Given the current financial climate, cutting costs and maximising efficiency have become key priorities for many businesses. As a result, the procurement function has not only gained in visibility, but also in strategic importance. In this context, 4C brought together a selection of professionals from several sectors to determine whether procurement can drive strategic business decisions.
Jamie Ogilvie-Smals, Director at 4C Associates, debated that procurement can drive strategic business decisions, whereas Richard Roberts, Sales Director at Sharedband, argued that, although procurement is a critical function, it does not genuinely drive business strategy.
Procurement can Drive Strategic Business Decisions
Michael Porter, Bishop William Lawrence University Professor at Harvard Business School, identified three broad business strategies: cost leadership, differentiation and focus. Of these, cost leadership is particularly effective during an economic crisis. The strategy entails providing products or services at the lowest internal cost for the quality required in that market segment.
Many of the companies which are managing to thrive in the current environment have adopted a cost leadership model. CRH, Ryanair and Whitbread are all examples of successful businesses which have been able grow their share price by focusing on cost transformation initiatives. Some of the necessary activities to deliver this strategy are driven by procurement.
“Procurement has the responsibilities and tools to deliver the cost leadership strategy”
By playing a key role in activities such as insourcing vs. outsourcing decisions and managing external spend, as well as having the tools to analyse cost vs. benefit, procurement can deliver a cost leadership strategy. With 3rd party costs averaging 47 per cent of revenue and procurement managing 83 per cent of this, it is fundamental to any business that 3rd party costs are controlled.
On average, the procurement function delivers 5.3 per cent savings per annum, of which 2.5 per cent are cost reduction and 2.8 per cent are cost avoidance. In 2011/12, 4C delivered an average of 8 per cent cost reductions for clients. These figures represent a significant improvement if they can be translated to increased margin and consequently, greater shareholder value.
In a stagnant economy, a cost reduction strategy can be a more effective tool for margin improvement than revenue growth. Cost leadership is therefore a key element of business strategy, and one which procurement is ideally placed to deliver. Procurement, through this delivery, impacts positively on margin and shareholder value and, consequently, can and should drive strategic business decisions.
“If organisations are not making use of procurement effectively, they are not maximising value for their shareholders”
Procurement does not Drive Business Strategy
There is little doubt that procurement is more important than ever. In an age of austerity, the function is crucial to the implementation of many key business initiatives. However, procurement does not drive strategic business decisions; it acts as an enabler and is a follower, not a leader.
“Procurement is an enabler and often critical to the success of many commercial operations, however, it is not directly behind major strategy decisions”
Looking at the business strategies outlined by most corporations, even those adopting a cost leadership model, procurement is seldom mentioned as a key driver. Also indicative of the backseat role of the function is the fact that few CEOs come from a cost reduction background. Tim Cook, CEO of Apple, is an exception but it is difficult to argue that the company’s success is a direct result of its supply chain practice.
“Tim Cook is one of the few leaders to emerge from procurement, but he was quick to broaden his horizons”
Procurement has also become more important in terms of managing risk. The suicides and alleged underage workers at Foxconn are an example of the type of risks inherent in increasingly globalised supply chains. Despite this, the function plays a supporting role in guiding business strategy. Decisions from the board impact on company procurement practice and not the other way round.
“Procurement is never mentioned in the front end strategy, if procurement leaders think they are driving strategy, they are getting ahead of themselves”
In the context of the debate, the word “drive” was singled out as contentious. Several participants felt that although procurement plays an integral role in key strategic decisions, the function was not ultimately responsible for business strategy. One attendee, employed in a procurement role in a media corporation, explained that although his department was critical in outsourcing a new piece of software, the initial decision to produce the product was not theirs.
“[Procurement] supports and influences strategy but doesn’t drive it, sometimes during M&As we are not even present at the decision making table”
Conversely, an attendee who worked for a car manufacturer described how procurement was currently leading a project which would determine the fate of a line of cars. In this instance, the function was involved in many key decisions, ranging from cost to manufacturing location. Another participant shared his experience working on a rail project, where procurement’s involvement kept growing until it eventually took the lead in many commercial areas.
It was suggested that procurement’s ability to influence decisions varied by sector. Financial services and some software companies were singled out as areas where procurement would play a less strategic role. The latter point was disputed, and it was argued that a cost leadership strategy could be applied to any industry and that procurement was best placed to drive relevant initiatives. The majority of the floor agreed that regardless of business strategy, control of costs was critical in the current market.
A tight vote resulted in a small majority voting against the motion; “Procurement Can Drive Strategic Business Decisions”.