Top 10 Signs Your Organization Needs a Talented Chief Procurement Officer
A CPO offers advantages over other approaches to buying. Here is how you know if you need one.
Organizations looking to improve the process side of procurement, stakeholder engagement and analytics, can find the answer in a chief procurement officer (CPO).
The cost of adding a CPO can often be offset by the significant return on investment (ROI) that the person provides by spearheading projects and streamlining operations.
Many CFOs are increasingly hiring CPOs to lead their organizations’ procurement transformation. But how do you assess whether your firm needs a CPO?
A number of symptoms may reveal blind spots in the current leader’s approach to procurement. In fact, if whoever manages your procurement function takes solely a transactional and highly tactical approach, he/she may simply be putting out organization fires rather than addressing problems in the company’s procurement process.
Following are 10 signs your organization should seriously consider hiring a seasoned CPO.
1. Internal customers frequently bypass the process of placing purchase orders (POs).
Internal customers may be frustrated by a procurement process that is inefficient, poorly defined and characterized by one delay after another.
If a high percentage of invoices come to the accounts payable department without POs, this often signals a PO process that is burdensome and inefficient. Internal customers are likely to continue this behavior until the procurement process becomes more responsive and timelier.
2. The cycle time for getting POs is excessively long—but no one knows exactly what is holding up the procurement process.
The first step can be to evaluate the workflow of the procurement process. A seasoned CPO will be able to do extensive process mapping of the procurement function and streamline the overall procurement process.
Some questions to ask, for example, include: Are delays due to an excessive backlog of contract reviews by the general counsel? Does the approval process require an excessive number of approvals with a low spend threshold?
3. Internal customers complain that the procurement process is a black box, and they don’t know where their requisition is in the approval process.
A common complaint by internal stakeholders might be that they don’t know where their requisition is in the overall requisition-to-source cycle. A number of contract lifecycle software modules can give internal customers better visibility and insight into the contracting process. And a knowledgeable CPO will be able to guide the organization to adopting the most cost-effective module with the most compatible user interface that best serves your organization.
4. The procurement leader hasn’t evaluated spend through the lens of the 80/20 rule.
Many organizations find that 20% of their vendors are responsible for 80% of the company’s spend. It often makes sense for a procurement leader to focus initially on the largest concentration of spend before dealing with tail spend (high-volume low-value transactions).
An adept leader will understand how to differentiate between high-dollar value transactions and tail spend. The optimal strategies to optimize the purchasing process for high-dollar value transactions and tail spend are distinctly different.
5. The company has poor spend analytics.
Spend aggregation for any organization requires good spend analytics. It’s usually impossible to aggregate fragmented spend across a company in a meaningful way without a robust spend analytical tool. If the head of procurement simply extracts spend data by looking at spend by vendor, they are likely missing the opportunity to classify spend with meaningful categories of spend.
6. Many of the PO agreements use vendor paper rather than a company’s templated purchase agreement.
If a company uses a high percentage of vendor paper-based agreements, it adds to the contract review workload by the procurement group’s contracting staff or the office of the general counsel. A savvy CPO will be able to work with their contracting staff and general counsel to create templates for both the terms and conditions and specifications for the order.
A significant number of vendors may agree to using a company’s template for a PO agreement.
7. Internal stakeholders put up significant resistance or push back when changes in the procurement process are introduced.
The most valued skill set of a CPO may be in change management. A savvy CPO will be able introduce initiatives incrementally and address internal stakeholder concerns during the transformation or change. If internal customers perceive little benefit, adopting change may be a slow-go. Procurement leaders can’t assume the process change will be self-evident to their internal customers.
8. The indirect procurement spend across the organization continues to be fragmented, and spend aggregation appears to be challenging.
Internal stakeholders may be unaware of how much common spend there is for the same goods and services across an organization. An astute CPO will be able to share meaningful spend analytics with an array of internal customers and make a compelling case to use blanket order purchasing agreements across the entire company—which ultimately saves money.
9. Internal customers view the procurement organization as “police officers” rather than as trusted advisors.
If a procurement organization is repeatedly seen as a “ruler-enforcer” rather than as a trusted advisor, internal customers may see little value in collaborating with them early on in the sourcing process. Internal stakeholders need to be treated as internal customers, rather than followers who need to be controlled.
A polished CPO looks forward to building strong relationships as a problem-solver and trusted advisor, over time, with internal customers. A smart CPO will have done their homework on the landscape of vendors across a given good or service area before advising internal customers on what their various options are.
10. The procurement organization evaluates all requisitions solely through the lens of the lowest price.
An astute CPO will coach their team on the value of a total cost of ownership model of procurement. This approach addresses variables like vendor performance and reliability as vendor to arrive at the total cost as a value proposition. If a cheaper vendor continues to deliver an unacceptable level of performance, this may also cause additional cost to internal customers.
If a CFO wants to create a customer-centric and service-based procurement group with increased savings, it usually requires hiring a CPO who has top-tier change management leadership talents in addition to an array of skills including analytics, the process side of procurement and stakeholder engagement.
About the Author: Steven Lutzer is the president of Lutzer Global Inc., an executive search firm that specializes in procurement, strategic sourcing and supply chain management. Lutzer had a 20-plus year career in supply chain management and global sourcing before founding Lutzer Global. For more information, please visit www.lutzerglobal.com.