What Did 400 CEOs Have to Say About Procurement to The Negotiation Godfather?

by Omid Ghamami

What Did 400 CEOs Have to Say About Procurement to The Negotiation Godfather?

400 CEOs Getting Advice from Omid G

400 CEOs Getting Advice from Omid G

I had the pleasure recently of speaking to 400 CEOs in Sri Lanka.   They hand-picked me to come talk to them because they wanted to understand procurement better, and they said they wanted to hear it straight from “The Negotiation Godfather”.

As a side note, on my last day, I was quite surprised to see a huge billboard in the financial district of downtown Colombo with my picture on it, advertising this CEO exclusive event. That was quite humbling!

Back to my engagement with the biggest CEOs in Sri Lanka.  Why did they hire me?  The reason was they wanted to understand the procurement department.  Procurement to them was a source of overhead, like payroll and accounts payable.  Why should they be investing in it?  Why should they care?  Nearly none of them had a CPO reporting directly to them.  Why change that model?

I spent time explaining to them how much of every dollar generated by their firms goes straight back to purchasing expenditures.  We went through industry by industry what those figures looked like.  I showed them how much harder their sales department has to work to generate profit, because costs have to be covered first, and only a fraction of sales goes to profi0074.  In contrast, purchasing savings are 100% profit.

Then we talked about the figure that purchasing keeps rolling up to them – Cost Savings.  They don’t get it.  “If my procurement department saved me $50M, then how come I don’t have $50M left over in my budget?!!” they would say.  I don’t blame them for the confusion.  I blame us.

I told them that their procurement departments needed to start rolling up their hard savings figures inlanguage of executives – not in procurement language – capturing such hard savings in terms of contributions to EBIT (Earnings Before Interest and Taxes).

I then challenged them on whether purchasing is not just rolling up results, but also establishing their value through ROI figures.  Nobody raised their hand.  This is not going to work in our profession, folks.  I indicated that their purchasing organizations need to be providing ROI analysis to them – cost savings divided by total departmental expenditures (salaries, burden, computers, etc).  I told them that then best in class purchasing organizations that I’ve worked with are generating 1,000 – 2,000% ROI.

We also covered the need to invest in purchasing systems to enable spend cube analysis. The best procurement personnel in the world are useless if your organization does not have simultaneous spend cube analysis by 3 vectors – what are you buying, who are you buying from, who is doing the buying. This requires the right system in place of course.  But this system is not optional. Without this system, you don’t have a purchasing department.

Read this twice:  I also emphasized that if they can’t afford purchasing systems to enable the above, that’s the exact reason why they should do so.  The world’s best CPOs use investment in purchasing systems to help get their companies out of financial crisis.  The worst ones let their superiors get away with saying “I see the value, but we can’t afford that now”.

We also talked about driving upstream design or product and service specifications for TCO as a major focus area for cost savings.  I emphasized with numerous examples that this is where the money is at, not in squeezing suppliers to make less money so you can report more cost savings.  The biggest cost savings are found before you ever negotiate.

Finally, we focused on investment in the procurement function.  Experienced personnel, budgets for training, and capability investments with the ultimate goal of enabling their purchasing departments to both be and be perceived as Value Added Centers of PROFIT inside of their companies.

I challenged them to stop viewing their internal departments as revenue generators and non-revenue generators, because then purchasing falls into the wrong category and will never get funded right.  I said there are only profit generators and non-profit generators inside their companies, and Purchasing IS a Profit Generator. 

What a session it was.  Everyone was engaged, and I landed a number of follow up deals from the engagement.

Now if you say “that’s Sri Lanka, not my geography.  I don’t have those problems here.”   First off, there were some tremendous industry sectors there.  I was really impressed.  Secondly, these companies were as world class as you could expect anywhere else in the world.  If they have these gaps and challenges, so does your company.

CPOs, I’m talking to you: If you are not driving the above agenda inside your company, to both be and be perceived as a Value Added Center of Profit by executive staff, you’re not doing your job.  You have an incredible opportunity to drive transformation.

Now go off and do something wonderful.

Be your best!

Omid G.

P.S.  I’ve developed a free one hour free online and on-demand video training for you – and you’ll hear me presenting throughout.  You will love it!.

Check it out at www.CenterForPSCMExcellence.org (look for the video offer called “Free CPSCM Training”)

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