There is no doubt that recession has turned up the heat on procurement. Recent research by Accenture found that 59 per cent of CPOs felt under greater pressure to perform. The same percentage reported an increase in their savings targets, while 73 per cent were focusing more attention on suppliers and 64 per cent were getting involved in new areas and projects in the organisation.
Yet just when CPOs are being asked to prove the worth of their procurement functions, many face hiring freezes or even job cuts. Accenture’s research found that 41 per cent had seen headcount reductions, with 5 per cent forced to downsize by 15 per cent or more. In this environment, what can CPOs do to cope with the challenge of doing more with less?
To get some answers, CPO Agenda spoke to a selection of senior practitioners, consultants and vendors in the international procurement community. Eight key areas emerged: prioritise workloads; increase staff productivity; scale back on strategic initiatives; squeeze more out of technology; tackle maverick buying; reassess spend priorities; use external expertise wisely; and outsource non-critical activities.
1| Prioritise workloads
Clive Dedman, head of procurement at Trillium, a UK property management company, says he now spends a much greater proportion of his time prioritising his managers’ workloads.
“Instead of offering ready assistance to various stakeholders, whenever they want, we say ‘we can do it on this date’. It’s important not to prioritise the internal stakeholder who shouts the loudest but to understand where our finite resources will bring the best results to the business as a whole. That’s not always easy to do, but I need to use the resources of the team as effectively as possible.”
Jim Nelles, a former procurement head who is now a partner at Roland Berger Strategy Consultants in Chicago, urges CPOs to understand the exact requirements of individual contracts to ensure a fair allocation of staff resources.
“You may have someone who looks after a spend of several billion dollars but they can easily manage that because it’s with one or two suppliers with very few specifications,” he says. “But you may also have someone spending as little as $100 million who has to deal with 50 different suppliers on three continents.”
2| Increase staff productivity
For Dan Morrissey, director of global procurement at Abbott Nutrition, the response has been to restructure the procurement organisation. “We’ve eliminated a lot of redundant activities,” he says. The company’s category managers are being asked to operate on a global basis, although they do have regional buyers under them.
“We’ve taken advantage of some operational synergies as well,” he adds. “We’ve consolidated all of our site purchasing operations into a regional centre in Europe so now we have fewer people processing purchase orders.”
But changing people’s roles and tasks only goes so far. “My biggest concern comes down to the quality of staff,” Morrissey says. “The new things that I have to do are not simply more of the same; they’re new and difficult activities.
“There’s an unbelievable amount of requests that are coming from very senior people in our company and all of this requires a different skillset and a much higher level of management talent than we necessarily have.”
He hopes to overcome this problem by automating some operational tasks that would allow the procurement function to remove a number of junior positions and reinvest the savings in fewer but more experienced staff.
3| Scale back strategic initiatives
Other CPOs feel they have no choice other than to cut back on some of their more strategic projects. “I’m having to do things I’m not in favour of,” admits Bob Wagner, vice-president of procurement services at Cardinal Health, a US-based manufacturer and distributor of medical supplies.
“I’m beginning to decommission some of our dedicated heads around supplier performance management, and in some cases analytics and even supplier diversity, and placing them in category leader roles. That hurts because there are definite rewards around supplier relationship management. But I’ve got to get back some of that effort so I can begin to address getting more spend under management. We’re definitely reducing what I know to be best practice to keep the boat afloat.”
Jeremy Robinson, UK and Ireland sourcing and procurement lead at Accenture, adds: “Most CPOs are trying to release activities so that they can try to get more value out of a consolidated set of suppliers and also deal with the potential supplier risks.”
4| Squeeze more out of technology
Accenture’s research found that 46 per cent of CPOs had seen decreases in their technology budgets, which means that the emphasis is mainly on squeezing more value out of existing investments or finding systems with low upfront costs.
Cardinal Health, for example, recently brought in third-party support to categorise data from disparate ERP systems to allow it to make the most of its spend analysis and contract management tools from Emptoris. “We had the tool but didn’t know how to optimise it,” says Wagner. “This has given us more intelligence on where to hunt for savings and what categories have not been sourced.”
GlaxoSmithKline, meanwhile, uses a mixture of systems including Emptoris’s e-sourcing package, an internal marketplace catalogue created by SciQuest and an online travel booking system from Rearden Commerce.
“We had this idea that if we selected the right technology and deployed it globally we could do twice the work with half the resources and deliver twice the savings,” says Gregg Brandyberry, GSK’s vice-president of procurement, global systems and operations.
The use of e-auctions has been particularly productive, he says. “In 2008 we did 8,000-9,000 e-sourcing events in over 50 countries. If you deploy and execute good technology you can definitely do a lot more with less.”
E-procurement systems have been around for more than a decade, but many organisations have failed to roll them out fully or have only used them for limited spend categories. So there are opportunities to squeeze out more value here.
“E-procurement frees up our buyers to do things that are more value-added,” says Bill Cooper, CPO at the University of Missouri, which started using its system in January last year. “Staff are going to be doing different things: more contracts administration, acting in more of an advisory capacity, working out in the user community and getting involved in the 20 per cent of transactions that represent 80 per cent of our spend.”
The growth of the software-as-a-service model also offers benefits when budgets are tight. “That can deliver a quicker return on investment and carries less risk because the customer has the option to shut it down if it is not working for them,” says Anurag Dixit, vice-president of marketing at Zycus.
But for Atul Malhotra, head of purchasing at GF Automotive in Switzerland, introducing new technology is just another hassle that CPOs can do without at such a busy time. “When you start introducing technology you need more time to focus on that and have to adapt the processes that you already have in place,” he says. “That distracts attention and at this time we don’t need that distraction.”
5| Tackle maverick buying
The downturn provides opportunities and incentives to cut down on maverick buying. Tools such as e-procurement systems and purchasing cards can certainly help here, but there also needs to be a strong commitment from top management to police spend policies – something that ought to be more forthcoming at a time when cutting unnecessary expenses is a priority.
“In good times people find all sorts of ways to shortcut processes and to not use the tools,” says Nando Galazzo, vice-president of procurement at plastics manufacturer Borealis.
“We’ve shown people that they can save time on their transactions by using existing tools. In areas where there weren’t procedures in place we’ve made it mandatory to follow certain processes. By doing that you create the visibility and a system where people can manage the workflow and cope with emergencies.”
6| Reassess your spend priorities
Others are refocusing their efforts on specific categories. Jeanette Ho, vice-president of global supply chain management at TeleTech, a business process outsourcing company, has decided to step back from aggressively managing travel and office supplies – a category that was only sourced in 2008 – and focus on other areas, such as professional services, where there is more potential for savings.
“We have limited resources, so we can’t touch everything,” she says. “We have to openly communicate with clients and our leadership to agree on what we are going to touch. It’s about understanding your categories: which ones are cost-reduction makers and which ones you just have to keep under administration to drive some level of compliance against existing contracts.”
Thierry Stoedzel, a partner at consultancy Buy.O Procurement in Paris, adds: “Purchasing has to choose its fights and think about what will bring value in terms of turnover, cash and cost. The savings you make on second-rate categories will not appear in your books, so all of the effort you have put in could be wasted. You could actually exit the crisis weaker than when you entered it.”
7| Use external expertise wisely
While some organisations, such as the German engineering group Siemens, have imposed blanket bans on the use of consultancies, firms specialising in managing supplier risk and delivering hard savings – instead of merely identifying them – report brisk business. Using these external resources wisely to supplement those available internally, and insisting on a shared risk-reward model where appropriate, can pay dividends.
In November, TeleTech employed The Hackett Group to benchmark its procurement organisation and look at how it compared against its peers in terms of organisational efficiency.
“It helped to drive the need to consolidate our procurement talent in some of the low-cost regions that we operate in today,” says Ho. “We recently agreed to consolidate our procurement assets in Costa Rica, Brazil and Mexico into one shared services centre in Argentina. We were able to add value and take one or two people out of the process with no impact on the efficiency of the organisation.”
8| Outsource non-critical activities
Scarce resources and a need to focus on core spend has prompted some CPOs, particularly in manufacturing companies, to look again at the options for outsourcing indirect procurement – an emerging business area that in the past few years has failed to grow as fast as many people predicted.
“Companies are beginning to outsource categories of spend because of the current economic climate and headcount pressure,” says Robinson at Accenture, one of the main players in the market. “They might not outsource the whole source-to-pay process but they are looking for managed service providers to wrap more services into their portfolio.”
The economic downturn is also partly responsible for the 20 per cent growth of US group purchasing organisation Corporate United in 2008, reckons vice-president David Clevenger. The organisation, which signed up 29 new customers, negotiates contract discounts with selected suppliers on behalf of members. “It gives companies the confidence that they’re achieving savings while being able to redirect whatever limited resources they have,” he says.
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The challenge of doing more with less raises obvious concerns over the quality of work that can be delivered, and the impact that failing to perform could have on the procurement function at a time of increased scrutiny.
“We worked very hard to get procurement at the table in some business units that have not always appreciated what we can bring to a negotiation,” says Trillium’s Clive Dedman. “The main fear I have is that if we lose the ability to prove that we can add value in any procurement situation, other departments will do it themselves, which can lead to increased risk and less professional procurement.”
Yet some CPOs are reaping the benefits of that hard work. “The last three years when there was significant growth in business was the time to get your house in order and make sure that you had implemented sufficient systems and processes,” says Bart Kroon, director of global sourcing and procurement at Nutreco, a Dutch animal nutrition and fishfeed company.
“We built the right infrastructure and trained the right people and now it’s harvesting time. If you have invested well and have your strategies in place, this is a time when you can make a difference.”
CASE STUDY: GF AUTOMOTIVE
Feeling the pinch
As a supplier of iron and light alloy cast components for the automotive industry, GF Automotive has been hit hard by the crisis currently gripping the sector.
For Atul Malhotra, head of purchasing and member of group management, the downturn has meant returning to 2007 staffing levels – a reduction of 5 per cent – while taking on the additional burdens of renegotiating contracts with suppliers and monitoring their ability to continue trading. “You cannot mash those two things together in a reasonable manner,” he says.
His response has been to cut back on projects that are not absolute priorities, even if this means missing out on potential cost savings. “We were considering renegotiating a fleet management contract that we’d done two or three years back,” he says.
“It’s probably a good time to renegotiate but we’ve postponed it for the time being because we just don’t have the internal capacity to handle that.” A project to bring IT spend under management has also been shelved.
Increased demands have also led to some reshuffling of resources. “We’ve tried to bring some of the people in operational procurement, who might not have that much to do because of the lack of production, into the product team to work on some of the cost-cutting type activities,” adds Malhotra.
Nick Martindale (nick.martindale@cpoagenda.com) is deputy editor of CPO Agenda
For other CPO Agenda articles on the downturn, click here
