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Procurement has increased profitability, but can it deliver growth?

Author: Mark Kusionowicz

The enterprise business agenda for this and next year is looking to be primarily one of innovation-led growth. How does a Chief Procurement Office (CPO) ensure the relevance of the Procurement function in that environment?  I have analysed the results of three different surveys to try and come up with some conclusions.

 The surveys reviewed are:

Cost Centre to Profit Centre

There was a time when the Procurement function in most corporates was considered a 'cost centre' -  that is, they carried out an essential function which had a cost but which did not contribute directly to the profitability of the business. In the main that thinking has now moved on and Procurement can absolutely be recognised as a 'profit centre'.

It is not difficult to work out why - every dollar, euro or pound of cost savings made above the cost of running the Procurement function itself, turns into an increase in profit for the company bottom line. Indeed, this recognition has evolved into responsibility with the Zycus survey of Procurement professionals reporting that 81% now have a corporate mandate to manage spend from an enterprise level.

These cost savings come from various sources such as

  • cost reductions  - negotiations with suppliers, alternative or competing sources of supply;
  • cost avoidance - increasing supplier quality initiatives,  minimising annual price rises and currency impacts;  and
  • purchase process efficiency savings such as in the use of automation technology.

The savings generated have a real financial impact  - the Zycus survey shows that a typical European manufacturer with a turnover of €25 Million can expect to return €1.4 Million on purchases of around €10 Million and on a turnover of €1 Billion this equates to an increased profit of €56 Million. But how much longer can a company continue to generate increases in cost savings?

Cost Savings will not go on for ever

Whether you take the figures from the Zycus or the Cap Gemini survey there is obviously still intent to target ongoing cost savings.  However,  Cap Gemini reports that 56% of CPOs are forecasting less than 5% cost savings year on year so the growth has slowed somewhat.  Much of this will come through the Procurement function taking control of an increased share of the corporate spend and as the Hackett Group found in it's study, the expansion of Procurement's scope and influence is it's top priority. But with Zycus identifying that 57% of European Procurement departments already manage over 60% of total corporate  'non personnel' spend this source of new savings also has a limited future. So where can the CPO go to maintain the growth in importance to the business for his or her department?

The new game is Revenue and Innovation Growth

 

The Hackett Group survey identified that in over 50% of companies the number one financial priority is now revenue growth. Increased margin, where traditional Procurement cost savings initiatives play, was only the top priority in half that number.   The top two business priorities for management identified in the survey were "Innovate product and/or service offerings" and "Innovate business model and go-to-market strategy".

Is this a new opportunity for Procurement? At first glance it is difficult to see how a purchasing function can generate revenue directly. Some are managing it in small ways, such as selling advertising space in corporate directories and magazines, or disposing of unwanted assets, but this is not really generating revenue from the core purchasing function and, indeed,  if expanded would increase the costs of Procurement with the need appearing for sales and marketing activities.

It is in the areas of innovation that the Procurement team can contribute to revenue growth:

  • Innovation in the purchasing business model - the introduction of novel new global commerce models, such as from INNOVO,  will enable the procurement function to directly create income through purchasing. A rebate is paid by suppliers to buyers on the INNOVO network for purchases, and that is increased as more buyers source goods from those suppliers. A buyer therefore receives revenue not only as a result of the purchases they make, but also as a result of the purchases of others in the network - in effect a buyer can 'monetise' the asset of their supplier list by introducing them all into INNOVO.
  • Innovation in products and services - the increased range of spend management that the Procurement function has been taking on over recent years means that they are leading the relationships with the majority of key suppliers and partners of the company. By exploiting those relationships to tap into the suppliers' innovation and early product life cycles they can help drive increased speed to market for new offerings and so contribute to growth in revenue and market share.

So, far from signalling a reduction in importance for the CPO, I think that the replacement of a focus on continuous growth in cost savings by a new set of initiatives that build the 'top line' of the P&L will significantly increase his or her value to the business.

Image courtesy of jscreationzs at FreeDigitalPhotos.net

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