Executives – HERE is Why Your Procurement Department is Just a Cost Center

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Payroll. Accounting.   IT.  Human resources.  Internal audit. Legal.   All of these groups and more, correctly or incorrectly, frequently get lumped as cost centers by executives.

And once you get to the C-Suite inside of a Fortune 500 company, they tend to view their organizational groups in two ways:  “Either you are generating revenue for me, or you are not.  If you are, I will invest in you in every way, and will demand direct visibility to your organization.  If you are not, I will minimize my investment, and I will bury you in my org chart.”

Here’s the quick litmus test:  where does procurement eventually report in your organization?

Let me guess: Finance, Operations, Manufacturing, or in end user business units.  I have even seen procurement reporting into HR!  The HR VP justified to me “well, we buy people, so we should buy everything else too.”

Some of you will comment that “that’s not the way it is in my company.  We have a CPO that reports directly to the CEO/COO.”  I’m glad that’s true, but it’s not the norm, and it may not stay that way either – frequently, the CEO decides they don’t see the value and shove procurement back under an obscure function.

In working with large companies all over the world for almost 25 years now, the one gripe Chief Purchasing Officers have more than any other is that they are not valued by the company.

To add fuel to the fire, the sales counterparts that you are negotiating with have better systems, more staff, more discretionary funds, better data, and more resources than you.  In addition, they spend up to 20% of their time in training, while your procurement group only spends up to 2% of their time in training.

How could that be? It’s because Sales is a REVENUE generating function, and CEOs invest in those.

But executives on the “revenue generator bandwagon” are wrong.  All of them.

The problem is that they should not be differentiating between revenue generators and non-revenue generators.  They should be differentiating between PROFIT generators and NON-PROFIT generators.

Isn’t profitability the goal of every company?  Or is the goal to maximize revenue, and to heck with whether or not we are profitable?  I don’t have to tell you the answer.  It’s Business 101, page 2.

And procurement keeps trying to justify it’s worth with cost savings metrics.  Those metrics don’t work.  The reason?  Simple: the executive will simply say “OK, if you saved me $195M last year, great, then show it to me, because it’s not in my budget.  Where is all this money you keep telling me you’ve saved me?”

It’s interesting that part of the problem is that the saving go back to the end user group and they then end up using that money on something else!  I’ve only seen one organization that measures costs savings by how much is left in the business unit budget, which then goes back to the CEO’s general fund.  It was one of the oil & gas companies in Houston, Texas.

Not my favorite model, but it is one way to make sure the executive visibly sees what savings are coming from procurement strategies. Procurement departments the world over do a terrible job demonstrating their value, especially vertically within the corporation.

The reasons?  There are many, but the biggest in my experience it goes back to the fact that we are trying to influence vertically with metrics that aren’t a part of the C-Suite’s language.

What is the C-Suite’s language?  They care about the following metrics, which procurement directly influences but rarely tracks and reports:    ROI in the procurement function (department savings ÷ department costs), as well as improvements in EBIT, EPS, and corporate profitability.  That is how we should be communicating and influencing vertically.

Only then will executives start to see the value of procurement and can procurement be involved in critical planning cycles to drive upstream influence.

I invite you to watch an incredible video I’ve put together that really captures the essence of this transformation.  This is not for the casual procurement professional who is looking to jump to another profession, or has one foot out the door to retirement.

This is dense, and it’s 1 hour long.  But here’s the deal, once you start, you can’t stop.   The first 22 minutes of the videocaptures the heart of this transformation, and the rest takes you to implementation.  It’ll be the best 1 hour you’ve ever invested in your career.

Here it is, bookmark this link and watch this video:  https://tinyurl.com/Procurement-Transformation

I will leave you with this final set of thoughts below (grab a mirror):

  • Is your procurement department a value added center of profit?  Are they also PERCEIVED as a value added center of profit?
  • Are you taking costs out the supply chain or are you just shoving them back up the supply chain?
  • Are you getting more and more sophisticated at compressing supplier profits, or are you leveraging investigative negotiation strategies to create value and make the pie bigger?
  • Are you leveraging strategies to influence product and service costs to be streamlined for TCO, or are you just getting the best deal on what end users ask for?
  • Are you buying goods and services or are you buying performance results?  Hint: this is the biggest problem in procurement today that nobody is talking about.

And most of all, do you have a seat at the table with the C-Suite, or are you on the menu for lunch

Go watch the video above and find out how to bridge the gap from good to world class procurement.

Now go off and do something wonderful.

Be your best!

Omid G

“THE Godfather of Negotiation Planning” ~ Intel Corp

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