A Strategic CPO works for the CEO

The Procurement organisation often reports up through Finance. It's believed to align incentives, cultures and teams. However, there’s a catch.

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Tuesday, August 20, 2019

The Procurement organisation often reports up through Finance. It's believed to align incentives, cultures and teams. However, there’s a catch.

Much has been written over the past five-plus years about the importance of alignment between the CFO and CPO.

There have been countless conference sessions, whitepapers and webinars about aligning the goals and tactics of Finance and Procurement. It’s become conventional wisdom that alignment with Finance should be a core tactic for a successful CPO.

A common approach has been to have the Procurement organisation report up through Finance. It was thought that this would align incentives, cultures and teams. However, there’s a catch. At its core, Finance is a cost center. Being under the finance umbrella risks devaluing the 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” rather than part of “support”.

While it’s true that alignment between 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. The only thing “special” about alignment with Finance is that they are the official scorekeeper in an organisation. So long as Procurement is judged on metrics such as savings, return on invested resources, etc. it will be key to have good alignment to make sure there’s an understanding about how the procurement function is graded.

Collaboration is good. Not a very surprising statement but certainly backed up by the studies from Aberdeen: 

Collaboration Best-in-Class vs. All Other

As Procurement’s role has changed, so too has the way it must be treated within the organisation. The short-term, measurable results like savings are here to stay, as they should. But increasingly, the Procurement organisation is charged with improving profitability, time-to-market, innovation and risk management.

It is time to broaden both the way Procurement is judged and also its role within the reporting structure.

It is time for the CPO to report directly to the CEO

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 organisation. 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 organisation. 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 organisation, then there is every reason for the CPO to have as direct a line as the CFO. This view is gaining increasing traction in the market.

As the business impact of Procurement changes, so should its place on the organisational chart. By focusing the CPO’s role on value creation and innovation rather than “just” savings, we can improve the results for the overall organisation.