This week’s webinar notes are based on a May 29th panel webinar hosted by Proxima. The event is available on demand for free after an email registration here. In addition, anyone interested in the webinar should also read a recent HBR.com article discussing the four fundamental reasons why ‘Leaders Can No Longer Afford to Downplay Procurement,’ by Matthew Eatough, Proxima’s CEO.
The panelists were Peter Smith, Executive Editor of Spend Matters UK/Europe, Scott Sparks, Deputy CEO of Proxima Inc., Guy Strafford, Chief Client Officer of Proxima Ltd., and Jon Hansen, blogger and host of Procurement Insights, as the moderator. The event itself was a webinar best-case scenario: fascinating findings, insightful panelists, and nothing to 'sell' but the cleverness of the sponsoring organization.
Central to both the webinar and the HBR article are the findings of recent Proxima research that, on average, 69.9% of a company’s revenue goes to third party suppliers. This disrupts the common assumption that third party spend is roughly equal to staff spend, which was found to be 12.5% on average. Proxima also uncovered that the C-suite did not realize how much of their spend was going to suppliers.
The findings are another indication of the disconnect between procurement’s importance to the health of the organization and our perceived importance. The goal of Proxima’s research was to provide a measured demonstration of procurement’s potential contribution to profitability. For as interesting as the 69.9% and 12.5% figures are, still more interesting is the 17.6% of revenue left over after supply and staffing costs. Only after subtracting for taxes, benefits, etc. can a company start to see a profit.
In other words, by managing nearly 70% of the company’s revenues, procurement is better positioned than any other function to contribute to profitability.
Of course that also assumes procurement has the responsibility (or access) to bring all third party spend under management. There are always the hold out functions like marketing and IT that prefer to operate on their own and have historically been allowed to opt out of working with procurement.
Whether procurement is solely responsible for managing all 70% or not, it can not be denied that the supply base is more critical to a company than ever before, and recent trends show only growth in reliance on third parties. According to the HBR article, “In the last three years alone, companies have increased their external spend as a percentage of revenue by nearly 4%.”
Proxima describes this trend as ‘corporate virtualization.’ Corporate virtualization is the idea that while many businesses continue to operate (and to perceive themselves) just like they have in the past, they are increasingly dependent upon their suppliers. This virtualization is not about virtual offices or workers but is the combined result of outsourcing and vertical dis-integration. Rather than having operations or headcount internally, both end up being supply costs.
So the question remains, why is there such a disconnect between procurement’s potential and how we are perceived? One theory that emerged in the webinar is that we have gotten too cozy with finance. Although our shared interest in cost cutting and governance (not to mention an increasing number of procurement groups that report to the CFO) has led to a natural alliance, it may not have done us any favors with internal stakeholders who are less interested in per unit costs reductions and are more interested in strategy and value. In fact, that downside may be two-fold: not only does working alongside finance give procurement an unappealing ‘bean counter’ reputation, finance’s somewhat dismissive attitude towards procurement’s negotiated savings may role model how the rest of the organization should regard us.
Even with the 70% figure on our side, procurement’s potential extends far beyond costs. In fact, with the majority of revenue going back out the door to third parties, and dwindling internal production capabilities, risks continue to escalate as visibility and control decline. If procurement can build relationships, rapport, and even trust with suppliers in ‘good’ times, there is an improved chance they will look out for us when there is a disruption.
With all that potential, what can procurement do to bring our ‘brand’ into alignment with what we are truly capable of?
We need to sell our results, our capabilities, and ourselves internally, something that may go against the logical, rational nature of most procurement professionals. But a successful value proposition needs both a desirable product and an effective marketing strategy. As Peter Smith illustrated with a story from his time as a purchasing manager at Mars Confectionary, they have both a fabulous product AND dynamic marketing campaigns.
Procurement can see the opportunity. As long as the capabilities exist within each procurement group to maximize the potential of that 70% and guard the 17.6%, all that remains is to properly communicate our results to the right people. Now that’s sweet…