Procurement specialists within B2B and other companies drive considerable value for their organizations, especially when they do a good job controlling spending and manage supplier relations and the payment processes well. However, only about 10 percent of procurement staffs have captured the respect of their firm’s chief financial officers (CFOs) regarding the value they contribute, recent research suggests.
In one report “Building the Brand of Procurement and Supply,” A.T. Kearney worked with the Chartered Institute of Purchasing & Supply and the Institute for Supply Management to examine the 2013 data set of more than 170 completed, qualified and accepted submissions to the ROSMA benchmarking process. ROSMA, or Return on Supply Management Assets, is a performance-measurement standard that helps companies globally understand and measure how procurement contributes financially to a business. Some 750 companies have started the ROSMA benchmarking process, according to the report.
What the research found is that top-quartile performers are reporting hard financial results in excess of seven times their costs and investment base in procurement, “providing a strong basis for reinvestment and recognition.” Such performers also generate about $1.6 million in financial benefits per procurement employee each year, with “35 percent of the financial benefits coming from using advanced methods that create hard value beyond unit cost reduction.”
But while the top performers are doing well, companies generally still have a long way to go to reach ideal performance, the report notes. Indeed, most lack the reporting and tracking capabilities to provide ongoing, accurate visibility of procurement’s value-creating activities. “They simply don’t have a grasp of—and therefore can’t manage—their resources to optimize them with the same level of precision as is typically done in other functions,” the report found.
And that also is contributing to how CFOs view procurement, as only 10 percent of such operations have captured the respect, understanding and mindset of their finance leaders regarding the value they contribute, according to the report. “Almost 15 percent are “out of mind” or “inconsequential players” to the CFO community, and 75 percent have mixed and yet-to-be developed “’brands,’” it notes. “These CFOs know procurement exists and understand they are accountable for its performance, but they do not understand or recognize the value drivers of procurement or the results being achieved.”
However, because CFOs are the de facto scorekeepers, procurement’s brand value must be addressed, the report says. “Now is the time to redefine procurement’s position, clarify the value it provides, and radically improve the careers, development pathways, and recognition for its people,” it states.
Indeed, without being able to demonstrate the value of procurement in terms that resonate with CFOs and the rest of the C-suite, “many procurement organizations will continue to be relegated to the list of hygiene functions, used to support sufficiency at the lowest cost rather than being positioned as a strategic capability,” the report notes.
CPOs’ ideal role
As such, the chief procurement officer (CPO) plays an increasingly important role, especially when it comes to relations with the CFO.
“The CPO who is literate in value management is relevant to the CFO. Otherwise, engaging the CFO only in a myriad of in-the-moment discussions of granular issues misses the opportunity, especially when the CPO only attempts to summarize value delivery with a few simple and often inadequate metrics,” the report notes. “Procurement must translate its activities, resources and results into a similar set of metrics— hard financial results, the costs to deliver those results, and the return on the investment. Communicating the financial side of the scorecard opens the conversation to procurement’s strategic performance and value.”
Among CFOs, 81 percent consider hard profit-and-loss results as “king,” while just 19 percent also count cost avoidance. Subsequently, the sentiment of the CFO community regarding the value of procurement is clear, according to the report.
“What’s lacking is brand recognition to elevate the profession, its contributions, and the career trajectories of procurement professionals to attain success and recognition,” it notes. “As the scorekeepers, CFOs must understand and support procurement as a source of value.”
Commenting on the report’s findings, report co-author Tom Derry, CEO of the Institute for Supply Management, acknowledged the return on investment strong procurement programs bring to an organization.
“No firm in today’s ferociously competitive global economy can afford to take for granted that it is getting world-class performance from its supply-management function,” he said. “That value has to be measured and weighed against results of the firm’s competitors. With ROSMA Performance Check, we now know what world-class performance looks like. Our challenge as a profession is to make sure we are nota drag on performance, but rather a driver.”
The results of the report mirror those of other recent research. Ardent Partners, for example, in its annual report, “ePayables 2014: The Quest,” found that, while many CPOs report to the CFO, particularly in North American enterprises, a majority of CPOs do not report into finance. And among those who do, they do not always share common business values and performance metrics.
Moreover, accounts payable and procurement often measure success differently, with one focusing on cost savings, demand management, and spend under management, and the other focusing on faster processing times, achieving early payment discounts, and effectively balancing budgets, according to the Ardent Partners report.
“As a result, the value that procurement brings to the enterprise is often not recognized by finance, but ought to be,” Ardent noted in its report summary.