When John Paterson, IBM's CPO, announced last October that he would be relocating from Somers, New York, to Shenzhen, China, it certainly made the rest of the procurement world sit up and take notice. For some this was the logical conclusion of decades of sourcing products, materials and, more recently, establishing international procurement offices in low-cost economies, which has created a complex network of suppliers across multiple countries that needs to be constantly monitored, managed and developed.
Others, however, regard it as more of a public relations stunt designed to show how IBM has moved from a multinational company based in the US to a truly global enterprise. They question whether it really marks the "relocation of its global procurement headquarters", as the company billed it in its official statement, when only Paterson has actually moved.
For his part, Paterson says the reasons for the move are straightforward. "IBM is more of a services and software company now and we're looking to develop suppliers in Asia that support and develop our non-hardware business on a global basis," he says. "We also want to assist in the development of high-level skills to enable us to develop those suppliers and manage them on a global basis. That can be done much more effectively with the headquarters of our organisation physically in the region rather than 8,000 miles away."
IBM's move has to be seen in context. A recent study by management consultancy Booz Allen Hamilton and Duke University confirmed that procurement is only one of a number of white-collar functions that are now being offshored, although nearly all such moves do not involve the physical relocation of the CPO.
But where procurement differs from other functions is the country that is used as a base. Whereas India is the most common destination for IT projects, back-office functions, product development and contact centres, China is the most popular choice for procurement, accounting for 29 per cent of projects compared with India's 27 per cent (see figure 1, below).
According to Ben Schmittzehe, who runs a consultancy advising companies how to do business in China, the trend to shift sourcing to Asia has created a number of factors that mean companies need to have a substantial procurement presence in the region, which could stretch to relocation of the CPO. "It's very difficult to get beyond the obvious suppliers if you don't have people on the ground," he says. "There's a huge amount of fluctuation where suppliers are all trying to compete against each other and you need to keep track of that. Chinese companies are also setting up shop in Thailand and Vietnam and vice versa, so unless you're out there managing all that, it gets very complicated."
IBM isn't the only North American company that has decided to base its CPO in Asia. Last year, telecoms equipment maker Nortel appointed John Haydon as CPO and announced that he would relocate to Hong Kong, where he is responsible for an annual spend of around $7 billion. And in January, the world's biggest retailer, Wal-Mart, announced that Shenzhen-based Jeff Macho was being promoted to senior vice-president of global procurement, replacing a US-based executive.
IBM accepts it wanted to send a message by locating Paterson in China - the first time the leader of one of its corporate functions had moved outside the US - but claims this was as much for the internal mechanisms of the company as it was for external commentators and competitors. "It was about creating a new cultural change inside
IBM about what it means to be globalised," says Tim Carroll, the company's vice-president, global supply operations, who works closely with Paterson in its Integrated Supply Chain organisation. "That doesn't necessarily mean that everyone is centred in the US. This really sets the precedent for the rest of IBM."
The idea of having to overcome internal barriers chimes with Booz Allen Hamilton and Duke's research, which found that concerns about operational efficiency, a perceived loss of management control and a lack of acceptance by internal clients are emerging as major barriers to offshoring white-collar functions. All three were found to have risen dramatically between 2005 and 2006 to now lag behind only concerns over quality of service and data security as obstacles to offshoring.
The manager gap
There are other factors, too, that could see more procurement leaders following Paterson, Haydon and Macho to Asia. Whereas India and China have a seemingly limitless supply of unskilled workers (China alone has an estimated 150 million surplus rural workers), they lack both the numbers and the quality of managers that will be needed in the future.
A McKinsey survey of HR managers working for multinational companies suggested that only 10-25 per cent of India's 14 million young graduates (those with fewer than seven years' work experience) and fewer than 10 per cent of China's total of 9.6 million are considered employable. The report also estimated that Chinese companies alone are likely to require 75,000 managers over the next 10-15 years, yet the country only has between 3,000 and 5,000 today. The message to western companies is clear: if you want to use local talent, train people yourself. And that alone might be a good enough reason to move the CPO out there, at least temporarily.
"There's a tremendous amount of turnover and attrition," agrees Dermot Shorten, a vice-president at Booz Allen Hamilton. "It's a huge task to build up the organisation because these people get trained and then job-hop. Moving the CPO over there seems a bit radical, but it is a huge challenge to get the right talent."
China, India and the rest of Asia are also becoming key markets for western companies to sell into, as well as to source from. The Chinese economy has grown by over 10 per cent a year for the past four years and, despite a recent interest rate rise, it is forecast to grow by 10.2 per cent in the first quarter of 2007. Its first-quarter retail sales, meanwhile, are expected to grow by 14 per cent compared with the same period in 2006. "China - among one or two other very large Asian countries - is going to be where the market will go, so the need for our suppliers to support that market role is going to be greater here," confirms Paterson.
A separate report by Booz Allen Hamilton into sourcing in China revealed substantial differences between buying for the local and international markets, providing a further reason why companies with designs on the domestic Chinese market might consider relocating their CPO. Transportation and import costs vary greatly, while it can be a challenge to find local suppliers prepared to take on low-cost and low-volume work. There are also wide variations in the quality of design and process technology used by suppliers.
"A lot of companies are realising that whereas 80 per cent of their customers are in their home markets now, in 10 years' time most of the market will be in Asia," reckons Schmittzehe. "If you're procuring there and you end up selling there, then the whole centre of gravity shifts to a point where you may want to move the procurement function out there too."
The trend towards shifting procurement operations to Asia has profound implications for CPOs. Anthony Thompson, managing director for the Hong Kong and Southern China region at recruitment firm Michael Page International, believes more organisations will look to base their CPO in the region in the future and that this is already affecting the type of individual global companies want to attract.
"The main requirements are technical skills, interpersonal and communication abilities, cultural awareness and commercial acumen," he says. The ability to manage effectively relationships between the West and the East is also essential and often in short supply - a shortage aggravated by the burdens of extensive travel and family relocation, he adds.
There are also concerns that moving the CPO away from the company's headquarters could create problems for both the individual and the business. "Where purchasing really saves money is when negotiation works in an integrated way with engineering, manufacturing and marketing, and the early involvement by senior procurement staff in some of these decisions is crucial," says Shorten. "If you move the CPO offshore and yet the other senior vice-presidents are all back at headquarters, there is a risk that you will lose out on that cross-functional decision-making."
Richard May, who runs PMMS Consulting Group's Asia-Pacific business in Hong Kong, agrees that a relocated CPO could become increasingly isolated in the organisation. "There are many boards and management teams who are totally disconnected from Asia. They don't understand it and don't want to understand it," he claims. As a result, he believes that companies are more likely to invest in developing purchasing teams in Asia, following the likes of car makers BMW and Ford, which have recently unveiled plans to set up global procurement centres in India that do not involve CPO relocation.
Others believe that companies need to adapt to the changing nature of global business before they consider basing their CPOs away from head office. "Whereas most companies see the obvious advantages, few other than IBM, Dell and Nortel are comfortable having their most senior executives residing so far from headquarters," says Mike Bekins, regional market leader at headhunter Korn/Ferry International. "Most CEOs still like their C-level colleagues to sit at desks down the hall. But this will change."
Change of focus
Louisa Rousseau, group managing director at Asian executive search firm BA3LA, also believes cultural change is necessary. "There has to be a shift in how the role is perceived, from one whose focus is simply to seek low-cost purchasing in uncharted territories to one that involves building a sourcing strategy and a procurement organisation that can become an integral part of the company's global supply chain," she says.
There is a warning, too, from IBM's John Paterson that this approach will not suit every company. "It needs to be more than just having a dependency on India or China as a source of supply," he says. "You need to have the ability to run your organisation globally from just about anywhere in the world, and that involves having standard processing and IT platforms and very well-educated and skilled people around the world. Not everybody is in that situation."
Outsourcing or selling your procurement function to an external company is another way of having a presence in the region and understanding the local market without having to physically move the CPO or other procurement staff. American designer label Tommy Hilfiger recently announced that it is selling its global sourcing operations to Asian procurement specialist Li & Fung, which also purchased the worldwide procurement division of German retailer KarstadtQuelle in May last year. In the latter case, the retailer said it wanted to source 80 per cent of its goods in Asia by 2008 and reduce purchasing costs by 10 per cent.
Recent moves to relocate CPOs to parts of Asia have challenged companies to reassess the way they structure their procurement operations worldwide. IBM certainly thinks retaining the CPO at headquarters is outmoded and inflexible.
"If you want to establish yourself as a truly global enterprise you will see a need for the CPO to move outside the traditional base of the company's transactional infrastructure," says Carroll. "I don't think there's a choice if you're going to become global."
Asked whether his move to China is permanent, Paterson replies that he expects to be there until he retires. But whether the company's CPO position will remain there after that is an open question.
As Carroll says: "One of the things we have learned at IBM - and we found this out during the more difficult days in the early 1990s - is that there never is an endgame.
"We've moved our procurement department to China because we think that's what's best today, but you need to be prepared and flexible for that next move. In the next generation it could be somewhere else: to Europe, South America or even Africa. There's always change."
CASE STUDY: Tyco
Using local talent for Asia sourcing
Three and a half years ago, global manufacturer Tyco began building a "low-cost procurement presence" by recruiting and training local procurement teams in India and China. It is currently extending this philosophy to Thailand, Vietnam and Eastern Europe.
"It took a long time," recalls Shard Bohra, senior director for corporate sourcing at Tyco, who led the project. "Both India and China have huge populations but their companies are mainly national, so it's very difficult to find people with experience of international sourcing. But we now have 35-40 people in India, close to 60 people in China and another 30-40 people in Taiwan."
Tyco had to overcome a lack of internal interest towards the company's new employees in Asia. As Shelley Stewart, Tyco's US-based CPO explains: "One of the problems we had was getting people in Europe and North America to really understand the connectivity with these teams and the value they brought."
So when the company hosted a supplier conference in China in 2006, it introduced its own buying teams from around the world to each other.
"Many of our folks had never been to China before," Stewart notes. "That was one of the best things we could have done."
He understands why some companies might want to base their CPO in Asia, but doesn't feel a need to relocate there himself. "With IBM I think it's more about messaging than execution, and John [Paterson] being in that part of the world will force more of the organisation to look in that direction," he says.
"The truth is it doesn't matter where I sit. What's important is to make sure there's a connection between the people in India, China, Latin America or Eastern Europe and those who have the desire to create low-cost products."
Nick Martindale (
nick.martindale@cpoagenda.com) is deputy editor of CPO Agenda
