These days procurement should no longer be regarded as a mere purchasing centre to save costs.
Many companies have already started appreciating the additional value that procurement can bring and are shifting the role of chief procurement officers, and their teams, away from traditional tasks to having a more strategic say. The fallout from Covid-19 will be powering this expansion further.
Although the nature of procurement has evolved dramatically in the past five to 10 years, this may only be the tip of the iceberg. We believe that if procurement takes on board more priority market differentiators, they could take a front seat role in driving greater competitiveness.
To understand how procurement could have a greater influence on the bottom line, we recently surveyed more than a hundred CPOs from a broad range of industries and geographies. As their roles mature from transactional to more innovative, we wanted to recognise how they could take their remits’ traditional strengths, or assets, and apply these more creatively.
In particular, we looked at building stronger relationships, capturing innovation, monetising purchasing power, and championing data-based decisions. Our survey also revealed what percentage of businesses were already applying these tactics, or at least how many have them on their roadmap.
Deepen your relationships
Businesses today are facing more urgent and tougher challenges than ever before. Understanding the changing marketplace is critical, therefore having regular interaction and dialogue with suppliers results in improved market visibility. But what if firms could take this further still through deepening supplier relationships?
Tactically, this could help to develop the company’s topline revenue streams, such as opening up collaboration opportunities around co-market products and services or turning suppliers themselves into clients. Our survey revealed that 75% of CPOs have launched initiatives that contribute to topline revenue, and 65% already have this on their roadmap.
One example is a data and records management firm that expanded its relationship with its facility management supplier by providing the company with its own document and storage solutions. The two organisations then partnered with an energy efficiency company on an award-winning energy-saving solution that is now marketed to the facility manager’s clients. The data and record company is now a reseller of the same software packages that it uses in its own business.
Our survey also showed that much work remains to be done in this area, with 70% of companies revealing that they are operating without a roadmap to support the development of these strategic external partnerships.
Equally, there are advantages for firms when procurement deepens internal partnerships, serving as the “glue” within complex corporate ecosystems. Procurement functions are increasingly involved in internal consulting work that calls for their technical and business expertise, cross-functional understanding of operations, and wealth of data and analytics.
In some companies, they act as an internal coach on issues relating to costs and efficiency, helping their internal customers get a better understanding of spend and value. They can also lead transformation and change management initiatives.
Our survey showed that 81% of CPOs believed that the internal consulting aspect of their role would grow in the future, although only 15% have built this into their roadmap.
Drive smarter innovation
Negotiating intricate contract terms, particularly involving exclusivity and intellectual property, puts procurement in a privileged position of understanding the internal innovation activities of their suppliers. The advantage of this is that procurement can develop more informed views on emerging technologies and business models.
Procurement can capitalise on these insights when making decisions about backing promising newcomers and startups that do not initially pass standard financial track record checks. This ensures that contract terms are supportive of innovation yet protect the company’s financial investment and risk.
Here, procurement could use their skills to quantify and develop specific key performance indicators and incentives to boost the innovation capture from suppliers. One global carmaker has been doing this by implementing incentives for buyers to sign co-innovation contracts with suppliers. Likewise, a leading name in consumer-packaged goods we spoke to has set up a multimillion US dollar fund to develop supplier proof of concepts each year.
Innovation is a high priority for CPOs, with 77% expecting their role to focus more on innovation in the next five to seven years. In contrast, only 20% have built this into their roadmap.
Use buying power expertise
In the past few decades procurement teams have developed finely-tuned skills and judgement in negotiation and purchasing tactics. This allows them to add a lot of value when it comes to defining a more efficient approach to selling products and services.
Consequently, the procurement department itself as the source of expertise and services could be marketed to other companies, including competitors. Likewise, pricing and revenue-side negotiations have the potential for deeper involvement by procurement to leverage negotiation excellence practices and secure consistent company coverage to raw material costs and factors such as currency fluctuations.
More than half (55%) of CPOs expect a significant evolution in their role on monetising procurement services, although only 21% have built a roadmap around this.
We have seen good examples of how this could work in practice. One European hospitality company has turned its procurement operation into an e-commerce platform that offers the full spectrum of hospitality products, from food and beverage to technology to construction and maintenance. The platform brings together 3,500 suppliers and boasts more than 5,000 clients with an annual buying power of €24bn.
Champion data-driven decisions
Procurement departments sit on top of a mountain of data covering costs, demand, and other key performance indicators (KPIs). When combining this with procurement’s expertise in data management and analysis, it puts them in an ideal position to be at the frontline of core decision making.
Our survey showed that 85% of CPOs are expecting to see a significant or major evolution of their role on providing performance visibility in the next few years, although only 15% have built a robust roadmap to address this.
In practice, one US bank has been leveraging their “spend studio solution” in all business interactions. This gives them a comprehensive and consistent approach across the company for mapping spend, measuring operational performance, and improving their competitive position.
The future of procurement
Procurement has the potential to set the vision for the whole organisation. Well-executed programmes of change can make your purchasing organisation an active participant in building and executing your company’s strategy.
No other function has procurement’s unique mix of market knowledge, internal and external relationships, insight into innovation, negotiation skills, and access to useful data. These assets are simply too valuable to waste, and if companies choose not to leverage them, they risk that their competitors can gain a competitive edge.
CPOs must take the lead to identify, test, and elevate their new ideas up to chief executive officers. It is now up to them to leverage these assets, set the right priorities, and quickly build a roadmap against them. Procurement has the potential to play a prominent role in your transformation journey and could well be your best differentiator.
☛ Thibault Rochet is principal in the Operations practice and Patrick Daoust is partner in the Operations and Retail and Consumer Goods practices at consultants Oliver Wyman.