Geraint John (GJ): The title of this debate implies that procurement's traditional role has expanded in recent times. Is this a statement you would support?
Silla Maizey (SM): I'm relatively new to procurement. I've been in my role for about seven years; my background is finance. What I've seen is exactly what happened in the accountancy profession about 15 years ago, where it's gone from being relatively transactional through to something that's quite commercial. I think procurement is also now about how to drive the business forward commercially. To give an example, we're currently relaunching our Club World business class seat. When we did the last launch, 10 years ago, procurement's role was just to put the contract in place, whereas this time my team was also actively involved in the design phase and working with marketing and engineering to deliver the programme, which is commercially important to our business.
Luc Volatier (LV): Things have changed quite a lot. In the three years I've been at Numico, I've been involved in due diligence for acquisitions very early in the process. Clearly that's a big change versus what used to happen. In the past, procurement heard the news along with the rest of the world. We are also involved now in any innovation project. Whether it's a new product, new packaging or a new process, we get involved right at the beginning. Because of clinical trials it can take a few years for some of these products to reach the market, and in the old, traditional world this was far too early to involve purchasing people. Today, we are clearly positioned as a strategic weapon, and this is why we are now business partners or sounding boards for the executive committee.
Craig Lardner (CL): I think the profession has moved on, but it hasn't moved on in a unified way: some organisations and some industries, such as automotive, chemicals and pharmaceuticals, have moved at a greater pace; others have been lagging but they're still moving in the right direction. I don't come across too many organisations that, in 2006, still have the same procurement mentality and activity that they did 10 years ago. An example in my company is that I now go out on sales calls. The key account manager says to me, "Craig, I've got a purchasing director who is not convinced our costs are under control. Can you let him interrogate you and give him the evidence he needs?" So we go in together and we have a conversation. Spending time facing the customer is a good thing for procurement to do. Using Silla's example, if her team can be that close to customers they will be more able to help build a good seat.
Malcolm Harrison (MH): I think what has really changed is the application. Yes, the role has advanced, but I'm willing to bet you could find companies 20 years ago, particularly in the automotive industry, that had very advanced procurement techniques. In some businesses, for very good reasons we've been later to come to the party. What is happening now is that you are seeing it accelerate in those businesses where procurement was traditionally not strong. But I'm not sure the role has fundamentally changed that much.
Tom Rae (TR): I've been in the automotive sector for 22 years, and I agree that it has been one of the leading areas of procurement ideas. But, like Silla, I'm not a procurement professional. I've only been in this role for five years; the other 17 have been working in different manufacturing functions and running my own businesses. One of the things I asked myself when I was asked to take over procurement was "What the hell do I know about it?". The answer was "Not that much". So even in the automotive sector the general standing of the function could be vastly improved.
GJ: What's driving this change in procurement's role?
Peter Kelk (PK): In investment banking we are among the laggards, but we are getting involved in far, far more things than we were - for example, professional services. I think there are a number of reasons for that. One is that over the past five years cost became a much bigger issue in our industry. Two or three years ago we were still working on winning the hearts and minds of our internal clients as to why they should bother talking to us. Now we are beyond that and people see the value. Yes, there's a cost issue, but more and more there's a governance issue. If they've been through us then any accusation that could be made by the regulators as to why they chose a particular vendor is covered. That's another big factor in our industry.
Nando Galazzo (NG): Internal users vary from company to company in terms of the acceptability of receiving advice at the right time from procurement. But I think there have been two major factors that have opened up tremendous opportunities for procurement development. The first is globalisation, because suddenly the market that used to be next door and well known to people in the company is scattered across a wider part of the world map. The second is consolidation, where business is increasingly in the hands of big, well-organised suppliers, some of whom may have a monopoly. Both of those factors mean there's a greater need for professional procurement.
Jeroen Voorhuis (JV): Within Accenture, we are typically working for the board and what we are seeing is a lot of work that is not just about cost savings or supply continuity, it's about the supply chain helping to increase the business, reduce the risk, comply to all kinds of regulations. So we see many more requirements coming from the board.
Gordon Crichton (GC): We are in a global context today where building the brand to create sustainable shareholder value is the thing - power brands, premium brands. Not that long ago Luc's CEO, Jan Bennink, was presenting to the procurement function and he said: "If I'd been asked to speak to you guys five years ago I would have spoken about savings and cost out. I'm not going to talk about any of that today, I'm going to talk about growth, margin and cash flow." One consequence of brand building is that we don't care so much whether or where we actually make the product. And yet procurement is still controlling 60-70 per cent of the turnover. This means we are now real contributors to the business, rather than just guys who make sure factories get delivered on time. Another consequence is that we see many CPOs personally promoting their companies' brands, whether it's BA's Club class seat or the new Peugeot 407. That's a mega change from the past.
GJ: What needs to happen for procurement to be involved in non-traditional activities such as outsourcing, risk mitigation, mergers and acquisitions, supplier collaboration and innovation, rather than cost management and supplier selection?
MH: I think it's about the people. Companies that have very strong procurement people - particularly those that have worked in multiple companies, multiple industries and definitely multiple functions - are much more able to take a broad business perspective; and therefore they end up engendering much greater engagement of the procurement function within the business. They are able to talk knowledgeably to marketing people or M&A guys in the language that these functions - the internal customers of procurement - really understand.
CL: I've got some people in my team who I would absolutely have in those kind of meetings, and I've got others - hard-core negotiators - who I wouldn't let anywhere near them. There's a time and a place for that, and if suppliers want to sell like that, I'll buy like that. But when the suppliers want to be collaborative and think more broadly about innovation, then I'll buy like that too. They are very different animals.
TR: There are hard-nosed purchasers, who we all know, and there are the creative, innovative guys. But there are also people who come from the business, who understand the business language and who can look across the table and say "I know how your business works, I can tell you what your drivers are and what we can do in procurement to support you". One of the benefits of more CPOs coming from outside the procurement world is that they tend to be wonderfully connected in their organisations; they bring a network and credibility, and that helps to move procurement into the mainstream. If you look at the kind of complex, strategic, inter-firm relationships we are managing on a global basis, they require skills that some traditional purchasers just don't have. That requires a new breed of procurement specialist - a hybrid person who has M&A characteristics, legal and psychological characteristics. I think procurement is becoming more of a profession for generalists, rather than specialists.
Pierre Josselin (PJ): The question, as you start to be involved in M&A and financial activity, is whether you do that at the expense of another function. In a sense you are becoming a general manager rather than a purchasing guy. I think there is a limit to that. In our business we have commercial and marketing on one side, and operations on the other. We accept that division. Because of the way we've developed, purchasing wants to get its nose into everything, especially when we recruit young people who are talented. Purchasing is core for me, but it's not a general management job. You are there to use your brains and learn the business, but if you are talented you should move out of purchasing after five or six years and do another job, whether it's finance, human resources, manufacturing or marketing. It's easy to be clever when you are only the purchasing guy and you don't have a factory that stops, the pressure of the client to deal with, or have to stand in front of the board and say "Sorry, my sales are not increasing today". Purchasing people are not prepared for that, so they need to learn the real operational life. They can do business, they are very important, but they are not everything.
TR: Just to be clear, Pierre, I'm not suggesting that procurement takes over everybody's else's jobs, that would be stupid, we would have to be superheroes. In my group of 67 people, at least one third have to come from the business. I come from the business and when I leave procurement I'll go back to the business. But I think we have to have people who understand the business dynamics and are able to engage the experts, and that means having a depth of knowledge.
GJ: What are the constraints and challenges when it come to expanding procurement's role?
MH: I would say the biggest constraint we have is people. Are there other constraints? Yes there are. But the stronger a team of people you have, the more able you are to deal with those other constraints. Of course, the role of a senior procurement leader or a CPO is not the same as the role of a buyer. You still need buyers, you need balance in a team. We're spending a lot of time talking about the top part of the pyramid - the people who really aspire to progress within the profession - but you also need some very good, solid, experienced people in place as well.
GC: That's absolutely right. To put it in perspective, if you've got 20,000 suppliers the number you are going to start looking for innovation from is very few. You're still going to have 19,900 suppliers who you are going to deal with in the traditional way, so you need low-level buyers. Not everybody in purchasing is going to be a strategic thinker and not everybody is going to be close to the client. What has changed is that we now have a high-level demand for procurement that wasn't there before, so we've got to have people who can meet that. It's difficult getting the right talent into procurement today, there's no doubt about that. But it makes a massive difference. One strategic business thinker with the right skills and capabilities is worth 10 or 12 of your normal, run-of-the-mill purchasing people.
TR: I don't think we're moving away from the basics of procurement, we're talking about a shift of emphasis. Cost management, security of supply and all that stuff is our core business. Control systems and transparency need to be right. But I think in the past procurement organisations have only devoted maybe 2 or 3 per cent of their time and resources to strategic issues, whereas now it might be 10-15 per cent.
GJ: What I'm hearing is that the biggest constraint to expanding procurement's role is not so much a shortage of open doors, but a shortage of talented people. Is that right?
TR: I generally agree, but I think another key constraint is the organisation's culture and philosophy. If you take a company like Toyota, it is very progressive in terms of its purchasing, but that stems from a continuous overall business philosophy. Every function in Toyota works basically the same way, they have the same mandate. I think if you took Toyota's purchasing and you put it into Ford or General Motors, those organisations would be dead, because they simply would not be able to work within the constraints. If you want to challenge that, if you want to have purchasing start to lead the agenda, then you need to have a very, very strong CPO because you have to influence the board is a very basic and fundamental way. My organisation is more like Toyota than GM. But if I want to take on more of the Toyota way, then that's a very step by step approach, because we still are measured in the old way.
MH: The context, history and the culture of the company is important. Take a specific category as an example. I moved to NestlŽ from a company where procurement was heavily involved in any new capital expenditure project right from the start. Now I find myself in a situation where we have very limited involvement to actually influence the buying decision.
LV: I think it depends on the CEO. There's no way I could have done half the things I've done at Numico without the CEO I've got. We could take the best of us and put him in a different company, one in which the CEO doesn't give a damn about procurement, and he would struggle. You had a hugely supportive CEO at InBev, Malcolm. Your new CEO is great, but I'm not sure he has grasped the full potential of procurement yet. I'm sure you will convince him in the coming months.
GC: It's also about the CPO. If you look at cases of excellence, it's linked to a few individuals. You need a powerful CPO who is capable of getting CEO-level interest very quickly and creating credibility internally and enthusiasm among strategic suppliers.
PJ: I think you are right: you need a good CEO and a good CPO. If both are good, then you get a better result.
GC: Another big challenge is rolling out programmes in places like Italy and South America. It's no good just having a handful of high-level people, you've got to have a second level that is totally different from what you've got now. You don't want suppliers being given certificates and congratulated by the CEO one day and then two weeks later being hit over the head somewhere in southern Spain by a guy who doesn't even know that that event happened.
TR: I agree with that. Consistency in the regions is the key. Inconsistency with global suppliers, particularly your top 20, can really kill you.
PJ: Upgrading the function is also about making sure that the users at the line are empowered to use good purchasing practice to deal with the mass of suppliers that we don't care about.
PK: That's certainly true in my business. One of our big constraints is limited resources. Next year one of our challenges is how to effectively subcontract some of the areas where we think we add less value back to our internal clients, under our guidance, so that we can move into those areas where we think we can add more value.
GJ: Tom raised the issue of measurement a moment ago. To what extent are you being measured against non-traditional, rather than traditional, goals?
LV: We have exactly the same incentives as the rest of the top executives, which is top line, bottom line and cash. Seventy per cent of my bonus is based on that, and 30 per cent is much more specific. If the bonus of your procurement people is based on purchase price variance, you're dead.
CL: I have 20 objectives set by my CEO. Half of my bonus depends on the achievement of those objectives; the other half is based on the whole company's performance in terms of cash and earnings per share. Only five of those 20 objectives relate to money; the other 15 are so-called "softer" measures, such as safety.
PJ: Twenty per cent of my bonus is based on breakthrough projects designed to bring in additional sales of Û40 million next year. So I've got to co-ordinate with the marketing guys to fuel the pipe with projects that will generate this.
NG: I think we've fooled ourselves for many years that procurement can add value, and then when the CEO asks what we mean by value, we talk about reduced cost or even reduced price. That has pushed us into the grave. We can make presentations about innovation, value creation, collaboration, and so on, but many board members will still see cost savings as the main measurement, if not the only one, of procurement efficiency. There's a collective responsibility on all of us to articulate the role of procurement in value creation in our companies; to make sure we have the right focus on the right things. Speaking that language will automatically increase our exposure to new areas.
TR: The P-word is never going to go away. Price, and how we compare it to the competition, is always going to be a key measure. When my boss talks about value creation, first it's cost management, then it's about innovation, profitable growth and risk management. I took those four headlines to my team and asked what does that mean for procurement, what do we need to do? We had three days off site and when it came to cost we had about 400 measures; for supply risk we probably had 20-30 measures; but when it came to innovation we started to dry up. But if you want your board to measure you differently, you have to go through that process and then go back and argue that you should be measured on more than just price. We now have about 45 measures on which we can demonstrate immediately that procurement adds value, but it's a hard job.
CL: Even if your people only come up with two or three measures, that's the beginning of a new era for them. When the next strategic plan comes out, I bet they come up with four or five. When we first talked about innovation years ago in my team, someone asked "Is it the number of good ideas per year?". Then somebody else said "But hang on, what if nothing bites? Maybe it's the number of good ideas used". It was a really humble beginning, but it was a beginning.
SM: We probably kid ourselves if we don't think a large proportion of what we do is about delivering financial performance. That gets you through the door, then it's things like customer satisfaction and driving sales that keeps you there, because if all you ever do is contribute to the finances you could lose your credibility. But you need an entry point and what we are very good at - and what we are valued for - is financial performance. We shouldn't knock that.
GJ: How do you get the balance right between the traditional and non-traditional areas?
SM: By following the business driver on that particular category or part of the business. You have to be flexible enough to see what are the right metrics. One size never fits all.
CL: You find out what the strategic objectives are for the CEO and the board, then you ask "What must I and my team in procurement do to help ensure that those objectives are met successfully?". In reality, each procurement strategy that matches each corporate strategy brings the balance that we seek. To take an extreme example, if you had just one strategic objective from your board of cash flow, procurement people might just come up with things to improve cash flow rather than longer-term innovation or collaboration. It could look very out of balance, even though it was aligned to the corporate goal.
LV: The way I see my role in the company is to identify levers for the executive board and to explain to them the consequences of pulling or pushing them. We had a situation where one of our businesses was having difficulty meeting its bottom-line objectives and the head of the division said "It's very easy, we just get it straight from suppliers". We had a long debate where I explained that we can't invite all these suppliers for a big get-together with executive board members and give them awards for their fantastic contribution one day, and then, three months later, organise a reverse auction. In the end, we launched an initiative we call "Procurement Gets Primitive", where the objective was to identify suppliers with whom we could push very hard for price reductions. This goal was explained very clearly to people internally and to the suppliers. We derived much more than the business was expecting and we didn't really harm any relationship with suppliers. It's about being able to go the business and say "You need us, we're here". I think we've gained credibility from that.
GJ: Are there dangers in expanding your focus too far or too fast?
JV: I think if you step outside your field of expertise, you run the danger of ruining your reputation.
MH: In some businesses procurement is seen as a control function, and if you try to get into new areas and address those in a similar way that can be a big mistake. It's how you sell it within the business. There is a big danger in over-promising and under-delivering. That can ruin your credibility, but at the same time you mustn't allow that to be an excuse for not getting into new areas.
PJ: For me, if you are getting into a fancy new project or product innovation the biggest danger is to forget the basics - forget about getting the right price, securing the business, managing your risk, and so on. We are not mature enough yet as a function to let people go into the innovation bit without being sure that we are professional on the sourcing. That is a stretch for purchasing; you have to show that you are good at both. That requires mature people and sometimes additional resources.
MH: It's a bit like in sales. The biggest challenge in a sales environment is balancing margin and volume. The answer is that it's never one or the other, it's both. Yes, we want to push innovation, but we must get the basics right all the time. I think that's where a lot of people get rumbled.
GJ: To summarise then, are there any limits to procurement's role?
LV: The limit to procurement's role is the one set by the executive board.
NG: Also the capability of your organisation to absorb what you are doing; often the executive board will change their mind based on things they discover you are trying out. The overcommitment of your people constrains what you can do. So I think you have to be very honest with yourself. What is my relative influence? How quickly can the organisation absorb new ideas and practices? You have to avoid things that don't fit the organisation.
CL: The limitations are driven by the quality of your team and what they can achieve - in other words, the calibre and the horsepower you have. That's matched up against the strategic objectives set by the board and how you have interpreted those as your mission for the next year or three years, whatever the strategic timeframe is. Those two things together define the limitations and restrictions on the procurement function.
JV: I agree that you have to align with the overall goals. I think it depends a lot on the industry you are in. If you look at utilities, for instance, it's all about utilisation and continuity of supply, rather than cost. In industrial equipment companies it's more focused on global competition and cost out. Second, it depends on who you are working for. In the companies I work with, one CPO reports to the CFO and another to the CEO. In the former, it directs his team to focus on cost out or reduction of capital investment, whereas in the latter case the focus is more on top-line growth.
MH: I think you ignore at your peril the environment you are in, but I don't think there are any limits to procurement's role in the long term. We are all on journeys and we are probably all at very different stages on those journeys. We can influence some of the factors along the way but others we can't, or at least not quickly. Don't think you're going to change overnight a company that's been working in a particular way for 100 years. You won't. For me, it's all about how you take the steps in sequential order, how you build credibility, how you build the capabilities of your team, and you go as fast as you are capable of going. Sometimes that may not be very fast, but as long as you are going in the right direction then you are continuing to expand the role of the function.
SM: As a leader, I think the only limits you put on the role are the limits that you place on yourself.
PJ: I agree with you. If you've got leadership ambition, the world is yours.
GC: There's a quote from Sir Martin Sorrell, CEO of WPP, who said it depends which side you want to work on. If you're working on the cost-out side, there are limits. If your spend is €2 billion, you can only save €2 billion. However, if you are working on growth and value in, you can double that, quadruple it... the sky's the limit.
This debate was sponsored by TPF Business Solutions
