Spend Matters welcomes this guest post from Conrad Smith, senior director of global procurement at Adobe.
A few years ago, a consultant introduced me to a strategy tool that changed the way I do business. The strategy we developed became the “business hierarchy of procurement needs.”
You may already be familiar with psychologist Abraham Maslow’s traditional hierarchy of needs. In Maslow’s model, basic health and physical safety comprise the essential day-to-day building blocks at the base of the pyramid — and the fulfillment of those needs creates the stability necessary for the understanding and fulfillment of “higher” needs, such as belonging and self-esteem, all the way up to self-actualization at the pyramid’s peak.
In the same way, in a company with attentive leadership, a procurement organization that does a great job with basic transaction management is likely to be asked to help at higher tiers of procurement value. These upper levels of sourcing, supplier management and even overall company strategy offer opportunities for procurement to save the business far more time and money, by strengthening relationships and streamlining supply chains from the strategic level on down.
Here’s how skillful fulfillment of tasks at the base of the pyramid creates opportunities for procurement to help out on higher levels — and how the impact of high-level improvement filters all the way back down to every low-level transaction.
Building from the Base
Gene Richter, a pioneer of modern procurement, developed what he called the “procurement organization maturity curve,” demonstrating the steps procurement should take to become maximally useful to the business — from the initial stage of negotiating breakthrough contracts, to a second stage of controlling and leveraging major supply sources, all the way up to the final stage, in which procurement becomes actively involved in the company’s design process.
Like Richter’s curve, the procurement pyramid demonstrates that procurement can only reach the higher levels by proving one’s worth at the fundamental level of basic transactions.
Many businesses initially hire procurement specialists to help them handle basic needs like transaction management. In many small and midsized companies, the primary function of the procurement department is simply to “buy stuff, pay invoices, clean up the mess and stay out of the way.” In fact, in the minds of some executives, this set of skills constitutes procurement’s entire reason for being.
But as the procurement specialist’s deft handling of small, day-to-day transactions drives increased value and trust with the business’s leadership, opportunities for more high-level procurement functions — such as sourcing, category expertise and supplier management — will likely begin to open up.
When handled with the necessary skill, functions like these can enable procurement to create far more significant value, from even higher up in the organization, opening up even more impactful opportunities for value creation at the highest levels of strategic planning.
When an organization’s leadership realizes this, it can begin to leverage higher value levels of procurement.
Savings from the Top
I once worked for a company that had launched a multi-year initiative to cut millions of dollars in costs. To that end, we in procurement were tasked with finding the cheapest possible deals on every product we ordered. While our sharpest team members dug into deals, our transactional operations continued to suffer and delay the speed of business.
Although our procurement team eventually did achieve “our” savings goal, I always felt that we lost focus on our internal customers. They complained endlessly about the slowness of procurement — while all the while, we were celebrating our cost savings.
This disconnect created a perception that procurement was out of touch with the needs of the business, a belief that ultimately eroded the trust necessary for enable procurement to be involved in the most important deals and plans. During this time, one of our internal IT architects actually told me that IT never delivered new functionality to our team because it felt we didn’t know what we needed. Scary!
If we had only realized how critical the transitions were to our internal customers, we could have started at the foundation, built trust and then received more invitations to collaborate and add value further up the value pyramid.
The Opportunity of Interplay
In fact, most of the opportunity for value creation is wrapped up in the top of the pyramid. At the individual transaction level, a procurement expert may be able to save 5% — perhaps as high as 10%. But if that expert works with designers and suppliers from the beginning of a new initiative, it’s possible to design products and engineer supply chains in integrative ways, to achieve much greater efficiency and higher cost savings. When procurement gets involved at the strategic level, new products can be designed around the most cost-effective materials and processes, right from the start, and company-wide initiatives can leverage strong vendor relationships that lower costs and speed up acquisition at every level of the organization.
There’s a clear interplay here: The only way to get to the top levels of the pyramid is to establish trust and a solid track record at the lower levels, like transaction management and supplier negotiation. Procurement organizations who handle those basics well, and build trust and confidence in their department, will create more value opportunities higher up in the pyramid — which will, in turn, create savings and drive value all the way back down throughout the most basic transactions.
When procurement finally builds enough trust to become involved in conversations about the business’s goals, and the ways the organization aims to achieve them, they’re in a position not only to save on costs but also to actively help everyone do their job more easily and effectively. It all starts with listening and understanding our customers: What’s most critical for them?
Once we’re able deliver on the basics that keep the business running, then we’ll be invited to the table to participate earlier and further up the pyramid.