Everyone agrees with the statement that procurement needs to start driving business value. But most people still struggle with exactly how to define procurement’s contribution to business outcomes, so it can be measured and managed.
In today’s traditional procurement paradigm, procurement considers value being relative to your financial business case. Procurement is measured by the cost savings it can realise during the negotiations. This was an un-discussable truth during the economic era of stability, where the business objectives were focused on efficiency and lean mass production.
In our current “As-a-Service” economy, value still remains relative to your financial business case.
However, financial business cases have become multi-dimensional.
To survive in the “As-a-Services” jungle, organisations need to focus on optimising their short term cost base for their mature core businesses, to secure the necessary budgets to develop their mid-term emerging and maturing businesses and their long-term future business options.
Nothing new under the sun, except that these horizons are shortening so fast that businesses need to keep these 3 balls in the air simultaneously, each with completely different, and sometimes contradicting business dynamics.
Procurement cannot rely any longer on its one-fit all strategy of pushing cost savings to a maximum. Procurement needs to adapt its strategy to contribute to the specific business value drivers in each of these 3 horizons.
For your core businesses, Procurement will have to look for partners with superior execution to deliver productivity and performance. The market and the analysts are demanding predictable revenue and profit targets. Procurement will focus on cost savings combined with continuous improvement to secure your core business profitability as long as possible. Partners should bring you innovations to keep your core business value proposition attractive to your existing customer base or even make it more interesting to attract additional customers. Reducing your cost base and optimising the utilisation of your capital assets will be the driving forces for your procurement objectives to secure the necessary funding to mature your emerging businesses and to re-invent yourself in the future. Procurement main objectives will be its contribution to the bottom-line savings.
For your emerging businesses to mature and replace your current core “cash cow”, procurement will search for partners who can accelerate the growth of your installed base generating the necessary additional revenue to beat your competition in the ”battle for market and customer share”. Procurement has to create an appropriate framework with its suppliers to make rapid judgement calls to manage the ambiguity and changes of the external markets. Increased risks have to be managed to capitalise on new, unforeseen opportunities for accelerated growth. Procurement main objectives will be its contribution to the company’s top-line growth targets
For your long-term business options, procurement will have to deal with suppliers who are exploring new business opportunities based on fast iterative testing and validations of the assumptions defined by Minimal Viable Products. Your supplier relationships will be driven by fast feedback loops to accelerate your insights in the customer acceptance of your new initiatives. Procurement will not be able to rely on traditional risk mitigation. Procurement main objectives will be its contribution to the probability of success of the portfolio of options to be explored by your suppliers.
Developing a management system of value drivers will help Procurement to define more precisely the value it is expecting from its suppliers in each of these 3 horizons, each with its own very specific business dynamics.
The supplier’s core competencies are translated into corresponding financial targets of productivity, growth or innovation, which make the supplier’s contributions again measurable and manageable.
Procurement will become a key player in the orchestrating of value generating collaboration relationships with its strategic partners. Your CPO will become your CVO – Chief Value Officer.
Published October 2016.