How to conduct a Procurement health check
As a new COO, CFO or CPO you can assess the potential for improvement in your procurement department by analyzing five key areas.
Management can identify what improvements can be made within their procurement function by assessing it across five key parameters:
- Organisational standing – leadership, reporting lines, remits and mandate for action
- Staff profile – education, skills, experience, talent attraction
- Strategic sourcing – roles, process and competence
- Stakeholder engagement – how integrated the function is in key business units
- Strategic planning – full integration into the strategic planning and budgeting process
The argument as to whether procurement should be a board-level position is to some extent a red herring. The nature of reporting lines will be determined by the shape of the business and the relative criticality of the supply base and cost to the company – not all functions can be directly represented. Yet we see clear correlation between a function’s performance and the following factors:
- Procurement is well represented at the executive level, ideally through the COO or CFO, who can influence colleagues, ensuring early procurement involvement and strategic alignment of goals.
- The function has a clear and wide-reaching remit across all third-party expenditure, which is mandated and enforced.
- The procurement leadership has the ability to regularly update the executive team on performance, opportunities and strategic plans.
- The procurement leadership has the skills to influence and operate at an executive level.
Procurement organizations that have no representation or advocacy at the executive level often struggle to influence effectively. The function must also help itself by ensuring that it has the capabilities and skill sets to really add value to the business. Too often, procurement demands to be involved, only to disappoint key stakeholders by failing to resource projects with staff who have the required skill and experience.
During a recent functional assessment, a client CIO explained why he had little involvement with the company’s procurement team: “I would happily involve them earlier if I felt they added value to my team. My experience to date is that they don’t have the right skills or sufficient understanding of the issues within IT.”
Procurement is rarely considered a ‘sexy’ function. It therefore struggles more than others to attract professional talent. This is surprising as strategic sourcing is a complex process requiring a high skill set, with staff capable of influencing across a wide range of stakeholders, conducting detailed analysis, developing commercial strategy, leading negotiations, drafting contracts and managing complex change projects.
We find that companies that invest in high-quality sourcing staff invariably demonstrate a much higher performance and better engagement across all areas of their business.
One of the key ratios we assess is the distribution of resources between strategic, governance and transactional activities.
Underperforming functions often have a low proportion of strategic sourcing resources, or they may fail to differentiate between the various skills required to conduct reactive tactical buying and proactive strategic sourcing. High-performing functions typically have the following characteristics:
- Strategic sourcing is recognized as a distinct skill set and is staffed with sufficient highly skilled individuals. The strategic sourcing process is rigorous, and intended to define and challenge business needs, understand the supply market, define strategy, and run competitive tendering and supplier development activities. This should be where the function’s ‘stars’ reside and should be the main focus of investment and development. We would expect every pound invested in this team to be paid back more than ten times over – a sound investment for any company.
- Tactical buying and Procure-to-Pay (P2P) are separated from strategic sourcing, with staff focused on effective control and transactional process efficiency.
- Governance – high-performing functions build governance into their core processes, with few roles ‘policing’ the organization. This drives better ownership and frees up headcount to invest in value-adding strategic sourcing resource.
A company cannot function in the short term without efficient P2P activities, but strategic sourcing is the process that creates and retains long-term value. The activities have a different pace and require different skill sets. Unfortunately, some organizations do not recognize this and expect the same personnel to perform both, with the consequence that the ‘urgent’ usually overwhelms the ‘important’.
As P&L accountability resides within business units, procurement is usually positioned as a support function. To ensure full integration, procurement needs to engage with stakeholders and guarantee that procurement plans fully align with the company’s strategic goals and business unit objectives. High-performing functions ensure that staff spend significant time working closely with their internal stakeholders. Treating these stakeholders as customers of a service is a powerful way for functions to test how well they are engaged, how well they understand customer requirements, and how well the services they offer are understood and valued.
Procurement personnel should be visible and involved, and facilitate across all company functions. If they are ‘deskbound’ or used only at the end of the procurement process to validate choices made elsewhere, they have little ability to add value and the potential lost opportunity for the company can be significant.
A valuable test of the perceived value of the procurement function within a company is the extent of its involvement in the annual strategic planning activities. We look for the following indicators to test alignment:
- The procurement function has a clear planning process to identify and prioritize projects and activities. This process is defined and formally agreed by stakeholders and finance.
- It is consulted by finance and business units during the strategic planning cycle, to help define third-party costs, and its recommendations are integrated into business unit’s strategic plans.
- Savings targets are ‘baked’ into the business unit’s budgets – this drives alignment and accountability, creating a mutual dependency which helps ensure engagement. It is also a valuable measure of the business’s confidence in the procurement function’s capability to deliver.
- Progress against plan is regularly reported and all parties are held accountable for delivery.
Procurement’s targets and projects are too often not aligned with the business priorities, and savings remain ‘theoretical’ as they are not crystallized within the P&L.
For the senior management accountable for procurement – whether a CPO from a business background or a COO/CFO – an understanding of the key indicators of success is important.
While a full functional assessment is always advisable and highly valuable to shape any subsequent improvement program, senior management can make an immediate start by testing the aspects outlined above. If the initial review indicates shortcomings against these high-level indicators, a rapid in-depth review can be commissioned to benchmark the function, assess the changes required and define the benefits possible from investing in a higher-performing function.