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Procurement not following rules for success, time for a rethink

Guy Strafford
Jun 27, 2013 3:46:00 AM

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Every now and then a piece of fresh thinking comes out that upsets the apple cart.  There’'s a great one in April’'s edition of Harvard Business Review.  It references a study conducted by Deloitte, which identifies what the rules are followed by companies that are truly successful over a long period of time. The research reveals surprising results. And here is why...

The HBR article covers new research (conducted by Deloitte) over the last 44 years, across over 25,000 companies.  The aim of the study was to identify what are the rules followed by companies that are truly successful over a long period of time.  And they are, as are we, surprised by the results. There are three simple rules:

  1. Better before cheaper – in other words, compete on differentiators other than price

  2. Revenue before cost – that is, prioritize increasing revenue over reducing costs

  3. There are no other rules – so change anything you must to follow rules 1 and 2

This should be worrying for any CEO, CFO, COO and CPO – and definitely for anyone who works in the profession of procurement.  And here’'s why.  

Consider the focus of procurement in most businesses.  How is it targeted?  How is its performance assessed?  What do most people believe procurement is there to do?  Typically, the over-riding factor is to drive savings.  Savings, savings, savings.

Other areas may be measured, such as spend under management, compliance to deals, etc. –- but they'’re typically to ensure the savings are achieved.  There may be a nod to some other factors such as quality of service to stakeholders or innovation – but when it comes to crunch time, if the savings aren'’t there, everything else gets forgotten.  So in reality they are deemed unimportant.

What this means in practice is that the procurement function in most businesses may actually be getting in the way of success.  It may be causing damage because it is not aligned to what businesses need.

This adds a lot of weight to a growing belief that we at Proxima have.  And that is that small change is not what is needed in most procurement functions.  It'’s not about getting a bit of extra expertise.  Or some technology.  Or a new process.  Or some extra buy-in.  Or whatever the incremental step is you are attempting.

The big elephant hiding under the carpet is that procurement itself needs a rethink.  And it’'s a change of mind-set that’'s needed.  And that’'s one of the hardest things to achieve.

Procurement needs to be viewed differently, in terms of what it is there to do, and how therefore it is managed and measured.  The logical conclusion from this research is that procurement needs to be positioned as a function that aids growth.  That drives innovation.

This is a matter that we are thinking deeply about at Proxima, and you'’ll hear more from us in due course.  But in the meantime, I’'d be very interested to hear your thoughts on the matter (please leave your comments below).

If your business is a confluence of suppliers and related contracts, then what makes the remaining people more productive?
Guy Strafford 
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