In ten years’ time, the procurement profession and the role of the Chief Procurement Officer (CPO) has changed in many unique and profound ways. Yet, just like 2010, CPOs and other procurement leaders are entering the new decade grappling with intense challenges (some old, some new) and driving forward to achieve aggressive goals and objectives.
On that front, I’m pleased to continue with our exciting, new series on CPO Rising – “20 for 2020” which examines a broad range of CPO-driven topics. Today we continue with 20 for 2020: Key Themes for the Modern CPO’s Agenda (#8 – Risk Aversion), which is designed to help procurement executives set their organizations’ course for the critical months and years ahead. Enjoy!
20-for-2020: Theme #8 for the Modern CPO’s Agenda: Risk Aversion
Recent studies of human behavior and thinking invariably show that there are a large number of natural influences or biases that can affect individual and organizational decision-making. It is a fascinating field and worthy of study, particularly for those leading procurement organizations today or those that aspire to in the future. One common takeaway from a quick review of the subject is that the human mind does not operate in a fully-rational way. For example, many studies have shown that individuals generally place more value on not losing than on winning. This is known as loss aversion and it frequently leads to risk aversion, which is a well-known concept in business. The point is not that the best business leaders are more rational decision-makers (although that is true) or that they are less risk- averse. The point is that it is helpful to understand the personal and organizational decision-making process in place and the factors that influence it to better understand the mindset of the procurement organization.
In 2020, the profession’s top hurdles – budget constraints, technology gaps, and talent challenges – have given many CPOs good reason to question how aggressive they should be in attempting to expand the scope of their operations and influence. Except that in a risk-averse environment, challenges can quickly become major obstacles and the rationale for inaction. The tendency to favor decisions that lead to more predictable outcomes pushes many organizations to take more measured steps or simply stay in place.
Ardent Partners believes that the net effect of these behaviors is that in general, procurement organizations are not only less aggressive than they could be in driving change and transformation initiatives, they are less aggressive than they should be. For example, Ardent Partners’ research has shown that the added savings benefit for each new dollar placed under procurement’s management is, on average, between 6% and 12% during the first contract cycle. Those returns can easily justify an investment in resources and tools.
Final Thoughts
Of course, being less aggressive may be the preference of the executive leadership and it may be the personal management style of the CPO. It is also possible that these topics have never been fully discussed or communicated by the executive team. The point is that being less aggressive can be okay if that approach is aligned with the larger enterprise. But, a deeper understanding of professional and organizational behaviors (and their associated decision-making processes) and how they relate to larger business strategies may encourage more CPOs to counteract organizational prejudices and more actively push boundaries, challenge limits, and rethink paradigms. The topic merits discussion and the opportunity merits effort.
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