How, in the modern procurement world do you cut costs and make them stick? And how do you decide between long-term and short-term strategies? What are the best ways to bring stakeholders on board? And what skills are in demand?
These questions were put to a panel of five senior procurement professionals by Steve Bagshaw, CPO Agenda editor, as chairman, during the CPO Agenda Cost Cutting Summit, in association with SAP and Capgemini Procurement Services IBX.
The panelists were asked about the balance of implementing a long-term strategy while simultaneously picking up some quick wins. Patrick Dunne, group procurement and property director at Alliance Boots, felt that in the world of procurement, the long game is king: “I think everything has to be a long-term activity. Every strategy within a procurement world, or cost-based management as I like to call it, has to have an end-state.”
Dunne added it’s critical that procurement doesn’t become too consumed by delivering savings and cutting costs: “I always say to people, profit and money is like food: if all you did was is eat, you’d kill yourself. So for that reason you have to be about more than just cost, profit and money.” He concluded: “Delivering a cost conscious culture is the long-term objective, everything in-between, short-term, or medium is initiatives, tactics and strategies towards that cultural change.”
Daniel Baun Christensen, procurement platform manager at Lego, also feels it’s all about the long-term: “I see no quick wins as such.” In his eyes, successful procurement is all about working with stakeholders: “Your customers in your organisations are your stakeholders and if you don’t get aligned there are no quick wins and long-term wins.” Adding: “I haven’t seen ‘one size fits all’ in procurement.”
For Pontus Björnsson, VP account management, Capgemini Procurement Services, it’s about getting the right mix of the two: “The companies we talk to never allow themselves to choose between short and long term.” He agreed stakeholder engagement is becoming increasingly important in the industry: “We see that over and over again.From a long-term perspective that is the most important part.” He highlighted the need to deliver on all identified savings: “Another thing I’d like to raise is the difference between identified and realised savings. A lot of the short-term focus is in identifying savings, but maybe not realising them. I think that a long-term strategy needs have a huge focus on getting realised savings as well.”
Meanwhile Andrew Vaughan, group procurement director at BDR Thermea, highlighted the importance of getting senior level buy-in: “The lead for me is very much a top-down approach, it’s getting the CEO on board and driving the strategy – without senior board level support, it’s very difficult to engage. He also agreed that getting stakeholders on board is vital: “That for me is key and marketing the department internally is something I’m passionate about.” But no matter how good the strategy is, short or long-term, it won’t be delivered without the right procurement people. “Getting the right people is key. They’ve got to be as passionate as I am and they’ve got to be marketers and traders [in delivering procurement programmes] as far as I am concerned.”
The discussion then turned to how to develop an effective strategy and what aspects to focus on. Asked whether there was any company he looked at as having excelled at procurement, Dunne said: “In all the organisations I’ve been, I’ve never found one I’d want to go out and replicate.”
Instead, he feels its about looking for the individual aspects companies do well: “I would never say that any single company is world-class, what I would say is, there are companies who do things that are right for them. So you can pick and choose different things from those companies. We’re not very technology-led for example, we’re very people-led so the tools for our procurement team are very much the people.”
He added that while technology has a role to play in reaching the end goal, it’s people that are the real driving force: “We’re a results-orientated business and go after programmes and initiatives that can deliver.”
While technology is not a solution on its own, it still has a key role to play, according to Baun Christensen: “ERP systems or SAP or IBX will not solve anything, but they are key to ensure savings land. At the end of the day, unless you are excellent at communicating with your professional purchasers then you’re just going to be diluted.”
Drawing on his experiences at global toy brand Lego, he said: “I see so many examples where you can take the contract, look at the purchase order and then the invoice and there are always deviations. You need to nail the contract all the way through all systems and all processes to make sure you are creating the kind of value you say you are.”
While Ron Needham, vice-president at SAP has seen his procurement team’s ability to deliver savings improve as a result of engaging with the wider business: “We’ve been looking at new ways to save money because we feel we’ve done a lot of ‘tackling and blocking’ over the past 10-15 years. We’ve found if we expanded our thought leadership we did a better job of being viewed by the CEO as professionals rather than just the folks who have to save money on pencils.”
Stakeholder engagement Needham explained that he and his team had been working alongside the marketing and sales teams to communicate to them just what the role of procurement is, to enable them to pitch the products and services of the company with a clearer understanding.
As a result, he has seen the stock of the internal procurement team rise, which has opened doors to new initiatives. “We’ve been looking at things like bring your own device (BYOD). That’s frightening to IT, in terms of security and all the implications if somebody brings their iPad from home, but being a technology company, we were able to figure it out both practically and politically.”
He noted that selling it politically was more difficult, but as a result, the company was able to lower its IT spend – and it turned out to be a double win. “Equally, we can present it to the organisation as what we’re doing for the environment in terms of sustainability.”
But what about once the savings are delivered, how can procurement go about stopping the costs from being recycled? Vaughan believes that it depends on the area. On direct costs, particularly commodities, he feels it’s a “tough call”, especially as a result of the volatility in the markets over recent years. But on in-directs, it’s about getting agreement with the CFO from the start. He said: “There is a deliberation with the CFO to agree a process and a system to make sure your savings are ratified every month and signed off by the financial organisation and registered.”
Once the savings are cleared, things become trickier, though, as he explained: “In terms of stakeholders, it’s the common trait with marketing: you go in, make a saving on marketing and lo and behold, the marketing guys say ‘Great, I’m still gonna go out and spend my budget’. So those savings go back and are recycled.” But he doesn’t see it as procurement’s job to handle the savings once they’ve been achieved. “I must admit that I try and keep away from that debate as much as I can and leave it to the CEO and CFO. If you want to take it out of the budget next year, take it out, and we’ll work on a tighter budget.”
Björnsson agreed that directs and indirects require separate approaches but said procurement can still play an important role in limiting a future influx of cost rises. “I think the key to all of this is to actively work with the stakeholders, start to work with demand management, look at that and continue to work on the savings.”
At Alliance Boots, Dunne and his team take a more up-front approach, agreeing budget reductions from the outset. He said: “We jointly agree with the stakeholders to take the money out of the budget before we even deliver the initiative, which is a slightly different tack.” And the approach appears to have been a success: “Historically, we would have two out of every 10 initiatives succeed, today we have eight out of 10.” But the key to the approach is its longer lasting impact: “Once the budgets are reduced, it’s very hard for cost creep to come in.”
Change management
The panel shared their views on just how you create an organisational culture that is more open to change. For Dunne, it’s all about the individuals: “It’s in their people’s DNA. You either have the ability to go looking for change or you don’t, so I would say the recruitment policy you have in your procurement team needs be really carefully looked at.” He accepted that training and development can help significantly, but fundamentals such as personality are far more important. “The personality and the character has to be there.” He added that while hosting workshops and leading creative thinking sessions may not be the “normal skill set of a procurement person per se”, it is vital for leading change.
Identifying opportunities is also key: “One of the tools we use internally is being able to read profit and loss accounts, operating expenses and intuitively know when you look across different countries and different businesses that there’s an opportunity.”
Commercial skills are important to Vaughan, but interpersonal skills and the ability to influence are becoming increasingly so. “These days the guys are all talking to stakeholders, are representing [the organisation] week in, week out, and presenting to suppliers. The key for me is looking for those people that are good at influencing. I’d much rather focus on personal skills first, negotiation second.” Vaughan also believes that internal marketing of the procurement department can grease the wheels for change management. He has implemented a company-wide initiative called the 10 per cent burn. “In each of the our cost centres and in each of our spend categories we’re aiming for 10 per cent savings. And some of the guys are achieving it.”
Bjornsson felt a “no P [procurement] No Pay” policy could make people across an organisation realise the benefits it offers in the long term: “I think it has a tendency to be seen as a sort of a whip on the organisation, but I think that procurement should look at it as an incentive to make it so easy for an organisation to follow policies, to select the preferred vendor, and so on.”
Needham felt that the unique way that his department bridges SAP’s procurement function and overall market objective has presented him new opportunities. He said: “We’ve got stakeholder engagement from the beginning, we understand to a degree what they’re trying to achieve, what we’re trying to achieve and so we come to a greater consensus.”
As for driving compliance with policies, once the wider organisation has been introduced to the activities of procurement, Dunne, who developed the Alliance Boots group policy when he joined, highlighted the importance of promoting good procurement across an organisation: “Procurement policies that are tier two are critical. I wrote the group procurement policy and it basically said that anything greater than a €50,000 or £50,000 over the life of the contract must be let by procurement and sanctioned by the procurement director.”
He explained that if this was not done, the contract would not be approved by the board, but the policy had another benefit: “It means the independent finance directors now fall foul of corporate governance, so that’s a great motivator for people to make sure that procurement are engaged up front.”
In terms of getting the supply base to comply, Dunne believes procurement is limited in what it can do: “I don’t believe it’s ever possible to get a globally compliant supply base for an international business, but you can get 70 per cent of the way for those things that transcend national boundaries.”
Meanwhile, Vaughan believes the problem can be attacked from a different angle. “We’ve got too many suppliers and what’s interesting is ways of reducing the number of suppliers and the management strategies that presents,” he said. He is currently looking at bundling together suppliers to BDR Thermea in order to reduce the admin work required. “I think there’s more to be done in managing the supply from the other side.”
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