SHAREHOLDER VALUE
Clive Gallery & Duncan Brock
The globalisation of financial markets in recent years has increased the power of fund managers and institutional investors and put tremendous pressure on senior executives to deliver short-term results. This, in turn, has influenced the way publicly quoted companies are managed.
Sustainable shareholder value (SSV) reflects the capacity of such companies to regularly increase their stock-market value and outperform market indices. SSV powerhouses such as the household goods maker Reckitt Benckiser generate above-average growth and free cash flow – both key elements in the quest for competitive advantage. However, procurement’s impact on these key measures is unclear in most companies today.
To make procurement’s value contribution more transparent – and to improve the function’s “attractiveness” internally – CPOs need to be able to illustrate the financial effect of their activities on metrics such as gross margin, earnings before interest and tax (ebit), and free cash flow. The authors include a practical worked example of how this can be done in the latter case.
Measuring the function’s impact on SSV will become more important as outsourcing increases and more truly global suppliers are created.
EXECUTIVE DEBATE
11 panellists, Brussels
Procurement is expanding beyond its traditional remit, but how far should it go? To answer this question, CPO Agenda gathered a group of senior professionals from companies such as British Airways, Continental, Danone, Merrill Lynch and Nestlé for its first executive debate in Brussels.
Panellists noted that procurement was helping to drive businesses forward commercially through, for example, early involvement in acquisitions and innovation projects, and being invited to participate in sales calls. Cost pressures, globalisation, consolidation in supply markets and the need to build brands in pursuit of shareholder value were seen as some of the key drivers.
There was a consensus that skilled, knowledgeable staff with a broad business perspective were needed to fulfil this potential, but that there was a shortage of such people. Other constraints included company history and culture, the CEO’s view and limited resources.
The limits to procurement’s role were variously seen to be set by the executive board, the need to let other functions do their jobs, the capabilities of your team, the limits you place on yourself as a leader, and the extent to which you focus on cost out rather than value in.
VALUE-CASED SOURCING
Jules Goffre
Traditionally, procurement professionals have focused on sourcing goods and services cost-effectively. But today there is also a need to look beyond that, at the other assets, capabilities or benefits that a supplier can bring to the table. Value-based sourcing seeks differentiation, rather than commonality, in supplier offerings, which means that buyers end up having to compare apples with oranges rather than apples with apples.
Allowing things to be different moves procurement out of its comfort zone and raises difficult questions, such as how to define value and how to maintain transparency in tender processes. Value-based sourcing therefore requires a change of mindset, not only in the procurement function but also throughout the organisation as a whole.
This more strategically driven, rather than process-driven, approach to sourcing is particularly vital in industries such as pharmaceuticals and consumer goods, where a large proportion of value is already derived from external partners. But, as performance and value-based relationships and contracts grow in importance in many sectors over the next few years, procurement functions will need to develop the skills needed to manage them or be prepared for their influence to shrink.
VALUE-BASED MARKETING
Robert Shaw
Over $1 trillion is spent globally every year on marketing. And yet, despite marketing’s importance in driving revenue and cash flow, many organisations have done little to measure the effectiveness of their spending on advertising, direct mail, promotions and public relations activity.
A new approach called value-based marketing (VBM) is beginning to change that, argues Robert Shaw, an expert in marketing metrics. It “shines a light into revenue streams and profit pools” and seeks to manage marketing’s financial contribution, rather than its creative input. Procurement’s role in making VBM happen is an important one, not least because it is instrumental in establishing performance targets and measurements for external agencies.
Research into firms that believe they are managing marketing for profit suggests they do five key things well:
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approach planning differently from their peers;
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review confidence in these plans rather than just their financial performance;
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put revenue streams “under the microscope” using econometric analysis;
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select different measures and manage data differently;
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use optimisation tools to allocate marketing resources in a way that maximises value.
CASE STUDY: CSC
Geraint John
In 2005, the UK division of global information technology services provider Computer Sciences Corporation (CSC) was ready to outsource a significant part of its services organisation. But the deal, which could have been worth £300 million over seven years and involved the potential transfer of over 500 staff, never happened. Why? Because CSC’s procurement team calculated it was the wrong thing for the company to do.
It’s a measure of the influence procurement director Nick Caller and his 28-strong team now have at board level, and with the CEO, Keith Wilman, and CFO, Martin Coombs, in particular. Yet there is plenty of influencing still to do, Caller admits – not least with business unit heads and people at operational levels in the company. Another key challenge in 2007 will be spearheading the creation of a pan-European procurement strategy and organisation.
The secrets of successful influencing, say Caller and his associate director, Lee Rimmer, are to establish credibility by delivering results; develop trust; learn from your colleagues; understand the business; know your audience; do things for the right reasons; don’t be afraid to make mistakes; see your users as allies; be clear about your purpose; and, last but not least, be passionate and confident.
COLLABORATION
Carlos Cordon, Tom Vollmann and Henrik Eklund
Although many companies talk about creating partnership relations with key suppliers, the recipe for actually implementing and sustaining them has not been well developed. Often they are founded on some exceptional individuals, helped by fortuitous circumstances.
The authors – two professors at the IMD business school and a consultant in Switzerland – describe a process for developing collaborative customer-supplier relationships: one they have used successfully with several CPOs.
Using the results of face-to-face interviews and a questionnaire, they run a two-day workshop involving 8-10 managers from each company. Apart from getting to know each other better, the aim is to end up with a clear consensus about the problems/issues in the relationship, the potential solutions, a shared vision of the most important improvements needed over the next 6-12 months, and personal commitments to make it happen.
Although an independent third party is an important ingredient, ultimately it is the CPO will owns the process and has to make the key decisions, such as choosing which suppliers to work with at this level and who to involve from their own side.
MAKE-BUY DECISIONS
Simon Harper and Dave Phillips
With companies under increasing pressure to cut expenses and improve their return on assets, the dilemma of whether to keep key functions in-house or outsource them has taken centre stage. Manufacturing units are particularly in the spotlight, because of the rise of low-cost countries, but other critical activities such as HR and IT are also the focus of make-buy decisions.
The authors, consultants at Booz Allen Hamilton in London, argue that CPOs should play a “pivotal role” in determining a company’s course, leading business units in conducting detailed analyses that evaluate costs, benefits, risks and rewards, and challenging their organisations to make more objective and informed decisions.
They describe a framework designed to simplify this process based on three pillars: business strategy, risks and economic factors. Among their contributions in these areas, CPOs can act as independent arbiters in resolving which aspects of the organisation are truly strategic; oversee risk assessments that are more diligent than would normally be the case; and ensure that decisions are made on the basis of total costs, not simply on estimates of existing in-house costs versus those of an outsourced operation.
TECHNOLOGY
Malcolm Wheatley
In the space of just a few years, technology has transformed the procurement landscape. But despite everything that powerful new software tools have delivered, CPOs aren’t short of suggestions as to where further help would be welcome. Their “wish list” isn’t without a certain irony, because there’s ample evidence that they and their teams aren’t making full use of the functionality they already have.
Nevertheless, one desire is to improve the usability of procurement applications, which can help user adoption and boost compliance. Another is to get much better access to data with which to make more informed sourcing decisions. Still another is to build greater connectivity with suppliers, particularly smaller, less IT-capable firms and those in low-cost countries.
Looking further ahead, some CPOs imagine a world of “touchless procurement” where not only are purchase transactions made without the function’s involvement and spend data captured seamlessly, but also “intelligent software agents” automatically source, negotiate and contract on behalf of their companies in non-critical categories. So far, however, such technology does not exist, and the question of whether this is the kind of software vendors will develop remains an open one.
