The US escalating a trade war with China by imposing additional tariffs on Chinese goods. The ongoing debacle of European trade policies over Brexit. The perennial Middle East crisis over oil. 2019 has not been easy for global businesses and their procurement professionals.
But given that it is only one-quarter of the exhaustion, could we benefit from an expert’s insights and frame strategies such that procurement can navigate successfully through the rest of the waters?
Sure! Zycus got in touch with the CEO & President of SIG, Dawn Tiura soliciting her point-of-view on how procurement professionals can navigate through the uncertain times ahead. Dawn, a former partner in a CPA firm, focused on early-stage Silicon Valley enterprises and high wealth individuals, kindly agreed to explain her actionable list of do’s and don’ts that every Procurement leader can benefit from.
Zycus: What elements should be central to our conversation on procurement in the coming year?
Dawn: One of the important conversations that procurement teams all over the world should reflect on at the moment is their understanding that every dollar-saved might not directly translate into company’s eventual revenue objective but they do improve the bottom line when the focus is consistent. We have the unique ability to impact not only bottom-line savings but also top-line growth. We have insight into all lines of business as they are making decisions, not in the rearview mirror. And, we have relationships with suppliers who are incented to bring innovation to us. If that is not enough, why not use equivalent revenue? That will get the attention of the CFO, CEO, and Board.
Zycus: Most organizations majorly use hard dollar savings as the primary parameter to measure procurement and sourcing performance. Would it be safe to say it is a dated method of measuring current performance?
Dawn: Absolutely. We have to stop using savings as our sole barometer for measurement. Let’s look at an example:
The spend of an organization is $500 million; the cost avoidance from sourcing efforts at 12% comes to $60 million. Net profit margin is 7.5%. The equivalent revenue to generate the same value from sourcing efforts is $800 million (or $60 million divided by 7.5%)
The amount of energy required by the company to generate $800 million in revenue is massive and clearly understood by all members of the C-suite. Therefore, reporting results in terms of “equivalent revenue” instead of “savings” positions the sourcing organization in a more impactful and compelling way.
While you would assume that others will make this calculation and realize this is the case, they don’t, or can’t make the analogy to give us the credit we deserve. We must step up and change the dialogue to get the respect we have earned.
(Read Dawn’s complete blog that talks about this issue and a lot of others here)
Zycus: So the first focus of a procurement and sourcing professional is getting the C-Suite to shift focus from savings to equivalent revenue, what would you say would feature next in their “things to keep in mind” list?
Dawn: Third party risks. Procurement and Sourcing professionals should be particularly mindful about these threats and therefore should have a foresight aided by technology that would mitigate the potential of loss. A take charge approach towards risks is what the current environment demands. Procurement and sourcing teams all over are responsible for managing goals and key relationships for the organization. It becomes vital for them to work on these objectives while taking into consideration the various risks they might be exposed to. Strategical planning and readiness will help not only tackle these risks better but also ensure the routine operations and performance doesn’t get disrupted.
Zycus: From what we’ve seen, these discussions seem much underrated, what can organizations do to ingrain this line of thought across the team?
Dawn: You make a valid point. However, that is changing. Organizations are becoming more mindful that this change in mindset is long due, and they need to adapt. This is why we’re seeing more and more people investing in education and certifications, so they have the necessary skillset to tackle these changes better.
Zycus: Artificial Intelligence has created a lot of buzz. How do you think that is changing procurement today.
Dawn: There is a breakthrough using Artificial Intelligence to manage risks in tail spend. A lot of companies are still new to the idea of AI, but the use of AI will be a game-changer.
Zycus: Gartner’ predicts, “By 2022, 75% of all B2B tail spend goods will be purchased in an online marketplace.” Do you agree with this?
Dawn: Indeed. As legacy systems continue to phase out, it is only AI that can redeem procurement an improved balance sheet.
Another aspect of change that people might miss out on is accounting regulations changing concerning leases and procurement people need to be aware of the changes and impact on their companies. While the implementation of the new lease accounting guidance will fall within the accounting department, procurement needs to be a part of this review to provide its perspective on any proposed changes to agreements and to do the cost/benefit analysis.
Zycus: Moving forward, one thing that has always been a concern is how procurement can have a facelift from being a more tactical function to a strategic one. So what steps would you recommend teams take for this significant makeover?
Dawn: A strategic mindset is crucial to this rebranding of procurement. This transition is what will make other functions value procurement’s take on importing sourcing decisions. For this procurement, professionals need to be all eyes on various risks and opportunities. Professionals must be mindful of changing technologies. They need to prepare for it with certification in third party risk management and sourcing professional’s coursework.
Procurement and sourcing teams should consistently measure their contribution to the enterprise. An excellent way to measure one’s impact on to company’s strategic objectives would be to create a chart that cascades from the top management down to the business units, and how at each phase, the person has contributed to every success. On this note report from the Hackett Group also states, “This is a unique time for procurement organizations. Never before have companies been able to derive more competitive advantage from superior procurement capability. The function’s role is shifting from a sourcing gatekeeper to a provider of insight and decision support, made possible by improved access to digital technologies, data, and advanced analytics. World-class procurement organizations consistently get better results with 29% fewer (but higher-paid) FTEs per billion dollars of spend.”
Zycus: One parameter to measure overall procurement impact would be to track contribution in top-level business objectives, what do you think could be other benchmarks procurement teams could use to measure performance holistically?
Dawn:We need to, as proactive procurement practitioners, change how savings from procurement is measured. “Equivalent revenue,” the term will not only consist of hard dollar savings but elements like savings through cost avoidance. Anything that impacts the bottom line and contributes to growth counts!
Another common and useful benchmark used to measure performance is FTEs. The number of full-time equivalent employees (FTEs) needed to perform a process, or a group of processes is one way to gauge process efficiency. The fewer FTEs required to process purchases, the higher the efficiency and the lower the overall cost of the procurement cycle. However, consider only those who formally report into the procurement organization.
FTEs are employees who devote all or part of their jobs to sourcing activities, and they should factor into the measurement. Meaning, if a non-procurement employee spends a portion of his time to procurement or sourcing activities, he or she is a partial FTE. Their effort will also eventually add up to that of full-time employees.
Zycus: My last question to you is, what are three things procurement should start/stop doing this year?
Dawn: The first thing that Procurement professionals must stop is being transactional and writing checks. The second to stop would be to keep talking about savings over everything else, while the last one would be to learn to communicate in the language of the CFO.
Our Conclusion from the interview
A seemingly strong inference that can be drawn from this interaction is Procurement’s transition from a transactional to a strategic function. This shift in approach has been a necessity for some time now; statements from subject matter experts and veterans advising Procurement professionals advising alignment of goals and their measurement, to learn the language of a CFO instead of focusing on operational goals, go to show how vital that shift is now.
Read our latest eBook “Procurement Experts Outlook 2019” to gain more insights into what eight other experts predict for the procurement future.