The strategic development of procurement: A view from Grant Thornton
Jun 14, 2011 7:10:00 AM
Oliver Colling [OC], Head of Financial Management and Effectiveness at Grant Thornton discusses Procurement's journey, following the footsteps of Finance and HR, towards strategic business importance.
CG: Hi Oliver, thank you for joining me today. As Head of Financial Management and Effectiveness, what does your role entail?
OC: Very simply it is to help clients do things better in regards to the back office, cost, outcomes, service, a lot around the efficiency agendas and transaction processing, getting the value for money. Our key areas of work are Finance, HR and Procurement. The majority of our work has been about performance improvement over the last couple of years due to economic conditions.
CG: According to the latest ICAEW/Grant Thornton UK Business Confidence Monitor (BCM), a lower than expected GDP growth announced this week has weakened UK Business confidence. What are three 3 common objectives and areas of focus for CFOs over the next 12 months?
OC: Over the next 12 months, CFOs will focus more on cost reduction, driving value from their business - both within the operations themselves and the wider business dealings, squeezing both customers and suppliers. To date, I think CFOs have shown a great deal of resilience in holding firm with their achievements and also now making sure their business are prepared for recovery when it comes. Businesses have been through dramatic reductions in terms of cuts in head count but actually found they have cut themselves too deep and are not able to respond to the changes in market conditions. One priority is to be in a position to return to ‘business as usual’ and there seems to be some activity in mergers and acquisitions. Some more tentative than others but there is definitely interest in the market but this is not translating through to that many mega mergers but there are a number of acquisitive buyers out there who are gradually building up their portfolio purely through stealth, picking up opportunities through acquisitions of companies that are reasonably cheap.
Thirdly, it is hard to hold on to good people. A number of our clients have said that even through the recession they have lost a number of good people to competitors because the good people still move on. It is very important to be able to get the right talent and to be fit for growth.
CG: You mentioned squeezing customers and suppliers, in my mind this fits under procurement purchasing, how high on the CFO’s agenda is procurement?
OC: I think it is certainly on the agenda for many, I think the initial response to the public downturn is to trim, prune and cut cost without looking outside of the business. But maybe something to learn is that there is a lot of value to be had from looking at the supply chain and procurement – including the growing trend of supplier / customer collaboration. Times are hard, and all business leaders are starting to see the benefits in closer collaboration (internal and external).
CG: You spoke briefly about driving down costs by squeezing suppliers, now you are saying to work collaboratively with them. Do you think there is a trend with businesses to step back from the usual beating up of suppliers for the best deal and start looking at the supply chain more strategically i.e. cutting down the number of suppliers and focussing on developing these relationships to drive value and achieve the objectives?
OC: I think at the moment it’s the latter but slowly moving to the former.
One of our clients is in the food business as a white label manufacturer for the supermarkets. They have started to squeeze their own suppliers to reduce costs to meet growing pressure from competitors to deliver the price reductions the market is now demanding.
Another client in the distribution business got together with their top 200 suppliers and reviewed how they work together in ensuring sustainability of supply. Part of this was a general review of the operation as a whole and see whether there were opportunities for a more efficient way of working. The benefits of this would then be shared with the end customer as they are receiving reduced prices. But the ability to do this is dependant on the situation. The CFO has a driving role in this exercise.
CG: You mentioned the CFOs involvement which brings up the question of accountabilities. Should finance be responsible for procurement or how should procurement be aligned with finance? And at a higher level, what does procurement actually mean?
OC: Interestingly enough I have been talking to a large public sector organisation this morning who have exactly that dilemma. They have a procurement function but the procurement aspects are very limited. I understand procurement to have the strategic role of driving value from the spend of the organisation – through various methods, including contract negotiation and strategic sourcing. A number of organisations have teams called procurement who are expediting orders and running purchase order systems, but not adding value from the procurement function.
I think it is less important about who procurement reports to but more a need of a strong voice at board level, so procurement can report into the COO, CEO, CFO or as a CPO be on the board in their own right. It’s important that procurement is seen as one of the strategic ways in which business can operate more smoothly and create cost efficiency. And in some ways it is less important than who they have to report to.
CG: What does procurement need to do to get a seat at the board and what are they doing at the moment?
OC: What CPOs need to do is not to dissimilar to how CFOs proved themselves over the last couple of years with managing cash and the working capital cycle. CPOs have to prove themselves through results, in some organisations there is a groan when you hear the word procurement as they are often seen as a hindrance on flexibility and creativity with a long list of buying rules and processes. Actually turning it around and having strategic procedures in place, if procurement can save time, extract value from your supply chain and reduce the cost of your raw materials, it’s taken more seriously by the organisation as a whole as it can now demonstrate results and directly impact the bottom line.
CG: We are talking ideal procurement now, what do you think is holding back procurement from doing this and becoming more strategic?
OC: I think some of it is a lack of capability, resources and training within the people who find themselves in a procurement role. A good procurement professional pays for themselves 10-20 times over. Capability is not as highly developed as it should be within the UK. But then I think it’s the understanding of the wider role by CEO and COO’s that needs to be improved.
CG: In regards to capability are you referring to budgeting, resourcing or network capability? Where is it really lacking?
OC: I think it is a bit of all of those, to persuade a business to invest in procurement expertise is a hard one within certain types of business particularly in more established companies. To get a procurement role you will need to get someone that is good and by the way you are going to need to have to pay for that, which can be a hard argument. Again having that ability to lift up their eyes from day-to-day activities and look at some imaginative strategic options is difficult and not many people can do that.
CG: Your other point about the CEO, COO’s and the boards’ view, it all comes down to what value procurement can deliver. How do you measure this, is it purely cost what other things are being measured - where are CFOs seeing the value?
OC: With some of the organisations I have worked with there has been a very clear measurement of performance. A procurement manager needs to come up with initiatives on what savings they want to achieve the next year which will give them a clear measurement of value. For Example, a Procurement Director in a manufacturing company says that they are going to reduce print packaging by 20%, which is a hard number against which value can be measured. Another way is to reflect this in the broader operational matrix of the business, cost of raw materials, and elements of downtime in the manufacturing business, all of which can influence the operation of the company.
CG: So you are saying process improvement?
OC: Yes, potentially process improvement and getting out in to the market place and driving some hard bargains. Going out to long standing suppliers and saying “look your service is great but we need to get more value out of this and we need to look at this on a bit more competitive basis so we are going to tender for print packaging”. To have that ability to look beyond what you are used to and look at alternatives. This can be extended through the outsourcing route. Something that is different to bring value.
CG: Sure this comes back to internal capabilities i.e. does your staff have the capability, expertise, skill, knowledge and processes to enable them to become more strategic. There is an argument as to whether internal functions can keep up with an external organisations that can deliver this capability. Where do you stand on the argument of keeping procurement inhouse vs outsourcing it?
OC: This is a tricky one, for example, if you have a procurement function that is responsible for strategic and tactical procurement you may not want a single employee enforcing your procurement policies, producing detailed tender documents, marking supplier assessments and so on as you would need them to be going out there and being dynamic and getting value out of the market - It’s difficult to have all these skills in house. Utilities for example, have been outsourced to someone who manages utilities on a day to day basis. Some of the savings can be significant; also it is one less thing for the company to worry about. If you are a good food production manager you do not want to be managing the phone bills for example.
CG: What do you think the key merits are in outsoucing?
OC: 20 years ago I was working in a bottled gas business who owned their own fleet. The management realised that their expertise was in sourcing gas, bottling it and selling it and not in transport logistics. They questioned why they wasted their time managing fleet. They outsourced this, which allowed them to concentrate on the gas business. This is still a very persuasive argument, although activities like distribution have largely been outsourced by larger companies, there is definitely value in looking to outsource other activities.
CG: From that perspective when a CPO looks at outsourcing he will say do I have the expertise to carry out the task? If yes, great, keep it in house; if no, I need to look externally. From a CFO’s perspective they say is this the best deal in respect to the P&L? Yes; keep it in house, no; go externally. This sounds quite cut and dry at the moment so why isn’t everyone doing this? Is there still a stigma in the UK about outsourcing?
OC: I think there is, also I think there are lessons to be learnt from the number of outsourcing agreements that I’ve come across that have been disastrous, I think the reason for this is the fact that businesses are going into outsourcing without knowing what it is they are exactly after. I have said to clients: ‘before you speak to your outsource provider, it is important to know what kind of service you are after and then make the decision once you have decided on the service/product as to who the best supplier is. This may result in the function remaining inhouse or result in working with a number of competitors jointly through outsourcing.’ I think the mistake has come where outsourcing is believed to be the best answer and it can be for many instances but not always. I think that businesses fail when they don’t go through the steps and skip from A to Z; thinking that outsourcing must be best and go straight to an outsourcing company, get what they have asked for from them which is some times maybe not the thing that they need.
CG: What does good procurement look like and how do you define good procurement? From a finance perspective what do you think the key objectives are?
OC: I think the things Finance look for in Procurement are a balance between service delivery, quality of product and value for money. I think it is important that there is a fine balance which is really important from a finance perspective; that they don’t sacrifice one for the other, so going for the cheapest possible deal does not always give the business what it needs and does not always give the value that is required and ultimately the business suffers. So I think finance has a very strong interest in making sure that any sort of outsourcing deal works for the broader business and also does not affect the customer experience at the other end.
CG: How often would finance and procurement work simultaneous on this outsourcing partnership, or would the decision be with finance saying we need to cut cost and therefore we are going to outsource or does the CPO come up to the CFO and say we need to do this, who would instigate the outsourcing conversation?
OC: In my experience it tends to be someone in procurement who will recognise the opportunity. The best work examples that I have come across, have had all stakeholders identified at the beginning, the business operational side, procurement, finance, product and the customer side. Working together to understand what type of outsourcing deal they require and how that is going to be evaluated to get the best result for the business. I think where things are more likely to fail is where one or the other run off with it (e.g finance deciding that we need to outsource without the agreement of other departments) it is very important that all stakeholders are represented at the early stages.
CG: There is a lot of discussion at the moment about the new finance/procurement partnership which focuses on the trust gap between finance and procurement. Often procurement are being challenged on the value that it brings, leading to conversations about outsourcing vs keeping it internal. Do you think there is a trust issue or some sort of communication gap between finance and procurement?
OC: I think very often there is, I think it can be an issue of self preservation, particularly from the procurement function, particularly where there is that challenge over the capability to go out into the market place and drive value. I think there can be an issue with finance and the CFO not understanding procurement’s strategy or the value of the procurement function which is often seen as an expeditor to cash (through savings) and not as something that can add long term value to the business as a whole. I think it can work both ways, but I think there is definitely a mismatch in organisations.
CG: Whose responsibility do you think it is to close this gap, the CFO or the CPO?
OC: I think it is both, I think CPO’s need to, in many cases, de-mystify procurement as I think it is sometimes seen as saying “yes we are doing all exciting contract negotiations and we have all sorts of rules over the people that you can talk to and the things that you can do”. When actually everyone is working on the same side. I think there is an element of CPO’s needing to be more open but also there is a need for CFO’s to be more understanding of the sorts of pressures and the sorts of dynamics that the procurement function have to work under.
CG: Do you think it’s a case of the level of conversation that goes on – with CPOs looking how to get the best deal or how to source better whereas a CFO is looking at how to make the business more efficient and not necessarily looking at the detail?
OC: Yes, well I think that is traditionally the CFO leads cost reduction and getting value for money, and I think there in lies a possible challenge for procurement. I think ideally they should be working with a common interest, the CFO doesn’t need to know what is working on a low level but it is an important part of the higher level or strategic decision making that the CPO gets involved in. That goes for the COO as well I would say.
CG: So a CPO who is involved with board level discussions shouldn’t sit there and talk about the cost savings three suppliers, he would need to talk about longer term strategic practices affecting the business not justifying his team’s work?
OC: Exactly. Go back 20 years the way the old style personnel function managed to change itself to Human Resources Management, actually raising the issue of what happens with people within the business is really important and can help you achieve your objectives more easily and bring benefits to your bottom line. That battle has been won and in some ways procurement has that same kind of journey to go through to demonstrate its worth and to gain the seats at the board room table.
There is no quick solution to resolve this, it is just a matter of developing those conversations to the rest of the business as to justify the strategic gain more than just getting the best deal. It really has to be done by merit, by demonstrating that there is a real value that procurement brings to the business in terms of meeting its targets or delivering its strategy. That’s the way the CPO will be taking more seriously within the organisation, some of this will be hard work and building trust.
CG: Looking across other business functions, do you think procurement will have to reinvent itself each time it wants to align with that particular function? Do you Envisage a trend for marketing or HR to get involved with the procurement conversation at some point?
OC: I think it would depend on the nature of the business and the types of activity that procurement functions are undertaking. I have not come across it that much but there are certain things that procurement does that do have a direct effect on HR and marketing and so on, I think it should become more seamless so that any kind of major business decision involves all the major functions which it effects and which are responsible for delivering business executives. I don’t think we are there yet but there is no reason why that broader cross disciplinary working wouldn’t happen in the future.
CG: Is there a common theme, topic bug bear that the finance community are shouting about to be fixed in light of procurement, regulations compliance and if so, if you had a magic wand how would you fix it?
OC: I think the thing that irritates most people in organisations is the amount of authorisation that needs to happen before anyone can buy anything. There are still companies with the exactly same PO’s and authorisation process to get a bag of nails as you would to order a new building, the amount of time and effort wasted by many organisations chasing paper and authorising the same things two or three times is ludicrous. Setting people free and putting up front authorisation in place for all but the major categories of spend can liberate businesses and reduce rogue behaviours in organisations.