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Posts Tagged ‘strategic procurement’

In Part One I wrote about procurement salaries and I recently come across new United Kingdom data from The Chartered Institute of Purchasing & Supply (CIPS).  For those who are curious over the profession’s earning power, read on.

Earning Power

By Supply Management magazine

Purchasing managers are more highly paid than their colleagues in marketing, HR sales, IT and finance. Members of the Chartered Institute of Purchasing & Supply (CIPS) earn £1,500 more a year than purchasing professionals who are not members. The pay gap between men and women is virtually non-existent in procurement. And more than half of purchasing professionals say they have good or excellent job satisfaction.

Figures like that make procurement a real contender in the graduate jobs market. The profession is seen by many organisations as the department that saves money, and while purchasers were not immune to job cuts during the recession they have generally escaped the worst of the cull. And now, procurement recruiters are reporting a buoyant market post-recession as posts open up and buyers become more confident about switching jobs.

And salaries are holding up well. The general complaint in this resurgent procurement jobs market isn’t that there aren’t enough applicants, but that there aren’t enough of the right calibre, so employers are willing to pay more than average to get the right people.

For junior managers, which is entry level for graduates, pay is about on a par with the national average for similar jobs in other professions: £30,000 compared with an average of £29,650, according to the 2010 Purchasing & Supply Rewards research from CIPS and Croner Reward. This is ever so slightly less than you’d get in an equivalent position in IT (£30,904) or sales (£30,441), but a bit more than in finance, HR and marketing.

As you rise through the profession, though, you can expect the gap to grow. At senior manager level you would probably be earning in the region of £52,500, about £10,000 more than you would be in HR or marketing, and compared with a national average at this level of £45,000. The trend continues right up to director level, where the average for purchasing is £90,000. For HR this is £72,611, against a national average of £80,000.

It is only at director level that there is any discrepancy between the genders, with the women who responded to the survey (10 per cent of the directors who responded were female) saying they earnt an average of £78,000, compared with an average of £90,000 for the men.

Average bonuses reported in this year’s survey were £2,500, with the top earners getting £4,800. Middle managers generally ended up with about £2,160, and 29 per cent of all respondents received a bonus averaging £1,200.

Of course, reward isn’t all about the pay. Working conditions and job satisfaction are also part of the package. The news isn’t quite as rosy as far as working hours go. There has been a general increase over the past year in the number of hours procurement professionals work, although this is by no means unique to purchasing. The Chartered Institute of Personnel and Development has recorded a rise in the number of hours worked across the UK as the economy recovers and labour demands grow. In procurement, this has meant that the biggest proportion of employees work 41 to 45 hours a week; last year the biggest proportion worked 40 hours a week.

Despite this, 54 per cent of survey respondents rated their job satisfaction as good or excellent. Almost all of them said that their job security was fair to excellent, and 77 per cent said they thought their total pay package was equal to or above market rates. A happy bunch, then – and with the right skills and abilities you could be well placed to join them.”

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Developing procurement talent is an art by itself, particularly when I still see many leaders having a less than adequate understanding of how this profession has evolved.  It is a highly fluid practice and it requires professionals with great adaptiveness and agility.  Paul Teague, US contributing editor of Procurement Leaders, published a blog post recently on the topic that is worth sharing.

“How to Develop Procurement Talent

By Paul Teague

Stephen Hester, vice president and CPO of Smith International, was the first to raise the issue at a recent Procurement Leaders roundtable on risk management,sponsored by Emptoris. Procurement, especially in the oil and gas industry from which he hails, has a people problem. Specifically, he said, the need is to develop the next generation of procurement professionals, to groom executives who will have the broad knowledge and international savvy required for success in a global economy.

One by one, the other roundtable members echoed his sentiments when talking about the risks they face. You can read what they said in a report on the Roundtable in the next issue of Procurement Leaders.

I heard similar views expressed at a previous roundtable sponsored by AT Kearney on data analytics. Ahmet Hepdogan, vice president of procurement at Fresh Start Bakeries North America, called for a new generation of procurement executives with “holistic” knowledge.

There have been whole conferences on  talent development, including Procurement Leaders’ Forums. Procurement Leaders formed a knowledge group on talent management. Recently, the Procurement Intelligence Unit called talent management a key priority for CPOs. Google even has a special project on people skills, specifically management skills.

I thought of all that when I read the US News and World Report magazine’s most recent ranking of the best US colleges for studying supply chain management. Here are some of the courses those “top schools” will teach future procurement and supply chain leaders: finance and accounting (Massachusetts Institute of Technology and Pennsylvania State University), law and marketing (Pennsylvania State) and negotiations (Michigan State University), all areas of knowledge procurement professionals need. But, I saw only one course each in global supply chain management (Michigan State) and international business and finance (The University of Michigan).

Gadzooks! Given the globalization of business, the apparent lack of recognition among some of the curriculum planners of the importance of international studies is stunning. Even the Harvard Business Review touted the importance of international experience and knowledge for procurement and supply chain management. I guess the rest of the proverbial ivory tower has no windows through which to look at the world.

So what should the ideal curriculum include? Introductory courses in engineering concepts (to give them an appreciation for product design and manufacturing); corporate finance (so they will see how CFOs look at a business); business law, marketing and advertising, personnel management, and logistics (so they can truly understand the issues those functions face); risk management (think of commodity-price fluctuations, Middle East turmoil and Japanese earthquakes and tsunamis); computer science and statistics (to get them used to using software for analytics); and, especially, courses in international relations/culture/communications (because the world really is flat).

And, rather than study versions of those courses tailored for procurement and supply chain management, they should attend the same classes that engineers, finance students, political science majors and others who will make their careers in those disciplines attend. May as well get them used to collaborating with those folks early.

Oh, and once they get their first job in procurement, I suggest assigning them to those other functions for three to six months each to further appreciate the roles of the people they will serve.

Maybe the best academic program is not one entitled “supply chain management,” but a broad, interdisciplinary program called “business-cycle management.” That may better reflect the role future practitioners will play.”

One thing for sure, those who are trained following Paul’s prescription will no longer be labelled as just a “buyer”.  Let’s announce to the rest of the world how much value we can add.

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“Did you know that Guiness employees…

  • Enjoy free happy hours on Thursday nights at a onsite pub;
  • Receive a liquor allowance each quarter;
  • Can take advantage of partially paid gym memberships;
  • Enjoy on-site services such as health clubs, laundry and dry cleaning services, film development, tailoring and banking services;
  • Are paid well and receive great benefits?”

This is an e-mail I received from Vault.com to market its company profile and insider information services aimed at job seekers. 

Interesting.  Free alcohol on work site.

Though this is hardly unorthodox at all.  At least they are an alcoholic beverages producer, and who can testify their products better than the employees?  I once conducted a e-sourcing training program for Nestle in Beijing.  During break I found fridges packed with ice cream bars that are free for employees to indulge themselves, let alone all the other coffees and soft drinks.  How they managed not to weigh 200 pounds was a mystery to me.  What’s truly amazing, is when companies like accounting firms, investment banks and law firms, offer Friday parties and fully paid gym memberships to the employees as an attempt to promote workplace harmony and work-life balance.

Undoubtedly we all love our perks and benefits.  Other than the critical medical and insurance benefits that I think everyone should be entitled to, I am not too crazy on the perks above.  It’s a nice gesture, but I do get a paycheck from my employer.  If I think that paycheck is fair, I will be as loyal to the company as the reciprocal treatment is evidential.  If my colleagues want to complain about not getting free wine, free office furniture, free fancy stationery or even free meals on company dime, I am happy to see them leaving for the folks that do.  We all have a choice, and it’s not like our employers have tricked us staying for good.  They might have in other aspects, but that is a whole different story, and one that shouldn’t be mixed in the same pot.

At the end of the day, all I am saying is that as long as I am compensated appropriately, I’d rather make use of my paycheck and spend it on dinner parties, gym memberships, home furnishings, investment and vacation plans with my family and friends, my way my time.  If you find that you are not receiving your paychecks lately, call the Labor Department now instead of stealing office supplies.

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Gluing myself to the TV news seems like all I’ve been doing in every waking moment at home this week.  The daily developments are painful to watch, and it just appears as if the worst is always yet to come.  At work, we all are beginning to reflect upon how this epic disaster will have its effect toward our companies and commodities.  Business continuity plans need to be in-effect.  What about our staff, suppliers, partners, stakeholders, and customers in the zone of terror?  How will the utility crisis brought by the Fukushima Daiichi nuclear power plant turn out for the rest of the world?  Regardless of which line of work you are in, believe me, you will be affected. 

Jason Busch from Spend Matters has the following to say in how procurement and supply chain practitioners should be prepared for in this latest crisis.

“Spend Matters suggests an earthquake/tsunami procurement, commodity management and supply chain action plan based on the following steps for companies anywhere in the world in the following industries: automotive, diversified manufacturing (including transportation equipment and electrical machinery), aerospace and defense, high technology, consumer products, chemical/process. A plan should include at least the following steps:

  • Fully understand your extended supply chain and supplier locations and facilities — two, three or even four levels down
  • Stay in constant communication with your suppliers and send resources, if possible, to monitor production ramp-up at key facilities. Lessons from supply chain history suggest that what suppliers might be telling you on the phone in situations like this might be very different from reality. Those buying organizations who are on-the-ground first working closely with their suppliers are likely to receive more favorable treatment in capacity-constrained situations
  • Understand the geographic concentration of suppliers in potential regions in the area (and potential geographic concentration from a port standpoint as well). Even in a multi-source arrangement, natural disasters can help cancel out most of the insurance a split-of-business sourcing strategy provides when geographic concentration exists
  • Offer to help purchase raw materials and lower tier parts/components if necessary on a demand aggregation basis (your purchasing power as a larger organization may help secure supply given the constraints created by the disaster); provide resources to support the sourcing of materials necessary to get supplier facilities back up to production levels and understand, on a bill of material level, the raw material specifications that comprise a finished part, component, SKU or product (i.e., what your suppliers must buy)
  • Monitor the situation (and your supply chains) in neighboring countries as well as those throughout the Pacific that may be impacted by the disaster
  • Prepare to rely heavily on airfreight in the coming weeks and offer to step in and help suppliers from a logistics standpoint — despite the high costs, those who can rapidly secure sufficient capacity and favorable terms with airfreight working closely with carriers directly or indirectly through their 3PL partners are likely to face less; move quickly in general and consider charter situations based on industry, volume and the degree of impact
  • Put friendships and relationships with supplier personnel first — factories can be rebuilt, facilities can be overhauled, ports can be brought back online. Human lives and the spirit of connection are temporal. We must all remember that relationships need to come first — not the bottom line.”

I cannot agree more to the last advice, ever. 

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Do I believe in bonuses for procurement professionals?  Why wouldn’t I?   And it’s not just because we don’t want to be singled out as the only profession not getting any, it’s more toward the pay-by-performance concept that I believe in.  Otherwise, it’s human nature to be complacent.

Yet there are still many opinions within my profession who opt against the idea because of integrity, measurement and benchmarking concerns.  I acknowledge those concerns, but I think they are addressable through rigorous control mechanisms rather than taking away the incentives for precision, innovation, effectiveness and efficiency.

The issue is well addressed in the following article by Rima Evans, projects editor for CPO Agenda.   The pros and cons of bonus schemes are covered, together with an implementation checklist.  For those organizations who are not convinced of rewarding their champions of change, I hereby recommend this article to them.

“Because You’re Worth It

By Rima Evans

Procurement has been widely credited for showing its mettle during the downturn and delivering value to businesses, but has this been supported by adequate financial reward?

Amid the current period of fragile and uncertain recovery, now is not a great moment for pay rises – in fact, the latest CPO Agenda economic survey showed a considerable drop in the number of companies approving pay increases (from 25 per cent in May 2010 to 9 per cent in November 2010.) But bonuses may be an option for CPOs currently wanting to redefine or improve the way their teams are rewarded while having to adhere to strict mandates to keep salary bills under control.

Although bonuses are not uncommon in procurement (sector and level of seniority are obviously big influencing factors), there is still some way to go in terms of catching up with other professions.

Andrew Coulcher, director of business solutions at CIPS, says its annual salary survey with Croner Reward in 2010 showed about a third of procurement and supply professionals received a bonus.

Most FTSE organisations offer bonuses ranging between 10 and 30 per cent as the average value, although these figures don’t just apply to procurement staff.

Mark Childs, director at Total Reward Group, points out that the higher the salary, the higher the bonus procurement can command. “If you are earning £60,000 you might expect a 15 per cent bonus, but on £100,000 you might be offered a 50 per cent bonus,” he says.

This type of financial incentive has its obvious advantages – it promotes improved performance and results by being tied to personal objectives.

Jonathan Bean, managing consultant at Purcon, an executive recruitment company specialising in procurement and supply chain management, says: “Do bonus schemes work? Ordinarily they do.

Procurement professionals are tasked with delivering results – not always savings, but often performance that is quantifiable – and a bonus is a great way to acknowledge performance.”

He adds: “The size of the achievement does not always correlate to the size of the bonus and as long as the mechanisms for bonus entitlement encourage sustainable solutions rather than short-term actions, there is no reason why bonuses should not motivate over-achievement.”
Childs agrees. “Bonuses work – partly because people believe they work. In procurement if the lifecycle of the thing or service that is being procured can be measured over time then bonuses are worth looking at.”

A recruitment tool

There are added benefits, Childs explains. Not only can they increase the retention value of reward packages – which is an advantage for CPOs trying to keep talent from walking out the door – they can also be used as a recruitment tool to differentiate your organisation from the competition. 

For employers, bonuses are an effective way of keeping a proportion of employment costs variable, which offers flexibility when employment costs need to be reduced quickly, for example, during a downturn.

At an individual level, “providing a line of sight between their activity and earnings promotes a healthy psychological contract”, Childs also explains. “Often the consequences of not providing a bonus are more detrimental than the positive effects.”

Not all procurement leaders, however, are convinced by their worth and they remain a contentious issue for some practitioners.

CIPS also warns that while bonuses do have their merits, it is a particularly sensitive issue given the austere economic cutbacks being implemented in many countries, and employers should tread carefully.

Performance incentives

Coulcher says: “In times of recession and economic turbulence, retaining good staff and keeping them motivated can sometimes be a challenge. Of course procurement and supply management professionals should be offered incentives in the way other professions are and it’s just one way of keeping the high performers. Yet, with all the controversy around bank bonuses, naturally there is a degree of uncertainty on how this should be approached, and with public sector cuts even more sensitivity is needed.”

Martin Blake, head of corporate procurement at London Probation Trust, a UK public sector organisation, admits to much deeper concerns about the principle of bonuses, describing them as incompatible with the aims, integrity and effectiveness of procurement.

“They can create a negative effect for an organisation, especially when buying services. Reducing cost and making savings is easy – but at what cost to quality? Procurement professionals must act with integrity and in the interests of the greater good of the organisation rather than merely looking after their own interests. A salary should be sufficient.”

However, Blake concedes that the effectiveness of a bonus depends on the nature of what is being purchased. “If you are buying commodities or products that are very discrete, bonuses may not be so detrimental. But in services it’s a different kettle of fish. How do you put a bonus on such intangible aspects as creating robust contract terms to protect the business, or important factors such as flexibility? Procurement adds a lot more value to the organisation, for example risk management, but how do you measure that for a bonus?”

Motive to influence

By contrast, Dirk Zemke, director of strategic procurement, ESAAP, at Sensus, thinks if other departments such as sales are offered bonuses, procurement should be included in the deal too. “Purchasing has to convince other departments to change so why not motivate them with a bonus to change the thinking of others? As service levels are defined and agreed with other departments I do not think a bonus creates negative effects for an organisation.”

Zemke says there is a bonus scheme in place at his company, offering 10 per cent. “It does work. It helps to define the priorities clearly and helps people focus on these priorities. I think it’s important with a scheme such as ours offering 10 per cent to keep people focused on two or three projects a year. With a team of five that is at least 10 major projects or activities you can achieve per year.”

So what elements make bonus schemes work, how can they be structured and what criteria should CPOs set down for the individuals’ and organisation’s benefit?

First of all arrangements will differ according to role and job. Childs explains there is a key distinction between a bonus, and commission or incentive plan. A procurement manager is likely be on a more general bonus plan, driven by the profitability and results of the company, as well as having to meet personal objectives. Whereas more junior staff carrying out transactional work might more commonly be on a commission-based arrangement, directly linked to individual results.
“For junior staff, where there is a more direct relationship between what they do and results achieved in the short term, they tend to want to see the reward more quickly. So they might earn £20,000 basic but be able to increase that to £500-£1,000 more per quarter in commission,” says Childs.

Broadly speaking, there are a number of criteria or KPIs that may be common to procurement bonus plans:

1. Savings
On the face of it, this is a logical way for procurement’s performance to be measured, but there are challenges. According to Bean: “As savings can be captured in a variety of ways, such as negotiations, cost avoidances or specification changes to reduce costs, it is not always a clear-cut issue. One problem often experienced within procurement is of course the validity of savings and how they are measured or recognised within the business. If you change the specification of a material used in production, is that a saving that can be banked against procurement for identifying an alternate grade, or against finance as the cost of manufacturing the product is reduced?”
Bean also warns that the contribution by procurement can also be muddied if savings are reinvested but overall budgets stay the same.

Childs says procurement enjoying a share of the savings they make is not as common as one might expect. “It’s more likely to happen among outsourcing procurement providers, where their revenue is tied in with savings achieved. Where procurement is not the core activity of the business they are more likely to be on a conventional management scheme.”

2. Contract compliance
Candidates are often measured on this, says Bean, as well as spend coverage managed or influenced by procurement. “It can be quantifiably measured while at the same time showing how much leakage there is in contracts set up with suppliers.” It’s not completely watertight however. Procurement can often bank a saving based on anticipated budget. But the savings might not be fully realised as compliance or buy-in to a deal is poor.

3. Customer or internal stakeholder feedback 
This can often be used to validate activities and satisfaction levels and can be used as a KPI, especially if the business is encouraging experts in their field and wanting customers to have full confidence in procurement, says Bean.

4. Compliance to follow the sourcing process
A measurement that can be adopted especially within organisations keen to make sure their interaction with suppliers is fair, auditable and transparent.

5. Quality and outcomes

Offering bonuses that hold individuals to account for outcomes is an area of opportunity for innovation, explains Childs, particularly in long-term, major contracts or purchases of large capital items.

“An element of the bonus could be deferred and remain at risk subject to long-term outcomes. So if a person cuts a deal and claims a certain amount of success, but 18 months later there were outcomes or quality issues that were not so great, that person can be held to account. So a person can’t just walk away after a deal has been cut.”

Childs adds: “This is much like what is going on in the financial services. I haven’t come across a scheme like this in procurement yet.”

The value of bonuses is hugely variable – some meritocratic organisations offer up to 98 per cent bonuses, according to Bean, but he adds that it is not usual for companies to directly relate the bonus value to value of savings delivered. “Ordinarily it is a combination of company, function and individual performance,” says Bean.

Coulcher thinks the split should be about 75 per cent/25 per cent with reward linked to overall company performance and supply chain performance.

However, Bean also advises: “A typical CPO will have a pot of money that will need to be sliced and diced for team members and the exact value an employee receives is affected by whether they have hit or exceeded expectations. There is no guarantee that a higher performer will always get a generous bonus, especially if peers are also performing well and the pots needs to be divided equally.”

Ensuring an effective bonus scheme requires there to be clarity about its purpose and reason. Being clear to staff on what the bonus represents – reward for contribution over and above a job or role and how it differs from salary, which is an employers’ contribution for doing a job, is paramount to avoid confusion. Its benefits should also be clearly spelled out.

They also have to be part of a long-term strategic approach rather than about encouraging short-term wins, says Coulcher. “Otherwise it may not encourage the right behaviour in staff. There may be consequences with supplier relationships if any incentives are based on cost savings.”
Childs warns that many managers place too much faith in bonus plans and are over-reliant on them as a tool for management control. “It’s the combination of the bonus plan and management support that makes a difference to performance. You can have the most generous bonus in the world but if you don’t enjoy working at an organisation it won’t make any difference,” he says.

He also advises that plans be designed so targets can be easily modified when necessary, which will also avoid allowing schemes to get stale.

Can bonuses be taken away? Usually they are discretionary, but not always. However employment contracts rarely refer to bonuses being guaranteed, says Bean.

They are usually cut when people are more concerned about job security than they are about earnings. “It’s very difficult to take bonuses away in boom times,” Childs warns. 

Checklist

Five tips for implementing a bonus scheme

Align performance measures to your procurement function needs for both now and the medium term.

Keep bonus schemes fresh. Periodically change performance measures and be prepared to revise targets to reflect changing circumstances.

Align payment frequency to the procurement cycle. If you are letting long-term contracts then consider deferring some element of the bonus to be able to measure on outcomes and quality.  If you are trying to incentivise short-term, tactical, small-scale results, consider monthly or quarterly payments.

Think about the total reward package on offer to staff. It’s not just about earnings from a bonus. Personal development is also important, so too are opportunities to climb the career ladder, and the culture of the business plays an important part in motivating teams.

Be situational. Don’t look for best practice or compare with another organisation’s bonus plan. Have the confidence to do what’s best for your own business.”

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One of the keys to surviving before excelling in the corporate world is knowing how to read hidden agendas.  As an agent of change, I need to interact with a large number of internal colleagues before I can go about exercising what my clients want with the outside partners and suppliers.  What we call stakeholder management skills need to come into play.  However, never, ever assume people’s intentions with only the titles on their name cards.

Do you want to be judged by the book cover?  Of course not.  Do you like to be stereotyped by the function or line of work you take part in?  In order to ensure that one genuinely adds value to a decision, he or she has been prepared to announce something new, something bold, or something clever.  Whether you agree with that or not never is the issue.  It is the individual’s hidden agenda that you want to uncover through the conversations you carry out with each and every one of them.  Listening, and reading minds, therefore, is the real key to success.

A newly on-board executive who is badly in need to prove himself.  A neighboring department head who is plotting to eat up your team or even the department.  An overworked manager who cannot be bothered by another new initiative.  A VP who tries to make influencing decisions in using a partnering firm that he has close ties with. 

It doesn’t take a genius to come up with tons of examples like the above, but it does take one to identify and draw such agendas out of everyone before designing tactics accordingly.  It is not easy to be seen, since most of your colleagues have been in the corporate workplace for years.  They are masters of sugar-coating intentions.

So whenever we go about talking with business partners, always consider these questions:

  • Why is this happening?
  • Who are the players?
  • What are the benefits?
  • What are the players each benefiting from, and how?
  • What can I get out of it?
  • How do I go about getting what I want?
  • What are the risks?
  • Are my benefits worth the risks?
  • Is this really what it appears to be?

In my experience it is always this last question that is most valuable, and it isn’t too hard to figure out once you conduct your share of due diligence. 

Last word of advice:  If you want to stay in one piece, you better keep these hidden agendas in the wraps, as long as they are legal!

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I came across an excellent article on CPO Agenda written by Tom Lawrence, strategy director at European procurement specialist buying team.  Those of you who have read my earliest posts on procurement branding will understand my frustrations and aspirations of my profession.  If you are keen in hearing another person’s views, I have taken the liberty to honor Mr. Lawrence’s work by copying his article here.  I will read it again and again as it echoes my views and vision exactly.  For those of you in my profession who would like to get in touch with Mr. Lawrence and his consultancy, please feel free to visit his company’s website.  The bold formatting is done by myself in highlighting the parts that resonate with me most.

 

What’s In A Name?    By Tom Lawrence
 
“The profile of indirect spend has grown considerably in recent years, but it is currently receiving more attention than ever before. There are two principal factors behind this rise.

Businesses are struggling to grow their top-line revenues. While forecasts do predict growth, this is weighted heavily towards 2013 and beyond. The outlook for the next two years is very sluggish. Therefore, to increase shareholder value, organisations are focusing on the bottom line, and on cost management.

Procurement is making headlines. Three recent government reports – Sir Philip Green’s efficiency review, the Strategic Defence and Security Review and the Comprehensive Spending Review – have turned the spotlight firmly on procurement and the consequences of not managing it effectively.

Procurement has come a long way in the past 20 years. However, the journey is far from complete. The renewed focus presents us with an opportunity to redefine procurement as a key strategic support function at the very heart of business. Yet indirect procurement’s value is frequently misunderstood, and this ambiguity leads to business leaders undervaluing it.

There are several fundamental questions which, as a profession, procurement simply does not provide consistent answers to. If we are unable to clarify these issues ourselves, it’s no wonder ambiguity occurs elsewhere.

It’s all in the name. First, perhaps surprisingly, is the terminology that we use – indirects, overheads, goods not for resale (GNFR), and non-core. All these words are both negative and imprecise. Indirects are simply the opposite of directs. The same goes for non-core and core, GNFR and GFR. Using only negative terms immediately relegates them to the second division, where they are perceived as secondary and unimportant, if not irrelevant, when in fact the complete opposite is true. Procurement is crucial. Without it, an organisation simply cannot function.

We need to shift fundamental perceptions, replacing the perception of procurement as a cost to one where it is valued as a business-essential activity. And it might be time to adopt a new name for this activity – one that reflects its importance and which will help to change mindsets. At buyingTeam, we have been using the term ‘Enabling Spend’ for several months.

If you look at text books or read market research to answer the question ‘what is procurement?’, you will find much around the source-to-pay process (eg, supplier relationship management, contract management, strategic and tactical sourcing, spend analysis, etc.). All of which is true and accurate. But business engagement – a key ingredient for successful procurement and an essential catalyst, in fact – is almost completely ignored. Procurement’s potential is released when it looks not only outwards to the supplier community, but at its own organisation, acting as an internal consultant or analyst, challenging and influencing behaviours, business rules and ways of working.

Beyond an almost cursory acknowledgement of the need for change management, business engagement is ignored by most textbooks and research and, to be quite frank, by many procurement functions. Procurement will only ever be viewed as a function to secure the best deal if that is all it focuses on, or all that it is tasked to achieve.

There is no common or industry-wide understanding of the areas that make up Enabling Spend. In some organisations, professional services such as audit fees or bank charges, for example, fall outside the remit of procurement. In almost all of the organisations we work with, there are areas of spend over which procurement has little influence, and these can include large spend marketing and IT.

The function may be engaged by the business to negotiate a deal, but all too frequently buyers are not trusted with any further involvement. The root cause of this attitude is the ongoing lack of understanding, even among the CFO community, of how procurement’s principles should be applied to all areas of spend. This is a missed opportunity.

What works for direct procurement doesn’t necessarily work for Enabling Spend. Enabling Spend contains hundreds of diverse categories, with thousands of suppliers serving a very wide range of stakeholders, all of whom have different needs. In comparison, directs has far fewer areas of expertise, suppliers and stakeholders. So a totally different approach is needed – yet many organisations apply their directs approach to Enabling Spend.

The range and depth of skill sets that Enabling Spend requires, – such as commerciality, change management, communication, procurement and deep category knowledge – are vast. ‘Best in class’ is a misleading concept. What is right for one organisation is not necessarily right for another. Procurement must be tailored according to an individual organisation’s culture, structure, profile and strategic aims to deliver the best results. Rather than ‘best in class’, a more useful question to ask is: “What do I need?”

Which brings us to procurement outsourcing. Even here there is confusion. Procurement outsourcing has come to mean different things. To many people, it involves shifting work wholesale to low-cost countries using technology and streamlining processes, running the same processes for less money. It’s all about efficiency. Yet true procurement outsourcing – and where multiples of the value achievable through efficiency are possible – is about how to do procurement better. The benefits are all about effectiveness.

Given all the above, it should come as no surprise that business leaders remain unaware of what is achievable by getting this right, and are therefore failing to prioritise it above other initiatives.

Finally, organisations are simply not investing enough in the management of their Enabling Spend. This is certainly preventing large elements of the above from improving, and is possibly the root cause of much of it. In our experience, procurement can and should be generating a return on investment of between 8 and 15 times. This is a huge benefit and one that substantially outperforms the ROI generated by most other investment decisions. Moreover, it goes straight to the bottom line. We see time and time again that the opportunities to improve shareholder value and operational performance are great – and way beyond the expectations of the senior executives.

The value that most procurement functions deliver is simply not good enough. Yes, much of this is due to the lack of investment in procurement. Yet we, as a community, must shoulder our fair share of the blame.

If procurement is to take its rightful place as a key strategic support function and be recognised as one, it’s time for us to address some of these fundamental issues. In doing so, we can continue to push procurement to front-of-business leaders’ minds as a powerful strategic asset that can deliver real business improvements.

The time has come for us to raise our game and, in doing so, release procurement’s true potential.”

If you have read my earlier posts, you will remember that I have written about delivering solid ROIs to my employers (my commitment is 7 times and up, comparing to Mr. Lawrence’s 8 to 15 times), as well as constantly expanding our span of involvement to areas of above-the-line marketing, consulting, sponsorship and professional services so as to further maximize the author’s definition of “Enabling Spend”.  If you are interested in joining my (and Tom’s) vision of “raising our game”, I am more than happy to hear from you!

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