Transitioning from Being Measured on Savings to Being Measured on Value

We had a bit of a ‘galactic’ and somewhat philosophical speech from Ian Thompson, UK Senior Director at Tradeshift, at eWorld last month. But when he came back down to Earth, he gave some really sound, real-life steps to help the CPO start to transition from being cost- to value-focused.

Refocusing procurement on value-adding activities and becoming more agile is high on the CPO’s agenda today, he said, and it goes quite deep. They mostly know that their day-to-day concerns should be around strategy, innovation and value – not just numbers. But why does moving from a procurement cost focus to a value one really matter? Is it because, if we set ourselves up like the professional driver, we will be redundant when the driverless car takes over? Or maybe because, as we’ve already witnessed, smaller, more aggressive companies are disrupting the big, established ones, so we realise that size is not power and that change happens fast and is unpredictable.

Looking at the wider picture, as procurement people, does squeezing that extra percent or saving that bit on the margin really change the outcome? We’re at a time when the focus needs to change.

So he began by looking at what we really mean by cost and value.

Cost – is what we know has to be given up in order to obtain something. And it’s easy to measure. But the real value is the benefits the transaction brings, the reliability, the outcome, the value. We understand the cost straightaway, the rest, the usefulness, is not so evident. We find that out later on. So we can’t measure it until later.

Value – is not in a spreadsheet, or connected to Finance. It’s something you have to think about like an investor, because value determination requires human judgement. And we loved the anecdote and quotation he gave from Colonel John Glenn, first American to orbit Earth, as they went to light the burners: “I felt exactly how you would feel if you were getting ready to launch and knew you were sitting on top of 2 million parts – all built by the lowest bidder.”

Basically, we need innovation, above control. It’s possible that we sometimes stop innovation, because we are focusing on cost savings. But the Maverick spenders can bring in the stuff that does the best job – so maybe we should be helping them innovate while executing contracts in a way that keeps us safe/in control.

He then touched on AI and IoT and the creation of so much data. But what’s important about that, is how we leverage it to change things. On the Tradeshift platform there are thousands of businesses all transacting and collaborating with each other, creating spend, supplier performance, operational, supply, pricing, and third-party data. All of it, if used well, could unlock value and make procurement more relevant and agile – which is what is needed to make procurement a competitive differentiator and a value-add organisation. Why? Because the speed with which a company can detect risks or change and respond to them, depends on the level of integration and digitisation of the supply chain, leading to real value beyond savings.

AI has a limit though: Ada is the AI layer on the Tradeshift platform. She learns from user interactions, improves business processes, and offers contextual information instantly. And she is better than us at identifying no PO invoices, how to allocate codes and where to put them, because she can see products across the network, who’s buying and selling what, the approvals, the spend classification and so on. She can better understand cost – but not value. So cost isn’t going to be the CPO’s conversation anymore – automation will take care of that. It will be about what we can do, and how we can innovate to create value.

So what are the practical things we can do today?

  • Find innovative companies who aren’t your suppliers! Invite them in, collaborate, build relationships.
  • Become their ambassador. Treat them differently, have an innovation budget. Change the red tape around how you work with them, and see what you learn.
  • Find out what the top things are that the C-suite would like from the supply chain (outside of cost) – take that to the suppliers and collaborate, not just transact.
  • Implement a Net Promoter Score on yourself, by the supply chain and rest of business. Find out what’s preventing us from creating value, and take what you do naturally outside the cost world.

Ada can’t do any of this! But the CPO can, and still be strategic.

And remember – Cost has a shelf life: Value is limitless.

You might also like to read “Three Occasions When Procurement Should Spend More”, a Spend Matters briefing paper.

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