"The Procurement Value Proposition": Guest Post by Gerard Chick Part 1

I was recently interviewed by Jon Hansen on Blog Talk Radio, discussing my new book “The Procurement Value Proposition” co-authored with Gerard Chick.  In the interview, I discuss some of the major changes going on in the procurement area, and how we are at a crossroads for driving change.

Gerard added a great blog post to the discussion, which I’ve included below…Thanks Gerard.  The post was so interesting, I’ve decided to put it in several chunks – here is part 1.

The big business idea of the last 30 years has passed its sell-by date. The idea being that you drive cost out of the organisation to make it more profitable, to maximise shareholder value. Why has it passed its sell-by date? Because by driving cost out most businesses have been driving huge risk in. Why do organisations public and private, continue to get this so wrong, pursuing the will-o’-the-wisp of cost reduction with measures that end up increasing them? This preoccupation seems to have tainted the cream on the top of most business models.

With the shift in the economic centre of gravity to the east, has the competitive edge of western economies been irrevocably dulled? Have decades of outsourcing and downsizing drained our ability to innovate, grow and prosper; and if so then what can we do about it?

The last 30 or so years has shaped business models and the business landscape – globalisation coupled with rapid developments in the new information technologies are changing the way we live and work.

I believe that the evolution of supply side management has placed procurement at the strategic heart of many organisations and that some or all of what follows will become common place over the next decade or so as the sustainability of the organisation as an entity becomes paramount.

The supply function evolves:

• The procurement function shrinks – as the strategic impact of procurement really comes to the fore, organisations will still care about managing their spending; they just won’t have a large, discrete, function doing it. Procurement has two types of people working in it – doers (the buyers) and enablers (the value adders). Enablers will be deemed more useful to the organisation and stay embedded in strategic business units.

• Profits replace cost savings – yesterday’s cost savings focus, the eponymous “goalkeeper” mind-set, will give way to a strategically aligned emphasis on profitability. So will supply management still concentrate on cost savings or will contribution to revenue growth take over? How will you address the doer –v- enabler question?

• Budget battles fade away – as the discrete procurement function moves into a new modus the battles to ensure that cost savings are reflected in their budgets will fade with their passing. The perennial emphasis on cost savings only will have less weight than security of supply – timeliness and quality.

• Bye-bye to the “buyer”– those who excel at cutting deals in the back office will find themselves working for third-party services organisations — or maybe not at all! The enablers, value-adders will rule!

• Embedded procurement – will the future bring a loose network or a tight function? One of supplier-facing professionals embedded into strategic business units, communities, and processes wherever needed, constantly moving and reinventing their roles as needs shift –how will the highly successful procurement leaders make this happen?

A new supply management mind-set emerges:

• Outsourcing takes off- many current procurement and supply side activities, the ones that do not get pushed elsewhere in the organisation, will be outsourced as organisations rationalise and “slim down”.

• Service providers call the shots – the quantity and quality of third-party procurement services will increase dramatically simply because their performance, in many spend categories, will surpass what can be achieved in house.

• The strategic horizon widens- the past 30 years has seen procurement transform from tactical to strategic. But the notion of ‘strategic’ remains hemmed inside the function, almost a prisoner of its own history. With a cultured understanding of the (strategic) value-adding capability of procurement and a new generation of professionals – the bimodal procurement pro – the realisation of what strategic can mean gets much broader.

• Procurement gets commercial – as well as managing the physical supply chains, procurement will also become more intimate with the workings of the financial supply chain, ultimately stimulating good demand and increasing business value derived from spend (and supply markets) rather than simply reducing spend magnitude.