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Cost-cutter or value creator? Defining procurement’s role in 2023
How should procurement leaders be defining their role and their ability to create value for their organisation?
For many, value is easy to define. Often considered synonymous with cost, in a business context driving value usually means two things: cutting (or often “optimising”) spending or investing in a way that creates new value. Procurement’s role has largely been to walk an interesting line between the two – we get our colleagues the products and services they need to create value, while trying to keep the costs to the business as low as possible.
While the past decade has seen a shift towards procurement becoming a more strategic partner to the rest of the business rather than just an order taker, the uncertain economic environment has put a lens on this question of whether procurement’s role truly lies in being a value creator or a cost-controller.
Against a backdrop of 7% inflation in April, [1] EU leaders are concerned about the impact of this economic uncertainty on their bottom line, and, from my own conversations with those in the industry, many procurement teams are being tasked with finding efficiencies.
Whilst cost optimisation is a worthwhile endeavour in times of economic disruption, an effective procurement strategy cannot only focus on the now. How should procurement leaders be defining their role, and indeed, their ability to create value for their organisation in 2023?
Cost-cutting
Of course, managing costs is an important part of every organisation’s procurement function, and chief procurement officers (CPOs) know this. We recently conducted a survey which asked procurement leaders in Europe about their business buying priorities, which found that a third (34%) of buyers said improving procurement costs is their number one priority for this year, with many looking to offset the impact of rising transport prices, input costs, goods shortages and more.
This association of monetary costs with the concept of value still prevails for CPOs. Recent research from Deloitte found that, when procurement and supply chain functions report into finance teams, value is defined by ‘cost’ in 50% of cases.[2] And understandably so – as the stewards of buying for an organisation, cost is always a major consideration. While there are a variety of other factors that must be considered when buying for an organisation, such as the efficacy, usability and sustainability of products and services, procurement is there to ensure that costs don’t spiral.
But while cost savings are intrinsically linked to procurement’s strategic importance in the eyes of business leaders, there are some suggestions that this is an archaic view – that, much like other areas of the business, procurement needs to actively reconsider its conception of “value” to move beyond just the monetary. Boston Consulting Group’s book, Profit from the Source,[3] says that organisations need to “do the seemingly impossible” in driving costs savings while somehow still developing their offerings for competitive advantages in innovation, sustainability and resilience.
With this in mind, how do procurement teams show to the rest of the business that, even in tough times, they are taking the initiative and have more to offer than just trimming the fat on organisational spending?
Building resilience
Redefining value for procurement doesn’t mean moving away from cost altogether. One way businesses can reimagine value is in building resilience; investing today to protect against future economic headwinds.
For McKinsey associate partner Joe Basar, procurement has a vital role to play here. Basar argues that the roadmap for procurement leaders is made up of three stages: immediate action to enhance visibility, advanced solutions to enable resilience, and long-term capabilities to manage future uncertainty.[4] For Basar, true value is achieved through investment in a strong set of tools to understand, evaluate and implement change in purchasing practices, ensuring businesses can offset financial challenges both now and in the future.
Of course, spending now to avoid risks in future might be hard to justify during the current economic climate, but it doesn’t always have to be a case of cost-cutting or investing. In assessing where cost or resources can be recouped, procurement should take a proactive role in suggesting where any savings should be reinvested, especially into areas that build resilience to weather future challenges.
Value beyond finance
The economic climate isn’t the only external factor impacting businesses today. For many, social and environmental concerns are just as important, whilst others are actively pursuing investment in their procurement processes to drive value in other areas from time savings to risk reduction.
According to our findings, over half (59%) of buyers consider improving sustainability in purchasing practices as their number one priority this year, significantly more than those prioritising cost. It is striking that we’ve reached a point where concerns around rising costs and the state of the global economy means that cost-cutting hasn’t knocked sustainability, once viewed as a “nice to have” from the top spot. But, when you consider that two-thirds of the average company’s ESG footprint lies with its suppliers, meaning holistic environmental change in most businesses can’t be achieved without active participation from procurement teams, perhaps it’s not so surprising.[5]
And there are other competing priorities for procurement. Almost half (48%) of buyers feel that increasing efficiency within the procurement department will be the most important improvement for 2023. This could include alleviating challenges associated with distributed working, enhancing transparency in the supply chain to mitigate risk, or identifying the right products and selling partners to align with company goals.
Interestingly, these different views of value are by no means mutually exclusive. McKinsey analysis has found that top ESG performers see up to 20% faster growth and higher valuations than competitors, whilst strong ESG credentials drive down costs by up to 10%.[6]
Today, procurement is a strategic endeavour and, no matter how you define value, can deliver that value to any organisation. But with the current economic climate, it’s down to each organisation to assess what types of value they need their procurement team to generate to not only survive in the short term, but thrive in the long term.
[3] https://www.bcg.com/capabilities/operations/profit-from-the-source
