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What does the business want from Procurement?

December 18, 2014

Many in Procurement see the continued emphasis on cost reduction as good news. It seems to make their jobs secure and surely, one day, their status will also increase.

But those who have now lived through 20+ years of pressure on cost may be a little more skeptical. Indeed, Procurement itself is victim of those executive purges, with overall headcount and budgets for Procurement functions expected to reduce in the coming years.

The truth is that the only route to security is through the addition of quantifiable value – and traditional procurement savings are not in that sense a headline item. In today’s more complex world, the aggressive pursuit of savings often damages value and overall company performance. Procurement in this traditional form attracts more enemies than friends. And executives know that automation will steadily allow most purchasing decisions to be made elsewhere in the business.

Businesses are becoming ever more dependent on the quality of their trading relationships and the commercial competence with which these are structured and managed. They must achieve balance in their decision making (weighing the different needs and perspectives of multiple stakeholders). They must achieve balance also in the integration of what they sell with what they buy – so customer needs must be mirrored in their purchasing contracts.

Today, that balance is lacking in many ways because it is distorted by unbalanced measurement systems. Requirement gathering and validation is often flawed, leading to weaknesses in supplier evaluation and selection. The criteria for selection and the resulting contract terms (which then guide supplier behavior) are often misaligned with business goals. The post-award contract implementation and supplier management rely on untrained staff with quite different objectives and limited understanding of their role.

Each of these areas represents a glaring opportunity for added value. And we haven’t even touched on areas such as innovation, which is another possibility.

But it seems to me that most Procurement groups are struggling to move into these areas. In part it may be an issue of skills, but I think it is more often because top management is confused about what it really wants and the Procurement leadership team is not convincing in its arguments for change. While Procurement continues to be measured primarily on cost savings, it remains just one more stakeholder in the overall commercial process. It cannot lay claim to balanced judgment, nor to being responsible for wider business outcomes, while its measurements of success remain so limited. Other groups and functions will continue to see Procurement as reflecting an important, but narrow, interest.

Certainly, if top management wants to secure greater value from its trading partners, it should be thinking hard about changing the business dynamic. And if Procurement wants to be key to the future, it really should be pressing for changes in its role – and especially for rebalancing of the measures used to gauge its success.

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