Why are businesses failing to get the most out of their non-core costs? (pt 2)
Nov 14, 2013 6:00:00 PM
Part one of this three part mini-series discussed how non-core procurement is more complex, wider reaching and changes faster than most people imagine. In this post, we explore three further points, namely the necessary skills, knowledge and perspectives required to effectively manage non-core procurement.
Non-core procurement demands a surprisingly wide range of skill setsThe skills sets required to manage the non-core cost base are diverse and wide reaching. Skill sets such as negotiators, contract drafters, analysts, process mappers, change managers, business partners, C-suite peer-to-peer trusted advisors, researchers, solutions developers / ideas people, contract managers, program managers, influencers, supplier relationship managers, category experts, thought leaders, buyers, technology experts….. and so the list goes on.
And let’s not forget another factor in all this - we’re talking about hundreds of different cost areas (which I’ll discuss in more detail below)..
This is clearly too much to have covered by an in-house team for all but the very largest of organizations. So what happens is that businesses start with the basics – with the things they know they absolutely must have. And then they expand out as far as they can from there. But it means that inevitably there are large gaps. And that’s a problem. And it’s a big problem. It’s big because it is these more advanced areas that generate deep engagement with the stakeholders and budget holders. It’s these areas that result in a sustainable service to the business. It’s these areas that enable active on-going management of suppliers to drive out innovation and reduce risk.
As a result, procurement teams tend to lack the strategic level of relationship they need to be change agents; to be truly effective in their working relationships with their stakeholders. In short, they unable to realize their true potential.
Non-core procurement demands up-to-date insights and knowledge about what’s going on in each and every one of hundreds of areasWe're sure for each individual procurement executive/professional there are areas in which they have deep expertise. However, at the other end of the spectrum, we're equally sure very few, if any, have deep expertise and insights in all of the hundreds of non-core areas.
And yet, that’s exactly what a business needs to maximize the value for money it achieves from its activities. That’s a tough nut to crack.
But it’s even harder than this. Imagine that you did possess, right now, full knowledge about each and every area. As time progresses, unless you are frequently in the market and spending the time and energy continuously researching each area, your knowledge is going to dissipate. Technology, fluctuating commodity prices, innovations, new suppliers, new ways of working, and so on, all create an environment of change.
This is why the procurement function sometimes gets a reputation of being process orientated, of slowing things down and not adding much value. When asked to review an area in which they don’t have full knowledge – or worse, have very little expertise, they revert to what they know. They follow a structured strategic sourcing process. But put yourself in the shoes of the CFO who asks for help on the auditor relationship, who is told, “I’ll come back in three months once I’ve assessed the market.” Why would anyone seek guidance from someone who knows less about the subject than they do? The answer is – they wouldn’t. And therefore, they don’t.
In reality, if you are managing the situation well on an on-going basis with a constant flow of knowledge, your focus changes from an annual or bi-annual tendering exercise to continuous management – and the actual sourcing process becomes almost a formality.
The answer most people give to the question “what is the purpose of procurement?” is wrongMost businesses have a very unhealthy obsession with savings. It’s how they measure the performance of the procurement function above all else. In fact, they struggle to think of how else to measure it.
But no budget holder has ever spent money to save it. It’s not what they set out to achieve. Instead, they want to achieve their functional aims and do so in a way that maximizes value for money, reduces risk, exploits innovations, improves operations, and so on. So, right off the bat, tasking the procurement function uncover fresh savings misaligns them from the people they are there to serve.
Don’t get us wrong – savings plays a part and should be a by-product of great procurement. But they should not be the main reason for being. After all, if CFOs want to save money, all they need to do is cut budgets. It’s that simple. Savings, as the focus for procurement, is not a mature way of managing procurement. Procurement is there to help a business operate; to help it engage with third parties in the most effective way; to help it achieve its business aims in as low risk a manner and as effectively as possible. None of that has to do with savings.
And if the situation isn’t bad enough more often than not savings doesn’t even make it to the bottom line. As one CFO put it at an event we attended, “If I believed all the savings procurement promised me, I’d have a negative cost base by now!” Upon hearing this comment, the other thirty finance people in the room began to violently nod the heads in agreement.
The next and final post in this mini-series will delve into why overcoming this complex situation requires businesses to take a completely different view of what the procurement function actually does.
In the meantime, we welcome your thoughts and comments on this topic – please add them below.