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Analysts: Procurement measuring savings today, value tomorrow

 

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We were fortunate to have four analysts join Coupa’s Gabe Perez for a panel discussion at Inspire last month: Jason Busch Managing Director of Azul Partners and publisher of Spend Matters; Bob Solomon, CEO at Software Platform Consulting; Christopher Sawchuk, Principal and Global Procurement Advisory Practice Leader at The Hackett Group and Dawn Tiura, President and CEO of Sourcing Industry Group.

 

In our post last Thursday, we excerpted their thoughts on where the procurement function is headed. In this excerpt, we’ll hear their thoughts on changing the conversation about procurement’s value. Today the success of procurement is measured in dollars saved. Tomorrow, value delivered will become part of that equation too they believe.

 

Gabe: It seems very obvious to everyone on this stage and by the applause of everybody in this room that procurement should be and will be more strategic in the future. Let’s talk a bit about how procurement can deliver measurable value right now.

 

Chris: If you look at where we are today, the majority of organizations are measuring the value of this function based on cost savings. The challenge is that we know based on our bench-marking information that savings is leveling off.

 

So the question as we look forward is that how will we measure value? I believe that we will look at value differently and it's not just going to be cost savings. We're going to say, “Here's the value of my organization.”

 

What percentage of that value is based on cost savings? Today I would say it's it's 90% for some organizations. I don't see that changing at least in the near term, but it will be augmented by other forms of value such as risk management, or supplier-enabled innovation.

 

Gabe: I saw you shaking your head, Dawn.

 

Dawn: I want to get away from the conversation about savings. There's so much more value. I don't know about you guys, but when you say, “I can save you money” to a business unit, do they open the door and say, “Come on in. Here's my P&L. What do you want to do with it?” We're scaring people by saying, “We're here to deliver savings.”

 

Gabe: As you can see from our conference theme, “The Real Math of Success,” we are delivering savings. But the way that we're looking at it is, how do we make that savings quantifiable for a CFO? We think that's extremely important but we think the link hasn't been made as to how to move from savings into more of a strategic value driver. What are your thoughts on that?

 

Dawn: We do need to be able to translate what we're doing in procurement into CFO language. But we also need to communicate the additional value that we bring. Some of the best CPOs I know have top-line growth, not bottom-line savings, on their metric card for this year.

 

For example, phones on airplanes. That was not created by an airline. That was created by a supplier who got the attention of an airline procurement person to help them pitch it to the airline. It became a revenue generator.

 

So the first thing I would say is, pick up your phones when suppliers call. These suppliers work with hundreds or thousands of companies. They've got the good ideas, so listen to them.

 

If you can be a catalyst bringing innovation that can translate into top-line growth and innovation that can drive savings at the same time, now you're getting the attention of business units.

 

Chris: One of the biggest constraints today, as Gabe says, is that we are still being measured and benchmarked on cost savings. Until we change that, it's difficult to change the behavior of the organization.

 

Dawn: Then change the conversation.

 

Chris: I absolutely agree. Then the conversation has to change.

 

Dawn: Let’s talk about procurement saving us from this huge loss that you didn't even know could have occurred. That is potentially more valuable to the entire company than an additional 5% cost savings. We saved the company's reputation. That's the conversation we should be having, because that's what we can impact. Now we're adding strategic value throughout the organization.

 

Chris: I think there are some legacy issues that we have to fix because I absolutely agree with you. One of the challenges I’ve encountered as I've talked to some organizations is that they want to take that behavior that we've created of measuring cost savings and they want to extend it to everything. As we move into the other things that we do, for example some of the things you’ve mentioned, the question is, “How do I quantify it?” Well, sometimes we can't. And so in some ways we have to become good storytellers to say, “Here's the value I've created.”

 

Dawn: I would argue you can quantify anything. Granted, I'm a bean counter, but at the end of the day I think you can. If you look at a loss you avoided that another company was hit with, you can say, “For this company it was a $285 million hit. That would translate to a $3 billion hit for a company our size.”  We can quantify if we take the time.

 

Chris: We can, but the question then becomes is how much effort do we want to put in trying to quantify everything, rather than just creating additional value.

 

Bob: I think you have to keep savings in the equation. It can't be an either or. It has to be an “and.” And you are going to have to quantify these other things.

 

Let's look at the marketing function. It was one of the last bastions of avoiding quantification. And now you can't even dream of being a CMO in a Fortune 1000 company if you're not going to be incredibly analytical.

 

The trade show, every aspect of it is now quantified. So it's going to happen. CPOs have to just accept that and lead the way and push it. It's savings and it's measured innovation in all of these other categories, as well.