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Volatility may be procurement’s best friend

Guy Strafford
Jun 6, 2012 1:53:00 PM

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Guy-New

Having just read the data revisions suggesting the economy shrank faster than thought, it might make a change to start with some good news for once.

This month, we’'ve seen a number of exciting engagements signed with some world-class clients, and we’'re very excited to embark on some new relationships that should enable us to unlock a good deal of value through thinking differently about procurement. Having started 5 new major outsource engagements, and several more smaller ones this year already, these are interesting times.

What is particularly interesting for us is that a number of these new clients are in sectors deemed “'engine rooms”' of growth. Perhaps our good fortune is partly a symptom of the state of the Western economy or perhaps it can be attributed to our fundamental belief that procurement should be a strategic driver of business outcomes. Both alternatives lead to the same result in that our businesses are demanding a different level of procurement performance than have had hitherto.

This month’'s round-up looks at 4 recent major global events that are fundamentally changing procurement’'s value proposition in business today.

The next stage of the crisis is political

The not-such-good news (from a market outlook) is that May was another tricky month for the economy. Factors such as the UK dipping back into recession, elections in Greece ending in an impasse and the outcome of the French elections have not reassured the financial markets that a coherent way forward has been mapped out.

This has become a political crisis and as such it is harder to solve. The essential problem is one of expectations. The expectation of being able to live a great retirement and of cheap healthcare without paying enough tax during one'’s lifetime is unaffordable. Either reduce the cost or increase the revenue. The case for either has not been put across Europe or US successfully. Nor has the need for Germany to reduce its trading imbalances for the other EU member'’s benefits (necessary in order for the PIGS to trade their way to growth inside the Euro).  

The common theme is that the governments are happier to make unfunded promises than to face the music, and the electorate is increasingly resentful because no one has successfully made the case for them face the realities that they either pay more tax or get less back. Now that the money is running out because government borrowing capacity is hitting limits then the markets are less willing to lend to governments, so it means that the market is going to force changes which will be deeply disruptive to politicians and citizens with their heads in the sand. Many countries have started to test to the limit the appetite of the bond markets to fund their deficits which means that 'the ‘can cannot be kicked down the road much further'’. The next 24 months are going to be much more difficult than the past 24 because the political classes of many countries will have to face the economic music and/or face some form of street protest as a manifestation of frustration with the politariat. Street led rebellion has outcomes which are unpredictable, particularly when reinforced by the new media tools to help mobilise crowds.

Either our politicians make the case for the future looking different to the past model of too much out and too little in, or the bond markets and the streets will take charge. Given that the political answer to most problems has been spend more, pay later, we need a new more successful cadre of politicians. This seems unlikely (though not impossible, sometimes the times get the politician that is needed - Churchill, de Gaulle, JFK and Adenauer being cases in point).  

All of which means the difficult climate will continue with added uncertainty and procurement’'s role will remain in the frontline.

Shareholder Spring is a response to the crisis and may also help procurement

On the corporate side, we continue to observe shareholders making their voices heard on key management issues and there are likely to be further instances of disquiet occurring in the coming weeks. I think that this is an interesting trend. We have seen in the private equity markets, that the PE firms are much more operationally activist, intervening to drive the management teams to improve performance, as the returns from a rising market and financial re-engineering are no longer there. I am sure that the shareholder spring has been catalysed by the realisation that the model of passive shareholding has seen stock-markets go nowhere in the last decade and a bit. The prospect of continuation of the recession and flat markets, brings management performance into close scrutiny.

For Procurement, once institutional shareholders get more active, where will they stop? One of the reasons that I think that procurement is going to be more important in the future is that the limited ability of many Western businesses to easily raise the revenue line, will force greater operational efficiencies. In a world where the procurement costs of the FTSE 350 exceed labour costs by a factor of more than six to one, the route of shareholder activism leads inexorably to procurement. And Procurement remains underinvested in most businesses.

The Ariba sale is a $4bn bet on Procurement

In our industry, the $4 billion acquisition of Ariba by SAP looks set to change the landscape to a degree, though the full effects of the transaction are clearly still to become clear and whether this new ‘duopoly’ (SAP and Oracle) of procurement technology is a good or bad thing. What is important is that it shows some smart guys in {Frankfurt} are willing to take a $4bn bet that the future of procurement involves a degree of centralised co-ordination and management decision-making, which their tools assist with. It will provide further impetus to Procurement because these tools are enablers to functions bringing structure and visibility. A lot of sales guys in software firms will put a lot of effort in increasing the focus to a centralised procurement operation.

Furthermore, a key question is what will happen to the Accounts Payable Outsourcing marketplace as a result of this deal? We dig into this question a bit more here

In volatile times, expertise counts

As ever, though, the volatile markets provide an excellent opportunity Procurement to add value when it can advise stakeholders on what is happening and why, to help them make smarter choices.  It is helpful for businesses such as Proxima, who are in the markets all the time, in making it easier to identify new and valuable means of enabling purchasing activities to become more effective. With effectiveness comes enhanced shareholder value and we see this as the key financial element for companies navigating what promise to be increasingly tricky months ahead.

If you have any thoughts or comments you would like to add, please add them below.

This post was taken from our latest e-newsletter, Click here to read the online version of this month's e-newsletter and to subscribe to upcoming issues.

Guy Strafford

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