Supply Chain

Hire a Chief Procurement Officer – You Can’t Afford Not To

The modern chief procurement officer does a lot more than just “buy things” and sign contracts.
Nikesh ParekhDecember 15, 2020

Every company should have a chief procurement officer – a skilled individual in charge of working with suppliers and spend to optimize cost structure, profitability, and cash flow. But not many do. The problem may be the title. Procurement, vital as it is, sounds bland. But what if the job title fits the real value brought to the organization?  Call them the “chief profitability officer.” Or the “chief bottom line officer” or just the “chief getting s**t done officer.”

Or the “chief anything but procurement officer” — because organizations should not just view procurement as the chief sourcer, negotiator, and spender of money. The modern chief procurement officer does a lot more than just “buy things” and signing contracts. The title should express the value that procurement should provide to an organization if the task is performed in a strategic, data-driven way.

Unfortunately, today, procurement is too often mired in process. Putting together supplier agreements and managing supplier relationships doesn’t begin to approach what this function can contribute and does contribute in strategically-minded finance organizations.

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By our estimation, only about 10% of Fortune 5000 companies currently even have a chief procurement officer. Procurement tends to be managed at the director level of the company. Worse, it is relegated to a once- or twice-a-year sourcing activity that doesn’t make a strategic impact on the organization or to the bottom line.

But there’s a better way. A modern CPO, armed with the right data and tools, has a powerful impact on EBITDA and cash flow from operations, two of the most important financial key performance indicators of every global business.

Driving Continuous Insights

Most companies can’t imagine not having a chief revenue officer. They appreciate the importance of having someone focused every day on the money coming into the company. There should be a counterpart who maintains a continuous focus on the money going out of it. The modern CPO needs to have a deep understanding of their industry, but they also need the resources and influence to apply that understanding effectively.

Chief revenue officers long had a whole ecosystem of sales tools at their disposal. In contrast, procurement traditionally has only had blunt instruments that identified little except whether it was following processes.

Today, however, CPOs can access “spend intelligence” tools that use clean, aggregated, and modeled enterprise spend data continuously, allowing informed decisions at every step in the procure-to-pay workflow.

Spend intelligence delivers baseline insight to both finance and procurement. It goes even further, leveraging cutting-edge gains in artificial intelligence to provide both pre-built and customizable predictive insights that accelerate an organization’s ability to take the next right action.

What COVID-19 Revealed

During the COVID-19 pandemic, issues with the traditional procurement approach have been magnified. Companies have had to cut expenses rapidly, rethink investment plans, shore up balance sheets, and remake their strategy.

That has been a challenging exercise for everyone. The thriving companies have what I call “spend agility.” It’s the ability for enterprises to assess, predict, and change spend, investments, and operations strategy in real-time, to capture value-creation opportunities. They can triangulate and collaborate across the business quickly and make smart changes to their supply base rapidly.

Enterprises with “spend agility” can triangulate and collaborate across the business quickly and make smart changes to their supply base rapidly.

In the pre-COVID era, spend was on the rise and sometimes spiraled out of control as companies prioritized growth to drive market share and capitalization. In one case, a large advertising-driven company had three marketing agency partners whose marketing spend went from nothing to $10 million within six months, unplanned. This happened in $50,000 increments, and no one noticed until the expenditures were dramatically out of hand. A modern CPO armed with a data-driven spend agility approach has finely tuned instruments to identify such issues and determine if the expenditures drive business value.

That simple but essential step can enable a company to trim 3% to 5% of its supply base rapidly without reducing headcount. One Fortune 500 company reduced its information technology expenses by 17% in the first year through spend agility.

A modern approach to procurement brings additional benefits, like risk management. Spend agility can help avoid catastrophic supplier issues that can sink the company. However, like any form of automation, it requires a savvy and a talented individual overseeing and using it. It requires a modern CPO, who works in lockstep with the CFO to achieve business goals.

Partnering For Better Insights

Business leaders don’t want procurement departments to tell them how to spend their money — and that isn’t the procurement department’s role.

The CPO should drive more accurate forecasting by having data-on-demand and predictive intelligence of key supply-line items and cost drivers. By leveraging data smartly, the CPO can partner with departments to find smart opportunities to free up budget so they can invest in things that are more strategic.

When it comes to procurement, the future of technology is not simply “Are you on budget or off budget?” It’s time to take this chore off the plate of CFOs, and give chief procurement officers the resources and status they need to be difference-makers in the organization.

A new title that reflects that importance wouldn’t hurt either.

Nikesh Parekh is the CEO of Suplari, a provider of AI-automated analytics and insight for procurement.