Executive debate in association with KPMG

Winter 2011-12

A major survey of CPOs has thrown up some fascinating results. Ahead of publication in December, we invited 10 CPOs to discuss the initial revelations, covering centralisation, procurement’s strategic position and communication.

By Rima Evans

Participants (left to right)

• Andrew Hill: director, supply chain and procurement, Severn Trent Water
• Jason Smith, procurement advisory team lead, KPMG
• Ian Sexton, director, contracts and procurement, Network Rail
• Sabine Heine, principal SCM strategy manager, Vodafone
• Jason Baldaro, contracts and procurement manager, VSO
• Grahame Ball, CPO, Colt Technology Services
• Chris Jones, procurement director, EDF Energy
• Sophie Hulm, corporate responsibility manager, Economic Development Office, City of London
• Steve Bagshaw, editor, CPO Agenda and chairman of the debate
• Guy Allen, former VP global procurement at Fuijitsu
• Eddy Hills, vice president global professional services sourcing, Thomson Reuters.

Steve Bagshaw (SB): One of the research findings is around whether to centralise or decentralise the buying operation.

Ian Sexton (IS): I am not saying that I am converted. I would describe myself as not being a centralist, so when I read this report I thought, ‘Wow, there is some evidence here that if you centralise you do get some benefits from doing that’. Where we have come from is very decentralised and we have gradually centralised more and more of what we do.

Category management at the moment is not centralised, but we will be centralising it. As from April next year all of the categories and the category managers will report directly to me which they don’t do today. For me that is key.

I am not worried that every piece of procurement that goes on around the organisation has to be done by my team. I am concerned that if there are benefits we are trying to deliver within a category, we have sufficient levers and support from the board to intervene where we see,
for example, something done locally because it works for them, but not for the company overall.
We have a set of 10 decision-making criteria and number seven says: ‘You won’t optimise locally at the expense of the group overall’.

Andrew Hill (AH): Is the issue really about centralisation versus decentralisation or should it be about the capability of procurement functions and their stages of maturity? If procurement’s maturity is less formed, then it is likely you might want to be more centrally-led in order to develop it. However, if your company and functional capability is more mature in terms of the thinking and engagement of procurement within the business, then you might take the decentralisation route.

Why wouldn’t procurement empower end users to procure more for themselves within limits, thresholds and guidelines?

Grahame Ball (GB): We need to define this as well. We are a mature procurement team: we had been centrally led for a number of years under my control where we still had the policy and the governance and everything in the centre. But now I have developed a model where I am actively putting decision-makers closer to the business with their category teams. So you could still call that decentralised, but that is not a free-for-all. That is a managed devolution of power, in
some respects.

IS: I would call that centralised. If somebody running your sub-units is doing something wrong, in the end you are going to have to go and fix it. That is centralisation of authority.

AH: But procurement isn’t actually accountable for the cash that is spent by the budget holder. It’s the budget holder’s money and they are accountable for what they do with it. It is procurement’s role to ensure that the cash spent is ‘value for money’ and it is spent in the right way.

IS: My argument would be you have the responsibility regarding how they do it.

Chris Jones (CJ): The business is obviously ultimately responsible for the cash and they hold what I call requisition authority, the money, but in terms of commitment that is held by procurement. However, some of that is delegated in a controlled manner to the business, where it makes sense. What we try and do is make the right thing the easiest thing to do for a business so actually they don’t have to worry about it. If we provide agreements for key spend areas, it is much easier for them to use that agreement because they can do that without procurement again.

So even though I do centralise procurement, I believe we have done it in a way that makes it the easiest way for the business because when people try to go against it, it is actually more difficult for them.

AH: Is that because you have up-skilled the end users in terms of what to do and how to do it?

CJ: More so than probably before. What we have put the emphasis on is getting some good frameworks in place – it is the communication to businesses to ensure they know what is there that is important. It might sound stupid, but a lot of people do the wrong thing because they don’t know what the right thing is, so we have spent more time trying to promote communication and get real business alignment with the various businesses. It is that bit we are putting far more emphasis on and that is what will give the results.

Jason Smith (JS): In terms of centralised/decentralised, for me what the survey has thrown out is that there is a perception that the centralised model helps drives control, that it brings activities together, but it also can weaken your stance in terms of how you can partner with other businesses or how you engage stakeholders, your plants or whoever else that you are servicing within your businesses.

It comes back to the point that if you are mature in trusting that relationship then it tends to devolve out. We are starting to see more organisations take a centre-led approach to procurement, particularly with international businesses as it’s difficult for them to be physically in one place.

SB: It sounds to me that there is a lot of central control, but with some empowered devolution to the people that are actually out in the business, whether you call that decentralised or centralised, or centre-led. Are we in agreement on that point, although it is approached in different directions?

CJ: I think it is about that definition of control.

Jason Baldaro (JB): We have a different problem, being a global charity. We have had no centralised procurement function for a long time and we also work in a rather strange federated set-up where we have various offices that still receive funding from us, but have a degree of autonomy in what they do. These organisations and our offices have all been procuring things for the past 10, 15 years, for example, and now we are at a point at which we are receiving increased scrutiny and we need to find a way to centralise procurement. At the same time, we have other pressures.

We need to ensure that we buy responsibly and buy at a local level. Yet in some cases that is kind of in direct conflict with the need to have a central procurement facility. I am trying to build something that looks like something you would have in the business sector, but at the same time
I need to keep in the back of my head that this has to be something that allows people to buy at a local level.
           
Sophie Hulm (SH): Presumably you are in the same place as us in that you will have a responsibility to your donors. We have a similar responsibility to the tax payer to save as much money as we can, and the whole centralisation process is estimated to save £4 million. But there are some issues around supporting local firms.

For example, 40 per cent of our spend is with local SMEs at the moment. By having a centralisation process, we are going to have some big contracts that are not viable for SMEs.
SB: One thing I often hear is that we are much more a strategic part of the organisation, we have greater spend under management, our supplier relationship management project works very well – and yet the findings of this survey point pretty much in the other direction. The survey shows that procurement influences less than 60 per cent of organisations’ spend. That seems an incredibly low figure. Is the profession doing as well as it thought?
               
CJ: We have a definition – I wouldn’t say it is perfect, but it is what we use within EDF Energy on what being managed means and if it falls outside of that then it is not managed. Basically it says, has procurement actually actively done procurement on it? And we have full control from a tender or approval of a purchase order.

AH: It all depends upon the nature of your business. Having previously managed a procurement function within the airport industry, there are and will be some areas of third party spend that are more or less influence-able than others. For example, the police. Therefore it’s important to differentiate between what is ‘addressable’ spend versus what is ‘influence-able’ spend. It’s more difficult to address ‘police spend’ when it’s a sole supply and there’s little or no alternative choice. So I think it depends upon your definition, as there are some areas procurement can’t influence.

Guy Allen (GA): I am always very uncomfortable when I see an organisation that has talked about how much of the addressable spend it is managing and ignoring the rest because that is still a cost. Police in the airport industry is still a cost. I accept it might not be attackable, but there may be some things that you can do. I am not saying it is easy, but as a procurement professional you should see it within the scope of your responsibilities.

For me, the spend that a company has is everything apart from salaries and NI. It may well be you can do next to nothing on police costs or aviation fuel, but I am just worried that people put it under the carpet.

SB: What did you do at Colt?

GB: I manage our rent roll, for example, so technically that is under my management, but the amount of influence I can have on it is limited compared to some others. I can negotiate rent reviews when they come up, but other than closing buildings, which we do try and squeeze wherever possible, the amount I can do to take cost out of it is limited. Every dollar that we spend that is outside of payroll, somebody manages, but to a greater or a lesser extent.

JS: I get a sense as well that we are not marketing the function well enough. What came across to me in the survey is that we are well known for taking costs out, but actually over the past couple of years, the things we have had to do around managing risk, up-skilling people, and all the demand side work seems to have fallen away. Outside of that there is almost a PR job needed to promote how and what procurement does to deliver strategic value.

IS: That is right. Recently, I was invited to present to the executive leadership of Network Rail, which is about 90 people, and I had to explain how we were going to support devolution. I put a slide up and said: “This is what we have done over the past five years”, and a number of people came up to me and said: “We had no idea. We didn’t know that you had done all that.” We have just hired a comms person to help us to promote ourselves internally.

SB: You have hired a comms person to promote procurement internally?

IS: Correct.

SB: Has anybody else heard of that?

GA: Yes, GSK did it. Big companies can afford to do it.

IS: We’re implementing a new operating model in April so a key part of that is making sure people understand how things are going to change and that things don’t fall between the cracks. One of the things I was told was, “Ian you need to do more to promote the services that you offer the business and the extent to which you are succeeding in the things that you are here to do, your strategic objectives’. It took us a while to find someone because most good marketing people don’t want to work in procurement; they want to work in marketing. We will see, it is very early days.

AH: We are also developing our communications strategy, including how procurement is being repositioned within Severn Trent. I have seen many change programmes fail because of the language used – the broader business and end user’s don’t get what procurement is about. We use buzz words like, strategic sourcing, SRM and others, and while procurement teams understand, others won’t. These labels don’t actually mean a lot to the users in the business so I think procurement needs to re-think the language we use.

SB: Ian, did you avoid procurement-speak when doing your presentation?

IS: I did my best, yes. I can remember presenting it to the director of investment projects, who is responsible for about £2.7 billion of capital expenditure every year. We presented to him on category management a couple of years ago. He complained that the presentation used our language, not his, and that all the diagrams showed contracts and procurement (C&P) at the centre of everything rather than his function as the customer. So we did learn the lesson, but that was before we had the comms person.

The survey talks about to what extent do we manage demand. The ability for us to manage demand very much depends on how good we are at getting stakeholders to engage and that is all about talking to them in a way that they understand.

SB: Eddy, what is your approach to communicating with stakeholders, speaking the same language?

Eddy Hills (EH): We also have a comms person seconded into the group and that is incredibly valuable. Frequently, our technologists talk about things that we don’t necessarily fully understand so the business has worked quite hard at ensuring that we talk a common language so people understand each other.

The challenge for us, though, is to make life for the comms person as easy as
possible. It is no good articulating things and expecting the person to be able to translate. We have a few examples where we have had to go back several times, but the people to blame are us because we hadn’t thought about what we were saying when we wanted people to take
on board the messages. It has been a learning process.

SB: I want to come back to the point about the lack of progress. Do you think that perhaps the profession has an issue that they want a voice, but they are not doing enough about it?

Sabine Heine (SaH): You go to a marketing conference and you won’t hear the strategic importance of marketing talk by a CMO of a big company. We only manage 60% of the spend. For me, the sub-context is that 40% of the business doesn’t want to talk to us because they don’t see the value in what we do. One of the first surveys I saw when I started this role had the same answers as this one and I am surprised that there isn’t much in the way of movement. Strategic alignment, competencies – you can’t get the talent. There seems to be a list of problems, but no move to a solution.

SB: Would you go along with that Chris?

CJ: You are probably right. If we don’t get exactly what we want, we just have a moan about it and say: “People don’t listen to me.” Buyers often say: “Chris, I do all this and they are not listening to me.” We ought to spend less time worrying about that and more on doing something a bit more positive. Some people are excellent at doing something about it. But there are a lot
of people who are very bad. Maybe we need to try to get a few people out of
that camp and into the more positive camp because once you are positive, you usually succeed because people can see it. It’s body language.

GA: What I don’t know is whether it is much different in other functions. Is every marketing person ever employed fantastic? Is every HR person ever employed fantastic? I know the answer to that last one. As a buyer, you see lots of sales people and you know that 50 per cent of those are not actually very good. So I don’t know if it is different in any other function, but we do need to be more positive about ourselves. We do need to sound like we believe in what we are saying, because if we don’t believe in what we are saying why on earth is the internal client going to?   

IS: How many people around here think that their supply chain is at the heart of their company’s strategy?

GA: It’s going to depend on the industry. If you are a bank, I am not sure that the supply chain strategy should be at the heart of the strategy, frankly.

SB: Manufacturing really was the only sector for which this was true in any meaningful or significant sense.

IS: It’s not at the heart of our strategy and, in many categories, it should be.

SaH: Is it not just a function of what industry you are in? For us, if our supply chain breaks down for a week there is next to zero impact. As long as we have got the handsets in the shop, there is zero impact in terms of acquiring customers, making revenues. If Apple’s supply chain breaks down, there is no stuff in the stores.

If you are in manufacturing and you have got massive stock on your books because your supply chain is poorly managed, then you haven’t got anything to sell and the revenues don’t come in. That, for me, is where the strategic alignment is different and where the strategic alignment needs to sit. If you are manufacturing something then what you are doing or your product design strategy is going to be more in line with where the stuff comes from in the first place, whereas if you are selling a service, the stuff that you buy is more
supporting and ancillary.

GA: No matter what the industry is, your strategy should still be aligned to the corporate strategy. But we were debating whether it was at the heart of the corporate strategy. So procurement, HR or whatever shouldn’t write their functional strategy unless they can first of all list the corporate one. If they can’t list the corporate one, you can’t possibly be aligned.

Even in the service industry that Fujitsu is in, you can make a difference, around the quality of resources that you are able to put in front of potential customers, for example. Not all of those are employees – some of those are contract staff. You can make a difference around the relationships you have with partners, and so on.

Again, it’s who you put in front of your client organisation. You can make a big difference, even though it is a service organisation.

IS: The reason I asked the question was really to highlight the point about us navel-gazing and moaning about our situation. The extent to which – and this is a personal view – the supply chain is at the heart of decision-making around strategy affects how much C&P is at the table.
There have been decisions made in my company where they say, “Right, now the supply chain needs to suck it up. You have sucked it up in the past, so well done, C&P, get on with it.” You could take that as a compliment or you could say, “If you talked to us before you made that decision we could have come up with a better way of addressing that issue”.

There are too many decisions made in isolation and it is dependent upon the industry that you are in. It is right that we should challenge ourselves and look to improve and it is okay to have a moan as long as it doesn’t affect your performance.

SB: The survey showed that a number of organisations are still not delivering a significant or ‘excellent’ level of savings. I find this particularly surprising.

GA: I think the difficulty is how you measure it. Every business that I talk to – because I am intrigued as to how businesses measure cost savings – measures it differently and so you might
find that the guys here who claim they are not saving anything, by somebody else’s measure are saving something. There is not a common measure. If there was a common measure that we all subscribe to, fine.

IS: I don’t think there is, is there? When you say “savings” does that include cost increase avoidance? Our policy has cost increase avoidance in there as well, but finance will only sign off a cost reduction, a budget reduction in one year to the next. If you include cost increase avoidance then we are up at 8 per cent, but if you don’t then we are half that.

JS: That is where we do need to go to the next level of detail. Imagine if you are a retailer and if you were buying textiles / garments from China. With the fuel and raw material commodity prices you could have been exposed to circa 20 per cent increases over the past two or three years and therefore 1-2 per cent may be a pretty good result.

IS: It depends on the category as well doesn’t it?

JS: Absolutely.

GA: I know that Vodafone, for example, has got a brochure on how to measure savings. It is a very thick and glossy brochure that you send out to your internal clients. For other organisations, it will just be whatever they sign off internally.

SaH: It is not just a brochure. It is information on agreed savings definition methodology between procurement and finance, so part of the process is then saying, “We declare”, but it doesn’t get put on the score card until it has been signed off by the finance person.

JB: One of the biggest parts of my role at VSO now is to ensure that we are looking for cost savings in every contract we negotiate. One of our new strategy directives is to become a more agile organisation. For not for profits, a big driver is cost saving. I am pushing that, and I am pushing it back to every head of department who is in charge of buying something, saying “Go out there and make sure that you don’t just do something quickly and not ask for some kind of reduction on the price.”

AH: I wonder whether this is a metric that procurement is comfortable with and all hang our hat’s on too much and sometimes make it more complicated than it needs to be. If we were to go closer to our business users, we might find that cost reduction savings may not be their number one priority, it might be more about focusing procurement’s priorities on mitigating risk, certainly
in today’s economic environment that we are in.

So while the cost reduction metric has a role to play, no shadow of a doubt, I think procurement can over complicate it.

SB: It may be the one that we are hanging our hat on, but it seems that for many of the people who completed the survey that is the one that their organisation is also hanging their hat on. So is that procurement’s fault or is that the hand that we are dealt?

GA: I have never had a boss, not the organisation, that was not prepared to not give me a savings target. Yet if you went and talked to the organisation itself, to the marketing director, they may not have that particular drive because they have got a budget, and would be concerned that if they make savings the FD will say: “We’ll take it off you.” So the organisation as a whole may not see it as a driver.

CJ: Certainly, I have always had savings targets and to be fair I usually put them in for my guys. If I was looking at the nuclear side, that is probably the least of their priorities – it is all about safety, quality, time because, at the end of the day, to have one of those stations down for a day is going to wipe out any cost saving that you are ever going to achieve in a lifetime, so it is irrelevant really.

You have obviously got to get the safety, the quality, the time, but the point is you can generally get the savings as well and sometimes it can go too far the other way – all you talk about is these things that are more difficult to put a number on because what is the starting point on some of those? You don’t know. Yet savings is an absolute number and there is something about having a number that you can write down. “I have saved £X million” looks very good and makes you feel good as a CPO.

But you need a balance to show best value to the company. That is what I try and show if I go and talk to the CEO: “To keep you happy, here is a nice financial number. However, look at all these things here as well.” Sustainability is a good example of something that is difficult to put a number on what it is worth, but it depends what you are trying to achieve as a company.

EH: I guess, despite the fact that we don’t seem to be able to agree what a saving is, it is probably the easiest thing to define.Whereas other things are quite difficult to put into numbers. That is a challenge.

SB: Without delving into the document that Vodafone produces, is there one way you can sum it up?

SaH: The ideal is a saving against the reference price. Most of the later pages define some of those exceptions and also the second or third options. But the ideal saving is one where 12 months ago, for the same thing we paid ‘X’ and now we pay ‘X -1’.

SB: X is the reference price?

SaH: Yes. The preferred reference price is the price of whatever you are buying on
1 January for the year, which in some cases is easy because you have just bought the same thing and in some cases is more difficult because it is a new category we have never bought before. So then there are different other options. The last, very last resort should be the first quote of the supplier.

GA: We have also measured cost avoidance. We didn’t ever lump them together, we reported them separately because if you are in an industry where the cost is going up at 20 per cent pa, if you can only pay 10 per cent of that 20 per cent, that is a really good result and therefore you want to target people to achieve that.

SB: And are these definitions of savings, of cost avoidance, understood beyond procurement?

SaH: It is agreed as part of the process that the savings are signed off by finance not procurement.
                   
SB: Jason Smith, you have got to do different formulations all the time. Have you come across one method for assessing what constitutes a price reduction or a saving that works best or is implemented most widely?

JS: The challenge with cost reduction is that many organisations set savings targets on the basis of baselining using the rear view mirror. For example, looking at what you spent last year and then using that as a reference point to say: “If everything is the same this year, here is where we are.”

It is interesting for me because if you look at total benefits, the way that they promote the function in retail is by saying, “Yes, we can do all this stuff that protects the bottom line and saves cash for the business, but because of our knowledge of the supply base here are the things that we can do that can drive incremental income and add customers.”

One example might be, if six months ago you went online and wanted something delivered to you next day, you had to order online before 4pm. Now the infrastructure and supply base is better connected to the extent that if you go online and order at 10pm, you can still have something delivered to your front door by next morning. This means that they can get more sales and new customers. It is the wider understanding of the supply market to help grow the top line that is promoting procurement’s reputation in that sector.

In terms of your question around reporting savings, I have seen good and bad examples of benefits tracking tools. The key is to keep it simple and make it auditable and amend your budgets so you don’t get creep. We are seeing advances in technology to help procurement track benefits and drive compliance to new deals.

One of the challenges that we have as a procurement function is that, at any point in time, there are a huge number of initiatives/supplier issues to deal with so we tend to focus on one or two of the biggest ones. Technology has a role to play in supporting post contract management.

SB: We haven’t really come on to the subject of technology at all so far. We
do touch on it in the report, so let’s expand on that. It is something that is frequently discussed in the profession and often derided, but I am not sure the benefits of this are universally agreed.

EH: No, the one thing I would say we could do with are more tools that are fit for purpose. There are a lot of people that have got a ton of technology and they are not using half of what it is capable of doing. Actually what they need, or could do with, is something far simpler and cheaper. It is a case of stepping back and doing some form of feasibility study and saying: “What do we need here? What is going to work?” before we jump in and add more unnecessary complex functionaility.

CJ: But that is our role. Our role is to figure out what we need. As CPOs we determine what systems to use.

EH: We should be, yes.

SB: There is one other area of the report that I wanted to cover – the number of standard actual net payment terms. I expected these to be a lot higher than they are. I would have assumed everything was 90 days or 120 days but the survey figures are much lower. For retail and manufacturing, it is at 50 days on average and for financial services 32 days. You might think: “Well, we should be extending our terms a bit further”.

SaH: We certainly find there is a massive difference from country to country. The UK is one of the toughest.

SB: By toughest, what do you mean?

SaH: In terms of extending payment terms. The UK standard payment term is 30 days and if you go to Spain it is 120 days. I don’t know whether cultural is the right word, but from market to market, from country to country the standard payment term is quite variable and the UK is probably one of the shortest. In Southern Europe, or even our local suppliers, three months is standard across the country.

JS: We are actually seeing quite a lot of innovation from procurement in this area. For me the numbers aren’t as high as I was expecting, but the two that are the highest are manufacturing and retail where historically from a cash perspective they have pushed out payment terms so they can get a one-off hit as a benefit.

But what we are seeing a lot more of at the moment is: “That is great that you have had the one-off cash hit, but how can you turn that into a revenue stream?” There
is currently a lot of focus on supply chain financing and how this can support you as a buyer and also your suppliers.

The thinking now is what benefits could you get if you paid your suppliers within a couple of days rather than waiting 50 to 60 days? What could you get from that supplier for paying them early? This thinking gets you engaged in a different discussion with your suppliers. It may be, certainly for the large companies, that they have a far greater ability to go out and borrow at a lower cost, which means that you and your suppliers could benefit. This change in the relationship and focus – moving from quick-hit cash benefit to being something that you can treat as a revenue stream – is an important element for me.

SaH: That is what we do. We have a supply chain financing programme and it goes hand in hand with extended payment terms. We can offer our suppliers financing based on our credit rating which generally is better than theirs.

JS: The challenge is for those organisations that have already pushed them out to 90 days and stretched that relationship already, to start having that debate once that has happened.

SaH: The supply chain financing isn’t a debate, it is a benefit for the supplier. It is not a case of, “You must take this”, it is “you can take this” and it helps us in the discussion of moving from 90 to 120 days because you still get paid on day one, based on our credit rating.

AH: And it is dependent on again the maturity of your supply chain and where you are as a business.


☛ Full details of the report findings will be in December’s CPO Agenda newsletter. Email editorial@cpoagenda to sign up.