What is VALUE for your organisation? How do you define it and measure it? And how is it changing? Jonathan Dutton FCIPS offers some insights for SUPPLY CLUSTERS members:
In the previous two articles, we asked a perennial question in each – How much should one buyer spend? And, how much should one buyer save? It depends, we decided.
But, although perennial questions in Procurement Land, they increasingly seem to be the wrong questions to ask.
Savings tend to zero over time
There are only so many times you can go to the market and expect savings within the same categories. Good luck with the 8th stationery tender. You are more likely to get cost increases than savings in such an effort. Especially given the vendor consolidation in that particular industry.
And, as the procurement profession has developed so clearly in Australia over the last 15 years, so many procurement teams are finding their limits in terms of savings. The ratio of total savings made against the cost of running a professional procurement team (their ROSMA score) is inevitably dropping. Proving our assertion in the previous article – savings tend to zero over time.
Economists call this ‘the law of diminishing returns’ and it is not a new theory; in fact, Adam Smith touched on it in “A Wealth of Nations” (1772). And more and more procurement teams are finding theirs in terms of savings as new addressable spend areas dry up and repeat trips to market become increasingly fruitless.
“Why carry permanent overheads to manage cyclical spend?”
This begs the question – if your procurement team is not making savings any more, what are they for? Some CFOs conclude that the best savings their organisation can make at this point is to retrench the procurement team itself; and delegate orders to the line managers, maybe.
As one CFO said to me once, “why should we carry permanent overhead in procurement, to manage cyclical spend? We can outsource our future forays into the market” he added. Or even utilise aggregators of course!
Was he right? Or was he wrong?
I believe that it is procurement’s role to deliver value. What makes this difficult is definitions of value vary by organisation and over time as well. Also, this approach demands alignment. To justify our existence in a low-savings world, you need to be clear on the purpose of your organisation and its goals and, crucially, exactly how the procurement team can support those goals more directly.
This is where true value abides in most organisations. Relevance to strategy and alignment to Mission & goals. Often these are interpreted by procurement. The EIGHT strategic benefits of the procurement contribution, detailed in the previous article, are a good example.
Cutting cost or growing revenue?
Very rarely is cost-cutting a goal. CEOs understand that you cannot ‘cost-cut your way to greatness’ as a strategy. Growing revenue is usually a core goal for most organisations – certainly in the private sector. But how can procurement help that? And how can it drive competitive advantage from the supply side? These are both topics for the JDC Strategic Procurement Masterclass.
“You cannot cost-cut your way to greatness”
Traditionally, procurement value resides in ‘The FIVE Rights’ – a concept in procurement textbooks almost from day one:
Ironically, this is still true today. The FIVE rights are still relevant. Nowadays, we often measure DIFOT – delivery in full on time. How often is it 100% though?
Yet two things have changed over the years:
1. The standard expected by stakeholders for delivering the five rights is now 100% – not 99% or 95% or even a high 80s score, as in the past. It is 100%.
2. There are now TWO more “Rights” … to make the SEVEN Rights of procurement :
What is value?
Value has broader definitions nowadays for almost all stakeholders:
In the public sector, procurement is increasingly seen as an instrument of policy. These policies have broadened beyond ‘value for money’ into compliance & probity, good process, and better policy outcomes. A good example might be the Indigenous Procurement Policy 2015 or, even, the Modern Slavery Act 2018.
“Procurement can be a very effective instrument of policy” – Lindsay Tanner
Interestingly, few organisations in Australia had proactive policies against modern slavery penetrating their supply side until after the recent act was passed in November 2018. Today, most organisations will income over $100m are (correctly) scoping out their policy and their action plans – an example of the definition of VALUE chaining over time.
In the private sector, new definitions of value can include how to grow revenues from the supply side. Category management applied well includes cross-functional teams working to increase benefits for customers – the real customers (external ones) that buy our products and services.
The father of modern marketing management, Phillip Kotler, defined six laws of competitive advantage: Four of these can be directly influenced by the supply side*
In the future, I think that increasingly internal stakeholders from boards to users will demand that procurement share more proactively and more directly in these aims.
Four dimensions of VALUE
Once you liberate procurement approaches from one-dimensional financial targets, a strategic approach to the supply side can achieve a great deal more for organisations. Robert Pease identified four dimensions for procurement value:
These include obvious cost or financial targets (procurement’s ticket to the game, after all) and more formal responsibility for risk management.
As industry has outsourced more and more, really over the last 30 years, we have increased risk as a consequence. Ultimately, you cannot outsource risk – it always comes back to bite the one outsourcing if you do not manage it carefully. Evermore so today, with a heightened awareness of stakeholders over issues of provenance – where things came from and how they got here?
Service quality can be demonstrably affected by procurement management as one of the laws of competitive advantage. Service standards, performance management and SLAs (service level agreements) should feel more familiar to procurement teams that they do.
As savings tend to zero, downstream post-award contract management can be a new area of opportunity for many procurement teams. Not just to leverage up service standards though. And not just to guarantee the utility from the products or services we bought.
Traditionally somewhat neglected, this is where benefits realisation should be happening. That is where we are harvesting the laundry list of hard and soft benefits detailed in the long-forgotten business case that justified our purchase. Also, where we gather the marginal wins from the negotiation room. There are more savings here yet!
Finally, the great prize of good SRM (supplier relationship management) is innovation. Another source of competitive advantage. Yet innovation is an outcome not an input. You cannot demand it, only invite it. And you should be specific to suppliers; no good just asking for “innovations please” – innovations for what? To solve which business problem?
Moreover, suppliers must have confidence in you as a client and confidence that you will respect their offering. Not ‘white-out’ their name and tender their ideas or designs. This demands trust. And trust is earned over time, you cannot tender for it.
The RIGHT question
How much procurement should be saving is increasingly the wrong question to ask. A better question might be “How are we helping?’ – that is how are we helping to strive for the corporate mission? How are we helping to achieve corporate goals? If we cannot draw a straight-line between what we are actually doing behind our procurement desks and the mission & goals of our organisation, then how are we truly relevant in future – a post-savings world?
So, how are we galvanising our external resource base to drive competitive advantage or greater value for our true customers? Or simply; what is value for our organisation, how can we generate it, and then measure it?
Jonathan Dutton FCIPS is the former founding CEO of CIPSA - the procurement peak body in this region. He now works as an independent management consultant specialising in procurement and has a non-executive role at Supply Clusters www.jdconsultancy.com.au