What is the best CPO tool or strategy in 2012?
Our field of 32 determines this year’s champion
Yes folks, it’s March Madness, Chief Procurement OfficerStyle, where the different procurement tools and strategies compete to get to the CPO’s Final Four
Day 6 – Region Four hits Quebec City (Old Town) – Laissez les bons temps rouler!
(1) Spend Under Management vs. (8) Procurement ROI
There’s a rumor up here in the Great White North (Quebec City!) that the new ‘numbers’ have arrived and would you believe that the king of the hill, top o’ the heap, A-number-one, procurement leaders drive a Procurement ROI that exceeds 11:1. Let’s for now cast aside the deep sorry, DEEP skepticism that arises with that number (and those numbers!) each year. [Sidebar: And, like the swallows returning to Capistrano each Spring, let us all soon watch and gaze as the loyal ‘friends’ breathlessly and preemptively defend these fine, fine numbers.]
Here’s the quiz, Procurement ROI fans:
A Hypothetical CPO with a Hypothetical Procurement ROI of 9:1 has the opportunity to invest money in a project with a guaranteed return. If $50,000 is invested, the return will be ten-fold or $500,000 savings in the first year (a project ROI of 10:1). If however, $50,000 more or $100,000 in total was invested in the same project, it would yield a total of $750,000 savings in the first year (a project ROI of 7.5:1).
Note that there are no other competing projects for investment in the company and the company hurdle rate for these projects is 12%
The question is – Should the CPO invest in the project? And, if so, how much? $50,000 or $100,000? Does the CPO invest $50K and improve his Procurement ROI? or does the CPO invest $100K and dilute her Procurement ROI?
Thinking?
Still thinking?
Ok, time’s up.
Smart CPOs will invest $100K every time. Here’s why – while the CPOs who invest $50K will improve their overall Procurement ROI and the CPOs who invests $100K will lower their overall Procurement ROI, smart CPOs are in the business of maximizing total (or aggregate) savings, not their Procurement ROIs. The $100K investment yields a higher net savings. They (and you) should make every incremental investment that meets company defined hurdle rates (and other investment criteria) and increases total savings. Yes, even if it lowers your Procurement ROI. If you are focused intently on maximizing your Procurement ROI, you’re focused on the wrong metric. Please stop.
Spend Under Management wins.
(4) Cloud vs. (5) Supplier Enablement
After a long and unkind week, I asked my wife as we sat waiting for our flight home, who she thought would win the big 4 v 5 match-up between Cloud and Supplier Enablement? To which she replied, “Supplier what?”
On another day, perhaps, I might have reminded her of any of the projects I had worked on the the first half of last decade to trigger a conversation.
On another day, perhaps, I might have called out a few of the ‘clever’ titles I had given to the reports I had written in the second half of last decade on Supplier Enablement to trigger a conversation.
On another day, perhaps, I might have eagerly rolled out a 15-20 minute freestyle on Supplier Enablement and some aspect its evolution beyond catalogs.
But not today.
“Yeah, you’re right,” I replied. “Cloud’s pretty big.”
(3) Supply Risk Management vs. (6) Automated Contracts
Ask most CPOs who have them, and they will surely say that “Automated (Procurement) Contracts” were a good investment. To which, many General Counsels would agree. There’s nothing wrong with ACs – good fundamentals, can mix it up upstream or downstream, somewhat versatile.
Our view on Supply Risk Management? The title of this article says it all.
Contracts? C’est fini!
Supply Risk Management is moving on.
(2) eProcurement vs. (7) Sustainability
At various conferences over the past five years, I have seen a growing number of procurement presentations centered around sustainability. It remains a topic of relevance for businesses and communities and it remains a topic where procurement can edge towards the front of the line and take some ownership. With less than five inches of snow this past winter in Boston (versus a typical 5-6 feet) and 60 F degree days in January and February, sustainability will only become more important.
On the other hand, you cannot stop eProcurement, you can only try to contain it! Yes, poor functionality helped contain it in the early days, as did overly complex processes, poor catalog content, an unwashed user community unprepared for the era of self-service support via enterprise software (requisitions, vacation requests, benefits packages, payroll, etc.), and an “un-empowered” procurement department.
With much of that in its rear view, this seasoned veteran has come to play in 2012 with a dominating inside game built on compliance, efficiency, and visibility.
Please welcome eProcurement as the final member of this year’s CPO Rising Sweet Sixteen
For those keeping score at home, click here for the updated, official CPO Rising 2012 Brackets – it is free to download and no registration.
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