I recently caught up with a procurement executive and “friend of the site” to discuss eProcurement systems and the complexity of managing back-end systems for a company that has been an aggressive acquirer of other companies. In the Americas region, the company is in the midst of moving from nine instances of one ERP system and numerous instances of other ERPs to a single ERP instance this year. That sounds difficult, but straightforward. What is interesting is that once this migration is completed, the company will spend the next four to five years on a global ERP migration project where the company will standardize on an entirely different ERP system (different than the one being implemented in the Americas). All of this back end work has slowed the company’s ability to get support for a P2P project which shows that sometimes systems of record still have the priority over systems of engagement. But, rather than continue on that topic now (if interested in that topic, here’s a discussion of those two types of systems), – I need to get to the case studies!
After talking through the solution provider landscape and the different scenarios of how to get an eProcurement online sooner, our talk shifted to procurement performance measurement and reporting.This pro was the Chief Procurement Officer of a multi-billion dollar revenue pharmaceutical company that was acquired by a much larger pharma company a few years ago. While he now has responsibility for more almost twice as much spend, his role has shifted from CPO to Regional Head of Indirect (a different spin on our “From CPO to” series) which was in actuality a horizontal move, not a demotion. With this shift in roles and companies, I was able to discuss two different approaches to procurement performance measurement within a single vertical. We will focus on the one where he was the CPO.
CASE STUDY #1: Procurement Performance at a Mid-Tier Pharma
Reporting out: As the Chief Procurement Officer, this executive developed a series of metrics that were reported up to the Chief Financial Officer on a quarterly basis. However, our friend quickly noted, “the only metric the CFO was interested in from a tracking perspective was cost savings.” But the interesting thing in this CPO-CFO relationship was that there wasn’t any rigor in defining that key metric and there was no feedback loop in terms of incorporating that savings into budgets. So yes, while the CFO was interested in understanding the savings, he had no interest in clawing any of it out of budgets. This meant that the business stakeholders would have to account for the savings but were then able to take 100% of their savings and reinvest it in the business. “The CFO’s office kept track of the savings as we reported them and when the different business units made requests for additional capital or additional expenditures, they would look at the savings generated and use them as a way to push back against the request. They would ask, ‘What are you doing with the money that came back into your group?’…… This process worked really well because it got the businesses to manage their savings gains more responsibly and enabled them to be more creative and occasionally sponsor a skunk works project.” The CPO would meet with the CFO on a quarterly basis and they would set the annual savings target at the beginning of each budget cycle.
Managing in: While this Chief Procurement Officer only reported a single metric, cost savings, to the Chief Financial Officer (his manager), he had several metrics that he used to measure the performance of his team. The metrics were a mix of hard savings, soft savings (or cost avoidance), spend under contract and the number of suppliers representing 80% of total spend. This CPO (who has an engineering background) believed that if his team was going to measure a metric, it had to be actionable meaning that ‘there had to be something that we could do to impact the numbers that were being reported. For example, there was a hard and soft savings target that we would track on a year to date basis. If we were not in line with our targets, we would take action and adjust our sourcing pipeline and bring projects forward and add more projects. For spend under contract, we wanted to bring every supplier who represented part of the 80% of our spend onto a standard contract. Before we were acquired, we were building up to that target of getting 80% of our total spend under contract.”
New company, same industry, different procurement strategy and reporting lines: The large pharma company that acquired our friend’s company handles procurement in an entirely different manner, choosing to use the procurement department primarily as a means to support supply chain activities (this CPO reports to the Global Head of Operations), while keeping indirect procurement as a function that is decentralized by region. The only procurement performance metric used by the company is hard savings, although there is some credit for any impact made on S&OP gains. The IT challenges discussed in the intro have also made it much more difficult for the indirect team to build out its own suite of solutions in support of its operations, despite a much larger spend.
The variety and nuance of the procurement function never cease to amaze me. Today’s case study is but one great example.
