Executive Briefings

Why Procurement Is No Longer Just a Numbers Game

We've heard it before: chief procurement officers aren't just cost-cutters. They're contributing real value to the organization. But is that really true?

Why Procurement Is No Longer Just a Numbers Game

If a new CPO study from IBM’s Institute for Business Value is to be believed, it’s actually starting to happen. The firm surveyed just over 1,000 companies – a sampling that was exceeded only by IBM’s study from the prior year, according to author and research lead Steve Peterson. All of the respondents were companies with annual revenues of $1bn or more.

Defining the term “procurement” can be tricky. It can mean both indirect and direct purchasing, of everything from paper clips to strategic materials that are essential to production. Peterson says the latest study didn’t include a strict definition of the word. It simply invited participants who “self-identified” as procurement officers, regardless of what they were buying. But only 13 percent of respondents actually held the title of CPO.

Titles don’t necessarily tell the whole story. More important in gauging the power of a procurement manager is the individual to whom he or she reports. While an increasing number of procurement officers are working under a chief operating officer, the majority still reports through the chief financial officer, Peterson says.

That’s not an encouraging fact. It suggests that the procurement function in many companies is still ruled by numbers. “The way the role is structured depends on what the CFO looks for,” counters Peterson. “What we’re finding is that CPOs who are really successful – for whom procurement is a major contributor to a company’s success – are those who take the enterprise view.”

Translation: CPOs are being asked to do more than just cut supplier costs, year after year. They might continue to be governed by key performance metrics, Peterson says, but they’re also thinking about how to improve interactions with suppliers, and be “transformative” to the larger organization. The successful CPO needs to be able to speak the language of other business units, he says – not just the budget-obsessed CFO.

In addition, Procurement officers are engaging in more in-depth conversations with external partners, including both suppliers and customers. “They were significantly more confident that they were hearing the voice of the end customer,” says Peterson. “They value those interactions.”

Ninety-two percent of high-performing procurement officers believe they can add value to external partner relationships, versus 68 percent of underperformers. And just over half – 52 percent – of the top CPOs have turned to suppliers for help in developing new technologies, versus just 39 percent of lower performers. (What’s really shocking is the 10 percent of underperformers who said they don’t value ties with external partners, and 11 percent who feel the same about internal collaboration. Is it any wonder they’re at the bottom of the heap?)

One finding that surprised Peterson was the tendency of top CPOs to stay current on information technology and practices that foster social collaboration and process automation, particularly with regard to “bleeding-edge” analytics. That’s the case with 41 percent of top CPOs, versus 16 percent of laggards. The study doesn’t define which tools are actually being deployed, but does find a “strikingly high” correlation between top CPOs and their participation in that general area, Peterson says.

In fact, the study finds that top procurement organizations are nearly twice as likely than their lower-performing counterparts to introduce innovations in the company, and one and a half times more likely to influence senior leadership to enter new markets.

Again, though, the devil is in the definition: What, after all, is a “high-performing” CPO? IBM asked respondents to identify their companies’ performance on revenue growth and profit improvement over the prior three years, relative to industry peers. The top 10 percent were designated as “role models,” and the bottom 12 percent as underperformers. According to Peterson, the self-reported assessments turned out to be surprisingly accurate, based on subsequent confirmation by IBM.

Peterson says he was taken aback by the slice of respondents who don’t value internal and external interactions. But he was heartened by leaders’ embrace of analytics, and progress toward automating the procurement function.

Procurement officers, like their counterparts in other supply-chain disciplines, continue to wrestle with the issue of talent. The challenge, says Peterson, lies in attracting the right people, then crafting incentives that elicit their best effort and ensure their longevity within the company. And that task becomes even more difficult as the role of the CPO expands to include a broader range of knowledge and skills.

Compensation is key, of course, but CPO morale is also closely tied to how much those managers feel they are contributing to the company. When it comes to high-level strategizing, do they have a seat at the table?

That’s a question Peterson hopes to answer in the next annual study. He would even like to ask managers in other business units, especially marketing and sales, about how well procurement is serving their needs. The answers should help to determine the real role of procurement in the organization today – and whether the traditional cost-cutting mentality of this vital function is truly on the wane.

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If a new CPO study from IBM’s Institute for Business Value is to be believed, it’s actually starting to happen. The firm surveyed just over 1,000 companies – a sampling that was exceeded only by IBM’s study from the prior year, according to author and research lead Steve Peterson. All of the respondents were companies with annual revenues of $1bn or more.

Defining the term “procurement” can be tricky. It can mean both indirect and direct purchasing, of everything from paper clips to strategic materials that are essential to production. Peterson says the latest study didn’t include a strict definition of the word. It simply invited participants who “self-identified” as procurement officers, regardless of what they were buying. But only 13 percent of respondents actually held the title of CPO.

Titles don’t necessarily tell the whole story. More important in gauging the power of a procurement manager is the individual to whom he or she reports. While an increasing number of procurement officers are working under a chief operating officer, the majority still reports through the chief financial officer, Peterson says.

That’s not an encouraging fact. It suggests that the procurement function in many companies is still ruled by numbers. “The way the role is structured depends on what the CFO looks for,” counters Peterson. “What we’re finding is that CPOs who are really successful – for whom procurement is a major contributor to a company’s success – are those who take the enterprise view.”

Translation: CPOs are being asked to do more than just cut supplier costs, year after year. They might continue to be governed by key performance metrics, Peterson says, but they’re also thinking about how to improve interactions with suppliers, and be “transformative” to the larger organization. The successful CPO needs to be able to speak the language of other business units, he says – not just the budget-obsessed CFO.

In addition, Procurement officers are engaging in more in-depth conversations with external partners, including both suppliers and customers. “They were significantly more confident that they were hearing the voice of the end customer,” says Peterson. “They value those interactions.”

Ninety-two percent of high-performing procurement officers believe they can add value to external partner relationships, versus 68 percent of underperformers. And just over half – 52 percent – of the top CPOs have turned to suppliers for help in developing new technologies, versus just 39 percent of lower performers. (What’s really shocking is the 10 percent of underperformers who said they don’t value ties with external partners, and 11 percent who feel the same about internal collaboration. Is it any wonder they’re at the bottom of the heap?)

One finding that surprised Peterson was the tendency of top CPOs to stay current on information technology and practices that foster social collaboration and process automation, particularly with regard to “bleeding-edge” analytics. That’s the case with 41 percent of top CPOs, versus 16 percent of laggards. The study doesn’t define which tools are actually being deployed, but does find a “strikingly high” correlation between top CPOs and their participation in that general area, Peterson says.

In fact, the study finds that top procurement organizations are nearly twice as likely than their lower-performing counterparts to introduce innovations in the company, and one and a half times more likely to influence senior leadership to enter new markets.

Again, though, the devil is in the definition: What, after all, is a “high-performing” CPO? IBM asked respondents to identify their companies’ performance on revenue growth and profit improvement over the prior three years, relative to industry peers. The top 10 percent were designated as “role models,” and the bottom 12 percent as underperformers. According to Peterson, the self-reported assessments turned out to be surprisingly accurate, based on subsequent confirmation by IBM.

Peterson says he was taken aback by the slice of respondents who don’t value internal and external interactions. But he was heartened by leaders’ embrace of analytics, and progress toward automating the procurement function.

Procurement officers, like their counterparts in other supply-chain disciplines, continue to wrestle with the issue of talent. The challenge, says Peterson, lies in attracting the right people, then crafting incentives that elicit their best effort and ensure their longevity within the company. And that task becomes even more difficult as the role of the CPO expands to include a broader range of knowledge and skills.

Compensation is key, of course, but CPO morale is also closely tied to how much those managers feel they are contributing to the company. When it comes to high-level strategizing, do they have a seat at the table?

That’s a question Peterson hopes to answer in the next annual study. He would even like to ask managers in other business units, especially marketing and sales, about how well procurement is serving their needs. The answers should help to determine the real role of procurement in the organization today – and whether the traditional cost-cutting mentality of this vital function is truly on the wane.

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Why Procurement Is No Longer Just a Numbers Game