Short term results like savings are here to stay, but Procurement is also responsible for longer term results like improving profitability, time-to-market, innovation and risk management. It's time to broaden both the way Procurement is judged and also its role within the reporting structure.
At its core, Finance is a cost center. With Procurement under the Finance umbrella, companies risk devaluing the Chief Procurement Officer's (CPO's) role in overall value creation as well as decreasing their influence in the organization. Instead, the CPO needs to be considered part of the business strategically rather than in a support role.
Additional read: Building a Procurement Center of Excellence
While it’s true that alignment between the CFO and CPO is important, that could be said of any function. It’s important for Procurement to be aligned with Supply Chain, Marketing and IT as well. Finance is the official scorekeeper of metrics such as savings and ROI so it is important to have good alignment to make sure there’s a mutual understanding about how the procurement function is graded, but that is about the only differentiator from other departments.
Collaboration is good. Not a very surprising statement but certainly backed up by the studies from Aberdeen:
As Procurement’s role has changed, so too has the way it must be treated within the organization. It is time for the CPO to report directly to the CEO.
Additional read: Finding New Areas of Impact for Procurement
The need for this change is driven by multiple factors:
- Role of External Spend: Over the past thirty years, external spending has become an increasingly important part of the organization. For a typical manufacturer, external spend can now amount to over 70% of company revenue. As spending increases, so does the importance of those who manage it
- Importance of Supplier Innovation: The purchasing department and the entire company get a profound strategic advantage from innovative suppliers who create products and components which would improve our own product and help create competitive advantage. By definition, suppliers know their market best and can use that knowledge to help identify better ways
- Risk Management: With the increase in external spend comes an increase in risk exposure due to external factors. Whether it’s car airbags or tainted produce, it’s hard to pick up a newspaper without seeing a company’s brand imperiled due to the failings of a supplier
- Alignment with CEO Priorities: What does the CEO care about? Top-line revenue, profitability, and shareholder value. It’s well-known that purchasing excellence is one of the most direct routes to profitability. Less well-known is the top-line impact procurement can have from supplier innovation, risk management, and time-to-market which have direct impact on shareholder value and sales
- Changing Skill Sets: With increased exposure and impact, the CPO needs to be a better politician and a better sales person. He/she needs to be able to visualize the importance of the function and the value that is created in the broader organization. He/she is much more than just numbers and is equally important as the CFO because he/she delivers both short term and long term value for the company = shareholder value.
If a direct line to the CEO signifies a function’s importance to the organization, then there is every reason for the CPO to have as direct a line as the CFO. As the business impact of Procurement changes, so should its place on the organizational chart. By focusing the CPO’s role on value creation and innovation rather than just savings, we can improve the results for the overall organization.