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The case for an integrated commercial service

January 20, 2014

I enjoyed reading a recent paper from Horses for Sources Research, which draws on research by Proxima to highlight the fundamental shift that has occurred in business operations and the challenge this represents to organization and skills. Essentially, the study found that the average business spends some 70% of its revenues on non-labor costs and this has generated a critical dependency on services supply chains. This has generated a need to fundamentally alter the way that supply relationships are managed.

The paper by Phil Fersht reiterates the case for a value-based approach to key supplier relationships and confirms the view that traditional approaches used for direct procurement are damaging business results. Its main contribution comes from some original research suggesting many organizations are already adopting new business models; but unfortunately it does not explain in any depth what these models are or how organizations might achieve them.

The ‘Six Characteristics of Companies of the Future’ are translated into a series of Procurement competencies that are once again interesting and reflect many of the areas that IACCM has been promoting for several years. Where the paper fails is in explaining its assertion that the future will be achieved through a ‘hybrid outsourcing and shared services’ operating model and quite how this connects to future Procurement. Indeed, it seems to imply that the main change is in re-skilling and re-focusing the efforts of the traditional Procurement workforce. But is that really achievable and is it in fact adequate?

I fully agree that supplier relationships are key to business success. But so are customer relationships, because without those, there is no need for suppliers. The real issue with current business models is the continued fragmentation of how we see and manage ‘the market’. I agree with many of Phil’s assertions, but in my view the real need is for an integrated market management service that oversees the alignment of trading policies and practices for both customers and suppliers. Continued separation of those who buy things and those who sell things is one of the unresolved tensions within most businesses. They operate with fundamentally different views of the world, rather than ensuring the internal collaboration that would generate a consistent value focus.

Indeed, as I mentioned in one of my blogs last week, recent research by the Chartered Institute of Purchasing and Supply found that the most serious weakness in today’s Procurement staff is a lack of commercial awareness. That, I suggest, is because they operate in relative isolation from the core business purpose, which is to be successful at selling goods and services. By consolidating contracts and commercial resources into a single services group, skills, processes and systems could be dramatically overhauled to ensure coherent and integrated management of external trading relationships.

 

One Comment
  1. The question of whether the skills of the traditional procurement workforce can and should be re-focused to deliver value adding services (not just more cost reduction) is an important and complex one. In today’s changing business landscape, with the pace and speed of information at the fastest it has ever been, the pressure is on to demonstrate added commercial value. Modernizing the procurement model is no simple formula. It needs to reflect the current business and economic climate, for example post-recession versus optimism about national economic growth, and it needs to acknowledge the complex attributes needed by individuals working in the field.

    Deloitte’s recent CPO study further found that CPOs “feel the Procurement function has a lack of skills and resources to effectively engage with the rest of the business”. The importance of having the right blend of skills cannot be underestimated. Specialists are essential and asking them to stop doing what they do best and instead focus on something entirely different will likely cause discomfort for all involved. Asking them to retrain could well have negative effects.

    There is no single, simple answer to the ‘how?’. It is completely dependent on the industry and business in which you operate. Identifying where relational problems are occurring between procurement and the wider business is the first step. Some businesses may benefit from creating a business interface role, others may need a complete restructure – no two models are the same and nor should they be. Businesses are unique and thus require a bespoke solution to striking up deep relationships that focus on value.

    Procurement individuals need to build trust as a fundamental pillar to their way of working. With trust comes a true understanding of the challenges, pressures and needs in a business. Bringing constant, up to date market knowledge to stakeholders is essential but without identifying the true focal points it is useless. The danger of entering a vicious circle of delivering cost savings that stakeholders do not care about looms large.

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