Return on Assets (ROA)

On the eve of the last month of our first year at CPO Rising and during a return trip home from a November vacation, it seems to be the right time to return to a topic that we first touched upon in the first month of our first year at CPO Rising – Return on Assets – which is part of our “award-winning” 😉 10 for 2010 series.

It’s budget time again and for several of the Chief Procurement Officers that I have spoken with this past month, plans for 2011 are starting to shape up nicely. Some have seen their new budgets and have an understanding of what, if any, ‘nice-to-have’ items have made it into next year’s plan; they also understand what items will have to make a return onto next year’s wish list. Other CPOs are still waiting, patiently, for the final budgets to be rolled out to the businesses and for their procurement budgets to be rolled out to them. We often decry the procurement organization that does not operate with a multi-year strategic plan, but it is more than a little bit difficult to finalize your plan without the final numbers. It’s also more than a little frustrating to play this type of waiting game at this point of the year.

No matter where a procurement team finds itself in the budgeting process, as it looks to the new year, one thing is clear – available resources will be fixed at some defined level (defined by what is in the final budget). Sophisticated Brave procurement leaders know that the real challenge each year isn’t to simply hit departmental goals but rather, to maximize those goals (or returns) with the resources (or assets) that are available.

For the past five years, we have been deluged with story after story about group after group that is “Doing More with Less.” We get it; you’re doing a great job. But are you really doing more with less? What exactly does this mean? More of what, compared to when? Less of what, compared to when? I say this, somewhat in jest, since it is no small feat to actually do more with less. It’s just that the sentiment is a little tired, particularly since the really deep cuts for most groups/companies have already been made (knock on wood). If you are doing more with less in 2010 than you were in say, 2005, that could be a real achievement, but that is also what you were supposed to have achieved – no matter if you were in tough times or good – increase efficiency, become more effective.

Doing the most with what you have and getting the best return on your current assets is certainly important in tough times, but it is also just smart business. “ROA” or Return on Assets ‘gives an idea as to how efficient management is at using its assets to generate earnings’ (Investopedia). In the Banking industry, for example, ROA is a significant measure of value creation and can have a big impact on share price. In the realm or procurement and supply management, generating greater returns on your assets (and resources) can be a significant measure of value creation and can have a big impact on how procurement is viewed within the enterprise. The returns made on certain assets can have a revenue-like feel to them; they are incremental, require relatively small investment, and can impact the bottom line directly.

CPOs who aren’t getting the budgets they’d like (and what CPO budget-holder ever does?), must maximize what they have; they must improve their Return on Assets. We’ll return over the next few articles to look at some of the top opportunities to increase ROA and discuss how some of these opportunities could be used to potentially fund the gap that exists between your department’s original plan for 2011 and its actual budget.

Postscript: You will notice that I have sought to improve CPO Rising’s returns by redeploying an asset for this article – the image 😉

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