Spend Matters procurement debate – Kim Godwin supports the motion

Kim Godwin, ex CIPS President and MD of PCSM, speaks at the SpendMatters sourcing debate recently in support of the motion "Cost reduction should not be the CPOs main priority".

Due to communication breakdown, we don't have the video of Kim's speech.  But he argued eloquently that if we want to be taken seriously as a profession, we have to be about truly strategic matters. In the absence of a video record, I'm pleased to publish the text of Kim's speech below - it's  a bit longer than our average post, but it is well worth 5 minutes of your time!

Cost reduction should be the top priority for a CPO… I don’t think so, because the top priority is the priority, it’s what you’re about, it’s your raison d’etre, it’s how you’re seen, it’s your purpose and prime role.

And if cost reduction is your top priority then I don’t think you’re in a good space. And the reason I say that is that a CPO is a Board level position. It’s a strategic role. And that word – strategy -  is much over worked in procurement, often meaning something like ‘big’ or ‘complex’. Considering that we’re debating against a professor I thought I would refer to Lamb, 1984, “Strategic management is an ongoing process that evaluates and controls the business and the industries in which the company is involved; assesses its competitors and sets goals and strategies to meet all existing and potential competitors”. In procurement speak this is everything to do with Porter’s 5 forces. It has nothing to do with cost reduction. That’s not a strategy that’s a tactic.

So the first point is that if you’re going to make cost reduction your prime target, you are immediately going to put yourself into the ‘tactical’ space. Stakeholders, Board members, staff, are also going to perceive you as a tactician – they’re not going to see you as the strategic influence on the fundamental business process of acquiring goods and services, and managing the supply chain.

In many organizations today you’ll find that a substantial proportion of that business, in terms of activity and cost, sits with third parties. You’ll often find critical business processes or customer facing processes, are in the hands of third parties. So in many organizations innovation, time to market, brand and customer experience, continuous improvement sits outside the direct organization. So what does any self respecting CPO do – measure cost reduction? I don’t think so.

And just picking up this point about the CPO being on the Exec Board. Board level executives aren’t there to manage their function or to represent and defend their function. They’re there as part of a talented and experienced team to run the business. Cost savings at the end of the day is a justification for the role of the procurement team and the job that the CPO is doing. It’s not a fundamental business metric.

So batting with cost reduction as the primary goal is batting with a functional perspective that lacks confidence and feels the need to have to justify what it does. Cost reduction at best is a tactical functional activity. How would you feel if the HR Director announced that their number 1 role was to limit wage increases this year to 1% below RPI? Or maybe to reduce headcount numbers by 5%? Or is their role about talent development and exploiting the skills that the organization has? And why should that be any different to the CPO exploiting supply chain talent, and about the potential contribution that the supply chain can make to the organization?

My second point is related to what Andrew calls functional imperialism, and I make my comments here in the context of services procurement, hopefully a relevant issue considering this is the UK and we’re in London.

In most cases the CPO does not own the budget – it’s someone else’s money. So what sort of dynamic are we introducing in making a claim that the procurement department has saved the organization money? No one would rightfully suggest that the budget owner hasn’t had some influence on the procurement exercise, so why would you make cost reduction the primary measure of your department’s contribution to business results?  This is inevitable going to lead to polarization, where the CPO is claiming cost reduction successes that the budget owners had a part to play in and, more importantly, bear the consequences of those decisions.

And if alienating the stakeholders by making your key performance measure reducing their costs, you then proceed to make an industry out of this by employing people to work out what the savings are; you get a committee together to agree how the cost reductions are going to be measured. And because you want everyone to believe in the savings figures you ask Finance to use some of their people to check your calculations.

And just when you thought it couldn’t get any worse, the Procurement staff – because they’ve all got their savings targets that inevitably impact their pay and bonus – get incredibly creative in just what constitutes a saving.

The Spend Matters blog recently listed savings types and came up with twenty, including

·          Take advantage of market prices naturally reducing such as most technology

·         Claim savings against high initial supplier bids

·         And from bitter and twisted (love it!) “Delay or obstruct a time-specific order until it’s no longer needed, then cancel and claim as a demand management saving”

This is the inevitable consequence of how the Procurement team will interpret and implement the number one priority of cost reduction. This is just like Man United are taking on Chelsea, but on the sidelines you’ve got the reserves having another game of football.

So to close, if as CPO you’re going to make cost reduction your key priority, you need to be prepared to face the consequence that what you’re doing is committing your team to a secondary role. You’re going to be those reserves playing the game on the sidelines, everyone watching the main game. Occasionally you’ll be useful and brought onto play when needed in the cost reduction debate, but most of the time it’ll be the main team that’s playing. They’ll be the ones shaping the value that third party suppliers and the supply chain can bring to bear for your organization.

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