IBM CPO Survey – good procurement boosts profit margins, it’s official

We started our series covering the IBM CPO Study last week, (download it here) and in our last piece we explained how organisations were categorised based on three key indicators of procurement performance basic operations, influence within their organisations and innovation.

The next piece of analysis in the report is truly one that every procurement professional needs to have in their arsenal, ready for the next time you have to justify procurement effort, investment or focus. It’s actually somewhat played down a little in the report – I think I would have had it in large luminous headlines at the top of every page!

This is the analysis of corporate performance, that suggests a clear correlation between the organisations considered to be procurement leaders and their share price performance. Now I've been talking about shareholder value and the need for procurement to get more aligned to this absolutely fundamental measure at various presentations recently. And this analysis really suggests a clear link between high-performing procurement organisations and that value.

“The truly impressive procurement performances came from the 15 percent of organizations (168) in our study that combined capability, influence and innovation. They offer the most fertile ground for identifying the procurement improvements and practices that can lead to success”.

 So how do the best organisations compare to others when it comes to profitability – certainly one key measure of shareholder value?

 "CPOs whose organizations rose to the challenge of the downturn were often provided the opportunity to further contribute to even more strategic corporate issues, such as brand development and new product/service introduction. In part, this insight helps explain the most important link between procurement and competitive advantage in our study: Top performing procurement organizations reported average enterprise profit margins of 7.12 percent, compared to 6.19 percent for all respondents and just 5.83 percent for low performing organizations".

 That suggests the best organisations in terms of procurement are making around 1% higher margins than their competition. That may not sound much, but any CEO who was offered an extra percentage point in margin would bite your arm off. Look at it another way – all else being equal, that is a 17% greater profit and likely shareholder value (7% margin rather than 6%).

Now, if we combine this with the findings from the Proxima report recently, which identified that on average organisations spend 70% of their revenues with third parties, we can see the basis of a very powerful argument for procurement attention.

The argument is simple – “procurement accounts for a very significant element of our cost base; and if you do it properly, it will generate shareholder value significantly greater than that achieved by competitors who don't take it so seriously”.

My goodness, that sounds like powerful stuff! Any CPO worth her or his salt should be able to leverage that into some serious Board level attention and, we would hope, investment in tools, resource and capability.

We'll come back to some more detailed findings in the CPO study shortly, but it is well worth downloading it here - free on registration.*

*We would be grateful,by the way, if you could provide your real details when you register - we don't bombard you with Viagra adverts, and I don't want the hassle of having to block certain emails, but it is good to see who is engaging with us. Yes, we mean you, Mr or Mrs "adfdsf fdadf"!)

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Voices (5)

  1. Dan:

    This is just common sense isn’t it?

    £1m extra turnover, assuming a 10% profit margin, would lead to £100k extra profit.

    £1m procurement savings lead to…. £1m extra profit.

    You can’t argue with the maths.

    Well, you can when you realise that those procurement savings aren’t going to lead to extra profit because they only exist on paper and aren’t actually going to result in any extra cash (“this is what we could have spent[in the worst case scenario], this is what we actually spent, aren’t we great?”)

  2. Trevor Black:

    When I began my CIPS studies over 30 years ago I bought a book which I think was called Purchasing and Supply Management (or something similar). In the introduction was a graph which illustrated how cost reductions added to profits. I used this graph for years when selling the benefits of effective purchasing (as it was then known). To paraphrase Basil Fawlty are these people reading the b******* obvious!

  3. bitter and twisted:

    Its a nice story with a conclusion we want to beiieve (except the IBM can help bits) but the evidence isn’t really there.

  4. Dave Orr:

    Given IBM’s dismal failures in the controversial joint venture South West One in Somerset to accurately forecast and hit the procurement savings target they made in 2007 (£192M forecast, £13m saved to date) then I find their survey somewhat IRONIC!

    Where was the “combined capability, influence and innovation” in South West One that IBM identify as key skills for procurement success?

    These are the very skills our naïve and trusting Councillors thought they would get from IBM leaders and managers when they signed up in 2007 to join South West One (75% owned by IBM).

    Last night (22/10/2013), the smallest South West One partner Taunton Deane District Council, will be scrutinising a proposal to bring back in-house many services that were outsourced to South West One in 2007. The paper is here:

    With Taunton Deane being just 5% of South West One and after 6 years of IBM “efficiency” through shared services and SAP ERP, they state:

    “The on-going revenue implications of returning these services are approximately cost neutral i.e. the current cost of service delivery roughly equals the Unitary Charge (contract) payments we are making.”

    What an inditement of the fad for big shared services in outsourced joint ventures in Local Government!

    Birmingham (with Capita) are surely next up for making (bad) joint venture outsourced news…..

    By 2015/16, will it be “odds on” that Barnet (also with Capita) will become the next joint venture candidate to follow the evidenced trends for shortfall or failure in Bucks, Suffolk, Liverpool, Somerset etc.

    What does this say about the state of auditing and regulation in our Councils….well Spend Matters and Peter have an answer for that too:

  5. life:

    Would be nice to believe but correlation is not causation, sadly….

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