It’s a common misconception that procurement in business is all about saving money.
While savings do play a role in procurement, there are many other factors that business executives must pay attention to in order to continue to deliver successful results.
Progressive chief procurement officers (CPOs) who wish to get ahead of the curve must focus their attention elsewhere: specifically, on growth through innovation. Procurement is uniquely positioned to identify and pursue opportunities for innovation and growth that other parts of an organization might miss. It can make unique contributions to areas such as ecosystem management, better governance and adoption of a holistic supplier view.
Increasingly, procurement specialists are viewing the opportunity to drive innovation as an attractive feature and strategy. Emelia Nosser, CPO of Shiseido Americas Group, notes that she was attracted to the company because “leadership was looking to procurement to help drive innovation. That’s very different from the cost-cutting mission at so many other companies. Of course, there are expectations around savings and performance, but the real focus is on growth and innovation.”
Despite the prospect of positive outcomes from driving innovation through the procurement function, some executives still haven’t jumped on board. That’s a dangerous stance to take. Those who fail to achieve optimal levels of innovation risk falling behind the competition. Accenture Strategy research found 52 percent of businesses saying that the formation of ecosystems by rivals poses a significant threat.
For skeptical CPOs, delivering innovation through procurement can be defined through a few key components:
- Effective ecosystem management. An organization and its suppliers and partners make up a crucial ecosystem within the overall business environment, and such ecosystems are vital to innovation. Suppliers, for example, are increasingly being relied on as a source of new ideas for giving the company a competitive edge. According to a recent Accenture Strategy study, 81 percent of C-level executives agree that ecosystems allow their organization to grow in ways not possible without developing a partnership network. Why are ecosystems so important? In the same study, we found that 63 percent of businesses view the ability to innovate as the top opportunity that ecosystems present.
- Better governance. CPOs also use a variety of governance structures to improve supplier collaboration, including annual top-to-tops or quarterly business reviews. These communication channels can deliver tremendous value when they’re chartered and structured with intent. Diageo, a multinational alcoholic beverage company, offers one example of how updated governance structures work well. CPO Jennifer Moceri is launching a new supplier relationship management (SRM) program, and notes that Diageo can improve its innovation pipeline and brand reputation if supplier partners play a more proactive and insightful role in ideation and delivery. She believes this type of partnership will drive sustainable business performance for both parties.
- Innovation from a holistic view. Procurement makes it clear that suppliers who support multiple lines of business will see more success than those in standalone relationships. It’s also common for procurement to form internal supplier councils around a given spend category, or for CPOs to share best practices externally in industry groups, creating a broader perspective of supply market capability. This visibility enables procurement to locate better supply sources. Procurement is also empowered to support growth through innovation because it shapes the terms, conditions and compensation of suppliers. It has access to negotiation tools that help form at-risk, gain-sharing and exclusive rights agreements. These commercial terms can influence business outcomes and ensure alignment. Challenging suppliers to invest in your partnership, or come to the table with original ideas, are often-underutilized tactics when forming these commercial relationships.
For companies to integrate these suggestions strategically, CPOs need to ensure they have base procurement capabilities in place. If, for example, a company’s source-to-pay infrastructure is poor, and it’s paying vendors late, innovation through procurement likely won’t be successful. But if the organization is ready, procurement might be able to make a significant contribution to growth.
An initiative to drive growth through supply innovation doesn’t have to be difficult to start. Pick one supplier, business area or spend category. Start with a pilot, then scale based on what you’ve learned. As Confucius said, “Better a diamond with a flaw than a pebble without.”
Too many companies fail to make progress in this space because they over-think or over-plan. Any business that wishes to drive growth and stay competitive must focus on updating its ecosystem to pursue innovative and agile business models.
Seth Rogers is managing director for Accenture Strategy.