Editor’s Note: Today’s article includes a large excerpt from Ardent’s annual “State of Procurement” research report, CPO Rising 2019: Value Expansion. This report is based upon the responses from more than 300 CPOs and is the culmination of a year’s worth of research, conversations, and insights. We consider it a “must-read’ for procurement professionals, and it is available now by clicking here.
The results are in… and the procurement industry is starting to plateau. Despite the many significant innovations that have emerged to propel procurement’s first wave of transformation (as well as the fact that procurement leaders and their teams rate their impact on the enterprise pretty highly), recent year-over-year performance data tells a different story. The average percentage of spend under management by a procurement department has stayed generally flat for the past eight years and is not likely to rise significantly any time soon. In 2018, only 15% of all CPOs had placing more spend under management as a top priority looking out over the next two to three years. This year, only 6% of all CPOs feel pressure to place more spend under management.
For the past decade, spend under management has been and continues to be a great leading indicator of the potential value that procurement has to influence results. It has been a key metric used to define Best-in-Class procurement performance by Ardent Partners for years in its research. This is not to say, however, that placing more spend under management has to be a top goal or priority. To the contrary, there can be many other, more important targets than improving this metric. Nevertheless, the fact that such a small percentage of procurement departments seek to increase this number, when the benefits of doing so have been quantified, indicates that the industry is evolving.
Average savings rates are also trending flat to down over the same time period, but these metrics are more closely tied to the economy. And, as has been discussed and explained many times in the CPO Rising series, the amount of savings delivered by a procurement department on an annualized basis has so many different inputs that fall beyond the influence of the department. Evaluating procurement performance based solely on savings can fail, by a significant margin, to capture the full value that the procurement group delivered in the period. To be clear, savings is important but its trend line is not a strong indicator of the profession’s progress.
Two metrics that are good indicators, the “percentage of addressable spend that is sourced” and “compliance rates” have not increased since the Great Recession, and have trended flat to down over the past five years. All of this data suggests that procurement’s momentum is actually slowing, and that its performance is at risk of slipping – despite the current level of innovation found in the supporting technology market, and despite procurement’s own perceptions of its impact. But why?
One answer is that the proverbial low-hanging fruit has been picked; CPOs cannot extract more juice from the same berries without further investment – as the law of diminishing returns dictates. Like body builders that need to periodically change their workouts in order to continue to strengthen muscles, CPOs and their leadership teams need to rotate their “fitness regimens” and regularly introduce new (or modify existing) strategies, solutions, and capabilities if they hope to expand their impact.
After all, conducting spend analysis to identify and realize cost savings, outsourcing tactical work to low-cost countries, automating processes, identifying strategic suppliers and reducing tail spend, leveraging eSourcing, eProcurement, and other business tools, and many other strategies have all become table stakes. These are no longer considered innovative strategies and capabilities. They have become part of the modern procurement paradigm – of operating in a business environment where enterprises, CEOs, share-holders, staff, and the public at large expect more, even if (or when) it is not known exactly how procurement should proceed and what it should do next in order to expand the value it delivers.
As the speed and complexity of business continues to accelerate, executives must adapt to new market conditions as they fight to retain market share and market relevance. Procurement departments, their operations, culture, systems, and the way in which they transform knowledge into strategies and those strategies into performance, must all keep pace. The procurement profession needs a catalyst or, in all likelihood, a series of catalysts to push it through to the next wave of value creation. Chief Procurement Officers and their teams need to reach higher for larger and sweeter fruit; and if they cannot grasp it, they need to start using new strategies, tools, and approaches to help stretch their reach, expand their influence, and increase their impact. The good news for CPOs and their teams is that they will not have to journey to some magical land to meet the wizard. In fact, most will not have to look any further than their own backyard; they can harness the leading business innovations and ideas already at work within the industry (and within their enterprise) and start to pave their own yellow brick road.
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