Proxima Report – Corporate Virtualization and the central role of suppliers in business (part 4)

In our previous post looking at the Proxima report "Corporate Virtualization  - A global study of cost externalization and its implications on profitability" we highlighted the need for procurement to communicate the scale and importance of this party spend to their Board and senior colleagues.  That has to be a key platform for strong procurement performance.

With the study showing that on average, 70% of revenues go out of the door to suppliers, the key issues then are around managing those suppliers to achieve your own organisational goals. We’re talking firms and people here who are often acting on your behalf – but they don’t work for you.  How do you motivate them? Where appropriate, how do you ensure they are aligned with your culture?  Make sure they understand your needs?

We can see the link here actually between the human resources function (providing over-arching  management of the internal resources  of the organisation) and procurement – in theory at least, doing the same for the external resources. But how many organisations look at it like that? (More on that topic to come soon)!

But the findings raise other issues about the future of procurement. The scope of what organisations are buying, included in that 70%, is ever growing. There is a fair chance it is more global than ever, with a wider spread of requirements, and covering complex services as well as goods.  A key question therefore is whether any procurement function can manage this alone?

Let's break that down into two sub-issues. The first certainly isn't contentious - the need for line managers and budget holders  to be heavily involved with the procurement process. We're not going to get into issues of organisational structure here - there are many alternatives. But it is clear that procurement can't handle the 69.9% without significant and informed involvement of others in the business.

"Suppliers are part of your business, if not your company" and "suppliers need to be viewed as an asset" are two headlines from the Proxima recommendations. And if you are looking for innovation and contribution to the top-line of the business, not just the bottom line, it is clear that procurement can't do that alone. Business stakeholders must also engage appropriately with the supply market.

Secondly, and perhaps more controversially, we question whether any firm - except maybe the VERY largest - can hope to be expert across the whole range of procurement activities and spend categories. We have written before about our "Lady Gaga" concept of the CPO - someone who acts as a focal point, strategist and promoter of the function, but will rely on many others, some employed and some themselves from outside the organisation, in order to deliver the desired results.

Those ‘others’ include outsourcing providers but can also include consultants,  software providers, specialist solutions providers, contractors... the point is that the CPO has the find the best blend of resource, capability and knowledge to bring value to that  overall spend.  Indeed, structuring, recruiting (whether staff or external providers) and managing those resources is now perhaps the most fundamental challenge for CPOs in this world of increasing complexity and opportunity.

We've focused largely on the procurement viewpoint in terms of this Proxima report. What about the CFO or CEO who reads it? (And they all should, of course).

Well, they should start by asking their procurement leader whether (s)he knows the metrics for their firm. What is the percentage spent with suppliers? Then go on to ask who the top 30 suppliers are, what they do for the firm, and how they are proactively managed to deliver value and help the organisation meet its own goals. Fundamentally, what is procurement doing to maximise the business contribution it makes across that entire 60, 70, or 80% of spend?

And then, based on the answers, they have a choice. Either get behind the CPO and help them make a success of managing that spend – or get themselves a new procurement leader.

(Download the report here. It is simply essential reading for all senior procurement people).

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