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The realization of Corporate Virtualization

May 7, 2014 5:01:00 AM

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Jon Hansen, Editor for Procurement Insights talks with Proxima about the trend of Corporate Virtualization, and it's impact on business.

CG:  Today I am joined by Jon Hansen, Editor for Procurement Insights and host of the PI Window on the World radio show who will be chairing an upcoming panel delving into the practicalities surrounding our research into Corporate Virtualization. Thank you for joining me today, Jon. 

JH:  Well it's great to talk to you again, Chris, and looking forward to a very interesting panel discussion too.

CG:  As are we. Jon, what is your view of the trend towards Corporate Virtualization? Is it a short term fix to overcome adverse economic market conditions or is it a business practice that is here to stay?

JH:  First and foremost, we have to ask ourselves - what does Corporate Virtualization mean? Personally, I liken Corporate Virtualization more to a state of corporate realization in which the fundamentals of business remain the same. However the practice (procurement) of managing this new virtual organization (your suppliers) is still operating almost adjacent to the rest of the business – often not aligned strategically. The trend of corporate realization has created a need for strategic capability and contribution from procurement to ensure an organization is at the forefront of this trend. Unfortunately, whether because of the procurement profession itself or the professionals within, the opportunities brought forward by this trend are largely going unnoticed as momentum and pace builds.

CG:  Are we seeing a marginalization of this function when compared directly to finance or even sales – both of which have grown into strategic business partners. What happened to procurement?

JH: Recalling a 2006 CPO Agenda roundtable discussion, senior people from well-known organizations talked about the fact that the best person to run a procurement function is someone who doesn't have a procurement background. There still seems to be a strong mindset that permeates from procurement’s heritage – built around simply buying stuff and getting the best price.

Forward thinking organizations are starting to push the boundaries of the function as business leaders start to realize the competitive advantage that can be gained through an efficient and effectively run supply chain. Unfortunately, many procurement professionals are still focusing on the wrong things and thus not keeping pace with the rapid change that is happening around them.

I have previously written about how procurement and finance, for example, are often disconnected by a common language. While procurement are presenting purchasing claims, cost avoidance results and process efficiencies – the CFO is worried about shareholder value, top line growth and brand reputation.

Procurement has to begin to think outside of its silo and look at how they impact the entire enterprise. Finance and IT have been on this journey over the past 10 years and are becoming more engrained across all functions within business today, not limited to their own silo.

In fact there was a study in CIO Magazine a couple of years ago where CIOs said that they actually had to come up with a new title because they were no longer confined to the laboratory or the technological realms - and were now having to communicate their value to the rest of the world.

Overall, procurement professionals have to start thinking outside the box. There are certainly some promising inroads being made – take the example of Toshiba’s new CEO, who was the former Head of Supply Chain. There is a recognition that the capabilities are there, however, I don't think that recognition has really caught on to the degree that it has gained traction in the mind of the C-suite and the wider business.

CG:  Is this just an issue of a common language or is there something deeper, more encompassing happening in the function that is driving behaviors?

JH:  I think it is actually a mindset problem. Did you know that less than 20% of CFOs consider the work of CPOs and their staff as having a very positive impact on competitiveness – less than 20%.

Furthermore, on average, only 46% of CFOs feel that the procurement teams contributed to enterprise growth and only 57% of CFOs feel that procurement contributes to enterprise profitability.

CG:  So why the disconnect?

JH:  I read an article about a year ago, Chris, where they talked about the fact that the bigger relationship challenges for procurement professionals aren't with external trading partners but internal clients, the very people with whom they are supposed to work and serve and drive value. Quite often procurement professionals look at their role in relation to how they have traditionally viewed the bottom line - which leads them to say ‘let’s keep doing that’ - without really understanding the bigger picture. This mindset needs to change to look further across the business and align with the various goals and objectives that are in place within other departments.

CG:  Well what comes first, the chicken or the egg? Can someone just wake up one morning and say, you know what, I'm going to stop doing what I have been doing for the past twenty years and I'm now going to focus on new and better?

JH:  I think this is slowly happening. The newer generations coming into the profession are much more militant in terms of what they can do. The curriculums by which they are getting their degrees are now much broader than ever before – touching on all aspects of today’s business environment.

However, for those who have been in the profession for 10+ years, they are going to be forced to change or find themselves out of work. Recalling another executive comment from the CPO Roundtable Agenda discussion who said, “I will take one strategic thinker over ten common buyers any day of the week”.

CG:  Are you concerned that this next generation of procurement professionals will be bullied into old ways of thinking?

JH:  I don't think so for two reasons. This new generation has a better sense of what they do and has a better understanding of the 'holistic enterprise', coupled with an understanding of the global market. So being bullied would be to ask them to deny what they know and what they've been taught, so I don't think that is going to happen.

The other side of that equation is the fact that I had alluded to earlier in that CIOs and CFOs themselves are going through a major upheaval in terms of their traditional roles. Finance people for example have recognized the strategic importance of supply management, and are actually making the transition over to the procurement/supply chain realm themselves.

This combination of motivated next-generation procurement professionals and non-procurement leadership is resulting in new thinking around how procurement can and should fit into the wider business picture.

CG:  These radical changes coincide or rather reflect the changing nature of business today. Our research found that 70% of revenues within a typical business are now spent with external suppliers. Couple this with a significant growth in public supply related scandals whilst the average size of a procurement function has not increased – it would seem executives have not quite grasped the concept of Corporate Virtualization yet. What do you think is in store for business in light of this trend over the next few years?

JH:  It's interesting you talk about the scandals, I remember a senior VP from Procter and Gamble came up to me after a keynote presentation indicating that, 'the only difference between public and private sector is that when we mess up in the private sector it doesn't often end up on the front page of the newspaper'.

This is no longer the case. We now live in a world that is on 24/7, fueled by social media - where news hits instantly, and once it is out there, it can catch fire, so to speak.

Companies can't get ahead of this anymore, so what they are starting to look at is prevention. This means truly understanding all the processes and inputs around the business’ operations and ring-fencing any potentially damaging areas. This is no mean feat.

I come back to our upcoming panel discussion around Corporate Virtualization, which is the realization that procurement professionals have to understand all these inputs, and how they fit in with the enterprise, whilst ensuring an effective supply chain.

These same professionals also have to understand the governance models in terms of dealing with external trading partners and what impact that has on them. We talk about the Internet of Things, what about the Internet of Things and Humans; we're all connected.

Information that at one time was siloed meant that streams of thoughts wouldn’t necessarily leave departments or connect across the business. Let alone bring in any new thoughts or information from outside the business.

Today however, there has been a realization that the external enterprise (suppliers and providers) plays just as big a part as internal departments in the success or demise of today’s corporations

CG:  Thank you for your time Jon, I look forward to talking more on May 29 at our live panel session discussing corporate virtualization in more depth.


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