How to Improve the Value of Procurement
By Sean-Michael Callahan | September 29, 2020
Sean-Michael Callahan is a Principal at The NiVACK Group where leads Business Development and Client Relations.
Having managed billions of dollars of indirect spend in my former role at a Fortune 100 high-tech firm, I know that the relationship between the C-Suite and a procurement organization can be… interesting to say the least.
Procurement should be a strategic weapon that drives profitability and makes the C-Suite’s life easier, but far too often, it’s just a tactical function. The important question we must ask ourselves as procurement practitioners is, “how do you go from tactical to strategic?”
The answer, in my opinion, is that in order to improve the value of procurement, you must use data to demonstrate value contribution and return on investment (ROI).
The importance of data
Many procurement professionals who read this will cringe at the word data. Collectively, our profession understands the importance of good data, but we fall short when it comes to actually collecting, managing, and leveraging that data. Far too often, the data we end up using is unreliable – and we know it.
Here’s my advice when it comes to data: Understand where it comes from, aggregate it, and break it down by category. Then, understand your supply-base and master your market environments.
Demonstrate value contribution
Armed with the right data and insights, you can quickly demonstrate value to your internal business partners. The key here is to speak to them in their terms.
Cost savings and avoidance can be tied directly to earnings per share (EPS) improvement, which is something that your business partners and senior leadership understand and value. Additionally, if you can demonstrate ROI in terms of EPS, then your value contribution will become visible, verifiable and irrefutable.
I’ve found that the most straightforward way to communicate options to senior leadership is to use conditional statements:
If you do __________, then __________ will happen.
“If you make this decision, then EPS will increase between $0.10 and $0.20 per share.” “By reducing IT costs, you can re-invest in more skilled staff.” Or, “If you change your T&E policy, then you can invest in new technologies that drive enhanced efficiencies and employee experience”.
Demonstrate return on investment (ROI)
Understanding your data is critical in demonstrating ROI, as well.
You can do this prospectively when proposing initiatives to senior leadership or business partners: “Implementing this new technology will cost $3M but will produce a 5x ROI over 10 years.”
Additionally, you can also do it retrospectively in order to summarize your team’s value-add. In measuring savings, for example, you must be in a position to easily and accurately compare your prior year spend to your current year spend so that you can measure savings against your procurement team’s total allocated cost.
Your procurement team should, at a minimum, generate a 10x return on investment. If you have 25 full-time employees and a total allocated cost of $4.2M annually, then your team needs to return at least $42M in value. Great procurement teams will deliver many multiples more than that.
What to do with all that value?
If you have business alignment and you measure impact as I mentioned above, then the efforts of your procurement team will show up on the company’s bottom line. At this point, your company (with the help of your procurement team) can do a number of things with the piles of money you just saved.
Here are just a few options:
- Distribute earnings in the form of dividends.
- Invest in infrastructure, tools, technology, and R&D that will fuel future growth. Think IT, Procurement technologies, etc.
- Hire additional employees and/or upskill your current workforce.
- Direct additional funds towards Sales & Marketing, which directly drive revenues.
Communicate the value of procurement
There’s one thing I can’t forget to mention because it’s absolutely critical.
Your team must share these results on a consistent basis (e.g. monthly) via spend, supplier and value contribution dashboards. When providing these regular updates, speak to the business in their terms (EPS improvement, P&L impact, etc.) so that they easily understand why your procurement team is so great.
When you do this, the C-suite will value procurement more and begin to view them as a strategic partner that can deliver value that’s just as critical as revenue growth!
The NiVACK Group helps executives protect against economic risk and improve profitability through cost take-out measures and cycle time reductions within their business. It’s the smartest way to be more profitable. Contact Sean-Michael Callahan and The NiVaCK Group to learn more.