance as a strategic resource. With this background, it is no wonder that most CPO’s have still to address the attention deficit of their CEO.

To do this, the CPO must ensure there is a strong link between procurement strategy and the overall business strategy. By focusing on their company’s unique key business priorities such as:

• Cost-down and value-add activities in order to maximize their business impact
• Meeting the expectations of the investment community by maximising shareholder value
• Integrating with critical business drivers, such as those linked to growth, return on capital and margin improvement

Despite procurements progress and increasing recognition in recent years it can still be amazingly difficult for CPO’s to secure the understanding and commitment to procurements value proposition among the company’s executive management. So here are some guidelines for CPO’s to effectively engage with their CEO:

1. Strategy and Alignment with the Business

Closely align procurement with the key business drivers. There has to be a clearly recognised value connection with procurements activities and its contribution to top-line revenue growth. Such drivers include:

• brand-building (Coca-Cola),
• product leadership (Apple),
• market growth (LG),
• reputation (IKEA)
• and exciting its customers  (Nintendo).

To establish this alignment requires CPO’s to demonstrate:

a) Leadership Branding

Procurement can be perceived either as a passive observer, a participant or a leader. The most effective CPO’s develop a leadership brand orientated towards their company’s priorities, to help overcome the perception of procurement as a single strategy function.

The CPO must engage with key stakeholders, win their trust and build influential relationships. By listening to the business stakeholders and understanding their key priorities and concerns the CPO can develop a leadership brand that supports the values and motivations of the business. Then by listing  each element of the company’s stated mission and corporate objectives and detailing procurements activities that support these, the CPO can set challenging objectives and develop a communication strategy to educate and inform others and to
report results.

b) Engagement and integration with the business

Expanding the scope of spend under management remains a top priority for most CPO’s together with ensuring the timely involvement of procurement in key business decisions. Internal marketing and persuasive selling are therefore critically important in getting the business truly engaged with procurement. CPO’s must ensure the business:

• Allocates appropriate resources to participate in procurement programs
• See’s procurement as a business process rather than a project
• Collaborates with procurement and shares information freely
• Recognises that the nature of procurement benefits delivered will change over time

c) Ability to speak the language of the board

Procurement must learn to talk the same language as the board and other  senior executives of the company. The challenge for procurement is to sell its value proposition in such a way that directly enables the company to compete more effectively. Procurement must, therefore, produce benefits that flow to both  the top and bottom line, and then express these benefits in such a way that translates in the lexicon of the business. If it doesn’t, then why should key stakeholders take procurement seriously?

Too often, procurement reports its cost savings in “monies saved”. Reporting these savings in terms of key company performance indicators is likely to be much  more effective and welcomed by the functional heads.

This strategic alignment with the business requires CPO’s to develop stakeholder strategies that move from stakeholder management towards stakeholder collaboration. CEO’s can support this collaboration through the business planning process.

When functional heads define their objectives, they should do so collaboratively by involving stakeholders from other functions to agree program timings, resources and appropriate metrics. Such an approach should ensure alignment when reporting performance outputs to the CEO.

2. Focus on Metrics that Matter

At the core of procurements engagement and integration with the broader corporate goals, is a requirement for measuring its performance through metrics that are valued by the business.

Broadening procurements performance measures to respond directly to the CEO’s priorities beyond cost reduction involves developing strategies that accelerate and promote the creation of value for customers. Cost management is still an important component, but it also requires a concentrated focus on contribution to growth, innovation, faster times to market, and continuous quality improvement, etc.

Procurements management reports and presentations can then build upon this wider portfolio of metrics to more fully communicate the range of initiatives that are producing both the expected cost savings and value creation activities.

3. Risk Management

Risk management is a core competency for procurement in managing the company’s engagement in external markets. CPO’s must therefore, ensure procurement has the skills, policies and processes required to evaluate and manage these risks:

a) No Alarms and No Surprises

The management of risk, and how well you are preparing your peers and your CEO for the impact that activities in external markets will have on your business is critical.

CPO’s need to develop an effective reporting and performance management system, to adequately capture and document results, processes and other strategic priorities under their responsibility for reporting to the CEO. In this way, fewer alarm bells will ring, and surprises avoided.

b) Mirror the company model on CSR

Particularly with the examples of failures in corporate standards in recent times supply management has become a key measure of corporate performance related to CSR due to:

• Increased general awareness from the public and investors
• Issues such as sustainability, human rights and social and environmental impact
• Increased, media interest
• Activist highlighting poor working conditions as well as turning their attention to other corporate purchasing practices

The key task is to develop a broad risk management program that effectively controls its companies unique risk profile and mirrors the expectations set by the CEO for the business as a whole.

4. Talent Management

The morale, commitment and development of people, have to be a top priority for all CPO’s, as without the right people in place investments in processes and technology will not succeed. Having a pool of highly capable talent with the knowledge, skills and stature to win support and to contribute at the highest level is critical. Without it the CEO and other key executives are unlikely to treat procurement seriously.

5. Supplier Management

If your Suppliers are as critical, a strategic resource as procurement often say’s, what have they contributed lately?

CPO’s must look beyond forecasts savings from strategic sourcing and capture the value following the implementation of the deal. Suppliers are a key resource for tapping into further cost savings, process improvements and innovation. The CPO must, therefore, be a champion for “supply chain management”, and promote the benefits of collaboration with the company’s key suppliers.

Conclusion

CPO’s must demonstrate leadership and the ability to add value and have a major influence on the growth agenda. Improvements in procurement must be much more than just incremental cost savings. They must also include value added initiatives operational efficiencies they contribute in support of the broader business objectives.

The CPO will need to develop many tools and strategies to win the respect and support of other key executive stakeholders  and will need to be supported by a team of highly talented people. The CPO’s role is not an easy engagement in a steady state environment. The norm these days is for CPO’s to be designing and implementing transformation programs to improve the business impact of procurement in their company.

Successfully executing this task is the CPO’s means of rising-up the CEO’s agenda.

Nuff said …