Running an e-auction for public relations services hardly smacks of a softer, more engaging style of procurement. But for the 175-strong function at British Airways, the event, which was held in May and knocked 25 per cent off its European PR bill, marked an important turning point in its relationship with internal customers.
Since 2001, BA, like most global airlines, has been in serious cost-cutting mode. Under its Future Size and Shape strategy, it has axed 13,000 jobs and taken out over £450 million in annual operating costs – two-thirds of it on external spend. Silla Maizey, BA’s procurement director, admits that it’s been an “intensive and intrusive” few years, both for her Heathrow-based team, who have had to follow a more rigorous sourcing process, and for staff across the company, who have had to comply with it.
A former financial controller, she says: “The ‘tough love’ approach plays to my personal style. It’s quick and it works. There is no ambiguity, no confusion, you can just get stuff done. There is a huge value to that.” In contrast, changing hearts and minds takes time – something BA simply didn’t have.
Forced to choose between the two approaches, Maizey says she would pick “tough love” every time. However, with the company now profitable again (albeit some way off its 10 per cent operating margin target), she accepts that a more “engaging and involving way” is needed to sustain results. “We talk about it in terms of how we manage when the red light goes off. That requires a very different set of behaviours in procurement.”
The PR auction was an early example of this approach in action. By working closely with colleagues in marketing, she says, scepticism about the tool and its impact on agency relationships was overcome and BA’s communication managers became genuine enthusiasts, rather than reluctant participants. “They now see how they can use this process and make it their own, rather than procurement doing it.”
Complex structure
Of course, not all large companies are as centralised and as simple in structure as British Airways. The American conglomerate Tyco, for example, consists of more than 200 firms based in over 60 countries, and only started building up functions at the corporate level two years ago. Shelley Stewart, its vice-president, supply chain, who works out of its global headquarters in Princeton, New Jersey, says that before new management took charge, the group was very decentralised and little attempt was made to leverage its $19 billion spend.
Now, as part of its top-down “operational excellence” and “One Tyco” initiatives, Stewart is responsible for delivering cost savings of $1 billion by 2006. Like Maizey, he believes the debate about corporate governance, and Sarbanes-Oxley in particular, has helped procurement, because of its strong emphasis on internal controls. But he doesn’t believe that simply wielding a big stick is the answer. “I’ve done this enough to know that you can’t just come in and say we’re going to do strategic sourcing and this is how we’re going to do it. You’ll have more people scrambling to get off the ship than you will people picking up the oars and helping you to row.”
It’s a view shared by Kai Nowosel, a former head of global purchasing at pharmaceutical firm Aventis, who has experienced both collaborative and dictatorial cultures and is unequivocal about which works best. “In many ways a centralised organisation makes your life easier. You don’t have to discuss a lot, you just make a decision. But dictating does not deliver the value. One of my previous companies was very centralised. We tried to dream up strategies, decide on suppliers and implement it. But users feel threatened by that and try to find ways around you.”
Such an approach also ignores the fact that users are likely to be far more knowledgeable about their areas than purchasing, and may have good ideas for improving how their budgets are spent – ideas that could go untapped. “Networks of experts are far more powerful,” says Nowosel, who now works for a big consultancy in Germany.
Given the many different permutations of size, make-up, culture, maturity and economic fortunes, what does good governance look like in terms of the way procurement policies are formed, the sourcing process is handled, and post-contract compliance is managed? Or, to put it another way, what are some of the common success factors for achieving sustainable results?
1. Involve senior executives
“Top-down support that is visible and vocal” is how Shelley Stewart puts it. ”If all the leaders in the company are saying this is the right thing to do, people will work on it.” At Tyco, CEO Ed Breen is executive champion for its telecoms category, while the CFO and treasurer take the same roles in facilities and energy.
2. Demonstrate value
“Results are what make people pay attention,” says Stewart, whether at board level or further down the organisation. So if you don’t have a clear mandate for procurement, seek to build your own by delivering benefits and creating “an aura” of authority, advises Silla Maizey.
3. Listen and seek buy-in
As well as picking up useful knowledge and ideas, listening carefully to internal customers will alert you to what procurement needs to do better, says Ulrich Piepel, CPO of German utility company RWE (see case study). “Everyone needs to have a stake in the process. People need to buy in to decisions,” adds Kai Nowosel.
4. Give responsibility to business heads
Nick Butcher, a former chief operating officer of DHL in Europe, says the most critical thing he did as executive sponsor of its global procurement initiative from 2000-02 was to make its country managers responsible for leading key categories. They in turn recruited other people with business roles and from local procurement teams, which helped to cement relationships.
5. Adopt a customer service philosophy
“Successful CPOs,” says Andy Kyte, vice-president of procurement strategies at analyst firm Gartner, “adopt a customer-service approach to budget-spending lines of business. Unsuccessful ones act as policemen and see business heads as adversaries.” Kyte reckons that no more than 10 per cent of companies have got it right, and that getting people with strong account management skills into procurement – possibly from the sales and marketing departments – is an essential enabler.
6. Be tough in some categories
Indirect goods and services such as mobile phones, laptop computers and business travel arouse strong emotions among users, so it’s important to listen and consult. But ultimately, says Shelley Stewart, procurement has a duty to make a decision and do what’s right financially for the company and its shareholders.
7. Know when to walk away
“You can shout at people as much as you like, but in a large organisation that can be very destructive,” says Nick Butcher. “At DHL, we were careful not to tread on people’s toes, even where we could have saved more money than we did.” Picking only the juiciest opportunities and leaving the rest on the tree for another day requires sound judgment and a deft touch.
8. Share targets and plaudits
Savings targets need to be shared across the business, “otherwise you will fail”, says Simon Lee-Smith, CPO at the UK-based mobile phone operator O2. Shared objectives among cross-functional teams produce superior results. And when it comes to shouting about success, make sure procurement doesn’t overplay its hand; let budget holders take their share of the credit, as well as the responsibility.
9. Make it easy to comply
The easier it is for people to buy from agreed contracts, the higher your compliance rate is likely to be. In a large organisation, that means implementing a user-friendly e-procurement system, Lee-Smith adds. With that in place, you are perfectly entitled to insist that all requisitioners comply.
10. Tackle persistent offenders
Even if you’ve done everything in 1-9, there will always be somebody who thinks they know better. At British Airways, an external spend group made up of senior executives reviews a named list of offenders every month. Those staff that continue to ignore the procurement process can expect the CFO to come knocking – and probably with an iron fist, rather than kid gloves.
CASE STUDY: RWE
Piepel power
RWE is one of the world’s biggest utility companies, employing more than 100,000 people in Germany, the UK, central and eastern Europe and North America. In 2000, it decided to create a shared services company, RWE Systems, to handle all of the IT, procurement, fleet, real estate and facilities needs for its core German market, which accounts for more than half of its €40 billion-plus annual revenue.
Centralising procurement has brought greater visibility, control and savings for the group, says its Dortmund-based CPO, Ulrich Piepel. Any requisition with a value of more than €1,000 now has to go through his 250-strong team; if it doesn’t have a purchase order on it, the bill doesn’t get paid.
Despite this strict regime, Piepel says procurement must win acceptance from users across the group – something that is helped by the 3,000 or so internal customer meetings his team conducts in a typical year. “You have to have clear targets and guidelines, but the rest is about talking and convincing. We want to be respected and valued by the company.” Satisfaction levels have risen from just 30 per cent when the centre opened to 75 per cent now, he notes.
A small amount of maverick buying persists – “people always want their own special sausage, as we say in Germany” – but a phone call from him usually does the trick, and he estimates he doesn’t make more than 10 a year. Piepel says he always makes a point of listening to the reasons people give for non-compliance, just in case it’s procurement that needs to change its tune.
Having the CEO’s full support is critical, he believes. However, calling on it to bring others into line is “something you do only once in your life. It’s better to have a psychological weapon than to use it.”
Geraint John is editor of CPO Agenda and editor-in-chief of Supply Management magazine (geraint.john@cpoagenda.com)
