Does your procurement function exist to deliver savings? Then you’re doomed...
Jul 30, 2012 7:25:00 AM
I am surprised by just how many people, including senior executives of many blue chip organizations, think that the purpose of procurement is to deliver savings. And it's evidenced by the performance of many procurement functions being measured predominantly on a savings metric. But this is an out-dated way of doing business. Think about it logically: budgets are not spent to achieve a saving. So procurement is misaligned to the needs of the stakeholders they serve if they are targeted on achieving savings.
Savings are important, don't get me wrong, but they are not the reason for being.
Achieving large savings is an 'entry level' measure of procurement capability. Savings are not a true measure of longer term success. Most types of savings that are delivered are best seen as defining historic weaknesses. They make little business sense as a stand-alone objective for excellent procurement.
Surely, procurement's main purpose is to ensure the organization achieves value for money from its purchasing activities and the associated behaviors. The long term justification for procurement, therefore, needs to move away from today's unrealistic promises of exceptionally large savings each year, of which only a fraction ever materialize on the bottom line. In its place is a one-off shift in the cost base in the first few years, followed by a function that stops the new cost base from deteriorating back to where it was. The business receives an invaluable service, providing a commercial edge, improvements in supplier engagement and innovation, market insight and advice, and an agent for change.
In short, there needs to be a paradigm shift in how procurement is perceived, away from delivering savings to where it should be a customer centric function that strives for value for money from the cost base.
And if you really listen to what senior executives say they want, its quickly apparent how misaligned procurement and finance leaders are. We recently conducted a piece of research involving 120 senior finance and procurement executives, across US and Europe, aimed at understanding the current perceptions of procurement. Its all in there you just have to listen.