Last month I had the opportunity to participate in a webinar that focused on the issues of procurement performance and procurement value and the fundamental differences that exist between the average CFO and the CPO in their perspective and approach to these topics. My co-presenter in this webinar was a CPO – Daniel Warn, Head of Strategic Sourcing and Vendor Management at Blue Cross & Blue Shield of Rhode Island, to be specific – who has graciously offered to answer a few specific questions generated by his presentation in another installment of our CPOs on the Rise in 2011 series.

For those that are interested in hearing more on the topic, an archive of this webinar is available by clicking here; while the report that fueled my portion of it is available here (Both are made available by Puridiom – registration required at each).

Q1 – What is a realistic timeline for achieving procurement transformation and how much do you attribute your success to the support of the CFO to this project?

Dan Warn: Great question, and the answer is “it depends.” For BCBSRI, a mid-size company with full CFO support of the transformation, it took 12-18 months to establish a baseline across people (create a centralized organization + hiring the right skillset), process (institute and enforce a new purchasing policy + best-in-class strategic sourcing process) and buy and implement P2P technology (Puridiom). That being said – we have lots of continuous improvement to do in each of the three areas.  My goal is to reach something of a “steady-state,” within 24-36 months which I generally define as ideal organization structure and team, 100% compliance to the purchasing policy, and 90%+ spend under management (i.e. spend on purchase orders). The support of the CFO / executive leadership team is essential. Without it, your success rate will drop significantly – I wouldn’t have even tried to tackle all three aspects of people, process and technology simultaneously without the support of the CFO and executive leadership team.

Q2 – You have achieved 6 out of 8 key benefits you hoped to achieve as part of your P2P implementation with Puridiom. The last two deal with consolidating and strengthening the supplier relationship. What is your plan for realizing the last two benefits and how will you translate these savings to finance?

Dan Warn: Puridiom’s core functionality allowed BCBSRI to realize the first 6 benefits, but it also enables the procurement team to have the visibility it needs and the ease of use the suppliers need to tackle the next two benefits. We plan to proactively communicate with suppliers on the benefits of transacting with BCBSRI through Puridiom in order to increase the amount of online interaction and continue to reduce our manual, paper based transaction costs as well as take advantage of payment term rebates, and other payables benefits. With the spend visibility that the system provides, we can now better identify our key strategic suppliers and place them in our “Key Supplier Program” which uses a separate set of metrics to drive a 3-5% cost improvement year over year due to innovation, gainshare, etc.

Q3 – What is the current average standard payment term corporation’s are specifying?

Dan Warn: Our standard payment terms are net 45 days from receipt of invoice which is a recent change. We used to offer net 30 with no discounts, and many times paid faster than that for no reason. Today we now also offer net 30 with a 1% discount off the invoice or a net 10 with a 2% discount off of the invoice. We are taking a phased approach to move all suppliers to the new payment term options including targeted negotiations with our key strategic suppliers.

4. How do you define, manage and provide metrics for the differences between cost savings, cost avoidance, and demand management?

Dan Warn: For indirect spend only, the simple description is that cost savings result from a unit cost reduction, cost avoidance is the difference between the lowest viable initial quote and the final negotiated price, and demand management depends on how much is attributable to SSVM involvement versus business line execution on a case by case basis. It is important given our business and type of spend that we capture both cost savings and cost avoidance, and I report on both to the CFO as part of my monthly procurement scorecard reporting. Additionally, we report on actual budget impact which is not always the same thing as cost savings or avoidance, although we do get credit for all three (savings, avoidance and budget savings). The CFO typically cares most about budget savings, but does understand the importance of all types of cost savings. Combined with a detailed spend analysis it drives a productive discussion between the CPO and CFO on what areas of spend to target moving forward.

Tagged in: CFO, Chief Procurement Officer, CPO, CPOs on the Rise, Performance