Read This to Justify Procurement Investment!

There aren’t too many pieces of research that one can use to truly justify investment for procurement at the level that redefines how a business operates. But if Proxima’s latest report, Corporate Virtualization – A global study of cost externalization and its implications on profitability, inspires even a single-digit percentage of those executives who happen to have the document placed in front of them, I suspect that some companies might be altered at the core. My colleague Peter Smith summarizes the focus of the research and some of the findings in a post from earlier today:

[The report] seeks to understand the cost base of organizations across the globe, by analysing the cost base of almost 2,000 businesses across 58 countries for 2009,10 and 11. The results are just as startling as they were for the UK report. Across the sample of 2,000 firms, internal staff costs accounted for (on average) 12.5% of revenues. By contrast, third party costs represented 69.9%.  And that’s up from 66% in 2009.

Based on these findings, Peter opines:

This data should be superb ammunition for anyone arguing the importance of procurement activity, and suppliers, to their organisation. That’s five times as much expenditure going to third parties as being spent on staff. Yet how much discussion does each topic get at Board level? Who is more senior – the CPO or the HR Director?

A fair question to be sure. But I suspect most financial and operational executives would sooner think about internal hiring and talent management than the new potential opportunities and issues the report raises (e.g., “manage your suppliers like you do internal areas of the company.”)

Are most procurement organizations we work with and talk to set up to do this? Not on your life. They’re living in a world much like HR was back when it was the personnel department, albeit having made small strides that might ultimately form the basis of a transformational marathon (or at least a 5K). But perhaps this report will truly begin to change things. Stay tuned as we analyze some of its findings and observations in more detail and hopefully begin to build the case for procurement investment based on a new view into organizational and shareholder impact.

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