I highlighted economic fundamentals as one of the key influencers in procurement at the moment. For UK based companies the current enviroment is showing two clear trends:

·         The recovery is distantly mixed. Unemployment is down, but mainly due to part time work. Growth remains uncertain. Public spending cuts will make a big difference to particular sectors including construction, IT and business services.  Overall, this is resulting in many supply markets remaining soft, and suppliers keen to do competitive long term deals. We are finding in our work and also in the data that now is a very good time to put in place longer term creative deals with suppliers.

·         The pound is strengthening in particular against the dollar and euro. Economic news,  the potential for interest rate rises due to high inflation is at 3.2% (down from 3.4%), and the governments debt reduction approach are all contributing to the pound being at its highest level since November 2008.  Inflation I expect that there will be more fluctuations in the level of stering that need to be factored into any long term supply agreement. However now is a very good time to consider creative European or American options. (See chart below of £ vs Euro).

Both of these trends are creating opportunities for companies to deliver additional in year benefits, and requiring companies to work hard to prevent inflationary increases.

Earlier this month we held a round table on procurement innovation with a number of leading CPOs.  Most of the discussion was around the key trends of economics, sustainability and technology that we’ve written about here. However, in the discussion at the end we asked what were the key issues that all of these procurement heads were concerned about now? The stand out issue was getting and retaining top procurement talent.

As procurement teams are looking to achieve more through collaboration, change and influence, these skills rather than category skills are coming to become more important. The feeling was that category and procurement skills could be trained (or accessed from knowledge management systems). It’s much harder to train someone in change and influencing skills who doesn’t have them in the first place. Many companies were reviewing their procurement teams and putting a premium on those with consultative skills.

Innovation is coming from organisations looking at using an understanding of psychology as they look to build teams. ‘You can’t make good procurement people unless they have lived the life at other departments’ said one participant.  More companies are looking at developing innovative talent management programmes to retain top talent. One CPO told us, ‘We formed a club with non-competing companies such as a bank etc. We had really smart people involved for example a really smart IT procurement person. No one single company needed this person full time for the whole year, so this person was shared among all these companies  and was really effective for all of them. The person gained expertise they would never have got from working for just one company.’

Although, one company was finding many candidates for some top positions everyone was finding it difficult to attract top talent, even in the current economic environment, ‘High calibre people get snapped up.’

Over the past three years technology evolution has accelerated with the rise of new applications, particulary social networking applications (such as Facebook, Linkedin and Twitter). The chart below shows the exponential growth of Facebook.

In addition, the growth of open source software now makes it lower cost and more straightforward to develop and integrate new applications.

What are the implications of social networking for procurement, and how are these implications changing procurement?

People are getting information in new ways and this is changing their buying behaviour both in their business and personal enviroment. Already, Twitter, Blogs and Facebook are rated in surveys as very influential in organisations buying decisions , even if the usage is low (see chart below).

Source - http://www.b2bm.biz

It is now much easier to research and identify alternative supply options and understand the strengths and weaknesses of different suppliers. Social Networking sites effectively magnify everyone’s network exposing them to more supplier information. They also raise expectations of the benefits of collaboration.

Top performing procurement teams will tap into these information sources, enabling them to credibly suggest more options and alternatives and quickly evaluate alternatives. Collaborative technology will dramatically reduce the traditional request for information cycles.

It will be easier to find and test creative supply options, and technology will help validate what is possible and not possible.

In addition, new forms of collaborative procurement will be possible, enabling additional savings and value.

There is little doubt now about the impact of C0₂ on the environment. Keeping global average temperature change below 2 degrees will require major change for the world economy. Much of the responsibility for this change will be put on business through regulation and economic incentives. In addition, the massive investment in clean technology and new environmental solutions is creating new opportunities for organisations to reduce cost through exploiting this technology.  For example, it is now possible for an organisation to reduce its energy cost by up to half:  energy efficient building and plant provide half of the savings, and using waste streams and renewable fuels can provide a 20% saving in energy cost. Good procurement can make up the remainder.

Source: AMR Research

The chart above shows that the reasons for why organisations participate in enterprise sustainabiity is changing. In 2008 the top reason for sustainability was ‘corporate advantage/corporate brand’ at 33%.  Now the top reasons are more hard nosed - Business Value at 29%, and Compliance to regulatory requirements at 27%. In other words companies are running sustainability initiatives because they are worthwhile or because they have to, and less so because of a drive to build the corporate brand.

This trend will continue and, in leading companies, sustainability will be incorproated into all of procurement. In the next few years green issues will become embedded in the business. As this happens, the need for a separate sustainability officer, or sustainability as part of the corporate and social responsiblity agenda, will fall away.

What are the implications for procurment?

Sustainable procurement breaks down into three areas:

·         Minimising the impacts of the supply chain, both social and environmental

·         Minimising the impact of the product or service produced, including waste minimisation and the use of renewable energy.

·         Buying resource efficient products, including:

• Recycled content products
• Energy-effiecient appliances
• Fuel effeicent vehicles

Everyone knows the UK and European economy is going to be tough, however I don’t think that we’ve realised how tough. The UK economy shrank by more than 6% between the last quarter of 2008 and the end of 2010, its biggest fall in modern times.

The chart below from the Office of National Statistics shows that growth is maybe predicted to be 2%, with a significant chance of a ‘Double Dip’ recession. The government budget deficit is running at 10% of GDP, which will have to be taken out of the economy, acting a further break on growth.

Many leading economic writers are pessimistic; Larry Elliott in the Guardian writes ‘Get ready for the austerity decade. Forget all thoughts that the economic storm of the past 30 months is about to blow over. We've had what Mervyn King (the Governor of the Bank of England) once called the NICE period of non-inflationary constant expansion but now we face a long DRAG – deficit reduction, anaemic growth. The lessons of economic history, the current configuration of the economy, and inescapable long-term challenges that have to be faced provide the same message: it's payback time.’[1]

In this environment revenue growth is very difficult and almost impossible without price cuts. Mainly large organisations (for example British Telecom) no longer even budget for price increases. Procurement has now switched from providing useful value and regulatory compliance to processes that are essential for cost management and profit growth.  This increased pressure on procurement under an intense spotlight will result in fundamental implications for how procurement operates. We see this macroeconomic trend driving four levers.

·         Boring is the new black. Continuous driving out of value will be the norm through excellent strategic cost management. Furthermore, ensuring 100% compliance through systems and mandates will be critical.

·         Ensure savings are genuine. Savings will have to be linked back to the bottom line and corporate value. In a low inflation environment, ‘real’ savings measures will not be relevant, procurement must demonstrate that it is reducing costs.

·         Pressure on the costs and return of procurement. Many large companies now have procurement departments in 100’s or even 1000’s of people. The total procurement budget can be up to £100m. These companies face the challenge that meaningful savings can come from reducing the size of procurement. They will have to demonstrate high returns from all aspects of spend, and have a leaner procurement team.

·         Cash is king (again).  Procurement will be involved in optimising cash flow as much as cost, as all companies continue to rebuild their balance sheets.

Our work at 4C, together with the opportunity to discuss issues with the heads of procurement at large companies gives us a unique insight on how procurement is evolving. As a result we expect leading procurement organisations to change substantially over the next decade.  The best organisations will adapt quickly providing their companies with increased value. 

Before looking forward, it is worth looking back ten years so we can understand how much procurement has changed in that time. The year 2000 was actually very different from today. Tony Blair was a very popular Prime Minister in the UK, George W Bush had just been elected in the closest American election in history. The internet boom was at its peak, with the Dow Jones index at 11,700 and the FTSE 100 hit almost 7,000. Now the Dow Jones index hovers around 10,000 and the FTSE is below 5,000.   There were no iphones, 3D TV or hybrid cars.

The world of procurement was very different. 4C was founded in 2000, at that time few organisations had large teams that focused on indirect procurement. Procurement’s focus in  most (especially non manufacturing )organisations was very much transactional and tactical.  Looking back at many of the articles in supply management shows some common themes of the times:

- Many companies were starting integrated strategic sourcing projects and creating more strategic procurement functions. Anglian Water was restructuring its procurement department of 10 in a more strategic one of 62.[1]  British Airways was merging its purchasing and operations contract divisions.[2]

- E-commerce hadn’t really started but expectations were high[3]. Suppliers like i² , Commerce One, Vertical Net, and many others were aggressively making the ecommerce case. Only Ariba of those firms remains in the large corporate market. There was much talk of mobile enablement via WAP.

- Investments were being made for strategic reasons  by some companies in a way that I don’t think that we would see today . For example Rover Cars was planning at £40m investment in a 4km rail link.[4]

Today, in the overwhelming majority of companies procurement covers all categories, mostly from a strategic and tactical perspective. Good technology is in place to enable buying across the organisation. Compliance is to procurement processes is high and monitored. Savings that genuinely impact the business are being delivered. Skills and capabilities are high.  This is a world very different to the one of ten years ago. I expect that procurement in ten years time will look very different from today.

What do we expect to drive this fundamental change? We’ve identified three key long term trends that we can see are already having an impact on leading procurement departments and are driving changes in procurement now.  We expect these trends to continue to drive changes for many years into the future. The three trends are:

1.  Macro Economic: The impact, extent and length of the economic slowdown has been under-estimated. The tough environment will force us to rethink how we maximise the value to ensure we are buying everything at benchmark levels.

2.  Sustainability: Buyer and supplier markets are changing as they seek to reduce the environmental impact either because it is more economic to do so, or because they have to.  This will change process and factors that we use in making a buying decision.

3.  Technology: New collaborative applications (for example, Facebook and Twitter) are changing how people get product and service information. In addition, open source software is changing the specialist procurement systems market.  This technology will open up new avenues of supply and also enable highly collaborative procurement processes that are just too complex with current ways of working.

Each of these trends promises to force the procurement of today to be very different in the future. The combination of the three will drive fundamental change. I'll be blogging further about each topic