Procurement Sentiment and Observations
During this pandemic, many organizational CEOs and Board members have become aware of and startled by the inefficiencies and bureaucracies in their Procurement organizations. C-suite executives discovered their organizations were in predicaments with deep and broad implications none of us had previously fathomed. Most of us never imagined we’d need to find new suppliers, support, or transition from current ones to diversify for business continuity at the drop of a hat.
Frequently, business leaders also found themselves working through Procurement bottlenecks and realized the function wasn't prepared to respond. Businesses struggled to be reactive at best.
Over the years, many Procurement organizations had expanded responsibilities for Supplier or Vendor management. With an overreliance on Procurement to solve critical business problems, inefficiencies were created.
Unsurprisingly, this view of Procurement is not new and has been prevalent in organizations for so long, it is practically ingrained. However, with 2020’s upheaval, it stung deeper.
Neither the business stakeholders nor the supplier community were satisfied with the procurement engagement model or processes.
Still dealing with it during the pandemic disruptions, these grumbles reached the ears of the CEO. With this backdrop, those who have been navigating Procurement inefficiencies are hopeful things may finally change.
However, they remain fearful this may give rise to more bureaucracies in Procurement. Suppliers and business teams have already encountered more Procurement requirements due to this pandemic, but without thoughtful considerations of how to address the concerns and streamline the process effectively.
The Perceived Value of Procurement
Throughout my career, I have been asked why Procurement exists. What value does Procurement bring? Why is this function so slow and reactive? Why hasn't Procurement evolved or become more efficient? Those are fair questions.
Holding responsibilities for end-to-end Procurement from Procure to Pay, Strategic Sourcing, Risk Management, Vendor Management, and everything in between, I and other talented Procurement professionals have questioned these very same things. Yet, it is difficult to admit the root cause of the problem because it is an inconvenient truth.
The trouble lies heavily with the Chief Procurement Officer role, which, by design, is installed with the premise to show less willingness to change the status quo. Some companies have added tools and vastly increased procurement team sizes, with an added scope of responsibilities, over the past decade. These have not reduced the stakeholder grumblings, brought effectiveness, or gained efficiencies for the most part.
How Did We Get Here?
Too often, the business only engages our teams at the last minute to usher the paperwork quickly after their favorite supplier is selected. This behavior makes the Procurement function seem ineffective.
You will hear well-justified arguments that CPOs are mere stewards of running processes required by other functions such as Finance, Risk, Legal, or Compliance. You will also catch that while we are not responsible for these processes, we are held accountable. We will also state, and rightfully, that appropriate investments aren't being made in Procurement for it to evolve as there is no support. So, CPOs have had no choice but to agree to continue the status quo.
The business and supplier teams will passionately argue Procurement doesn't know how to partner. They believe Procurement only cares about the lowest price and lacks business knowledge. They know the function as a mere "checks the box" and don’t understand the department’s true value. Stakeholders view it as a bureaucracy slowing the business down.
Let's face it—Procurement hasn’t been popular for a long time.
Those selected to helm it must be willing to fight the stakeholders with a big bark and an even bigger bite. When you peel the onion back a bit, it's easy to recognize the Procurement approach of operating without a partnership with the business or supplier community has led to distrust. This explains why the function is hard-pressed to find cheerleaders for it.
Myopic Value of Procurement
Look closer and you will see a dynamic that plays into an opaque behavior of a Procurement leader.
Having spent most of my career in these roles, I found that Procurement moving under Finance has been detrimental to the function and reputation. Finance professionals helming Procurement and Vendor Management responsibilities over the past decade have created metrics and knowledge misalignment, leading to further mistrust.
When Procurement approaches with a lack of partnership or domain knowledge, it continues to perpetuate the "divide and conquer" sales tactics successfully with the business teams. The approach has increased organizational risks and costs for all sides.
The "keeping things status quo" or "bite before they do" approach is something I never felt was right. For the "Finance leader or CPA" installed to oversee Procurement or Vendor management processes, it is a job without passion and typically ends up being either a stepping-stone to their next role or the last one before they retire. Regardless, it has resulted in a myopic mindset of savings, budget management, and compliance.
McKinsey & Company’s Global Procurement Excellence survey reveals the gap between leaders' mindsets and followers' becoming even more pronounced.
Procurement, often the lowest priority for functional budget allocation, makes a significant impact on the top and bottom lines of any organization and its reputation. The cost equation to keep in mind is much more than the annual ~1% budget allocation for this function.
This "low budget" function mindset has resulted in Procurement lacking visionary leaders willing to evolve it. Procurement teams have become transactional to "pick up pennies from the floor while leaving dollars on the table." This makes it near impossible to be strategic and gain a seat at the table.
Until the Finance procurement overseers are held accountable to different metrics related to automation and value-added delivery through partnership, we will not see Procurement's transformation. When the reward system and leadership mindset are focused on budget and compliance metrics, value-based deal approaches will be hard-pressed to find. There will be a continued preference for looking at negotiations and deals from a "rear-view mirror."
Creating Sustainability for the Long-term
I have witnessed Finance procurement overseers push their teams for unreasonable deal structures. Usually, through a talking point, "because we are X," and "every supplier wants to do business with us" mindset.
While it is safe to assume most suppliers want the work, they also need to be profitable and there for us when we need them. If they are deprived of "fair margins," they won't be around to assist when needed.
The Procurement overseer must be mindful of embracing processes that allow both the Procurement and business teams to quickly ascertain where the risks and fair margins are from market dynamics. Often, suppliers help the organization because of the relationships they have built and not because of the Procurement established processes.
Isn't partnership building what the CPO or any leader should be doing with their stakeholders across all levels, suppliers, and teams? Procurement’s function should be partnership building with a "trust but verify" approach to succeed. The lowest price doesn't necessarily equate to the best quality or the ability to deliver on commitments made by suppliers consistently. The latter two only come through building genuine, well-meaning relationships with streamlined processes that are transparent and benefit both sides fairly and equitably.
I have seen wildly successful outcomes on deals when there is an open and joint partnership approach between Procurement, internal business partner, and supplier sales teams. For years, I have advocated the method of asking our suppliers for an "unreasonable number of reasonable things" instead of a reasonable number of unreasonable things. However, these enormously successful outcomes are only possible when all teams involved are open to transparency and embrace leading with trust and partnership.
If your organization hasn't had the same challenges with the Procurement function, congratulations! Organizations with forward-thinking and proactive Chief Partner Officers measured on value and automation-based metrics are well ahead of their peers.
As a CEO, C-suite, or Board member, if you are ready to transform Procurement, it will be critical to keep partnership, automation, and AI as foundations. It can reduce your costs by 10% - 40% while boosting execution speed.
To gauge Procurement engagement and sentiment, I would welcome participation in this Sourcing Industry Group poll to help advance insights on Procurement transformation opportunities.
Within your organization, have an open dialogue to explore how Procurement and the CPO role can evolve. Increasing transparency in the Sales and Procurement cycle are also beneficial for this transformation.
If your organization is considering transforming Procurement, I invite you to read Part 2 of this article (forthcoming). Don't hesitate to reach out if your organization is looking for ideas on how you can transform the end-to-end Procurement process value chain.