Aligning your procurement mindset to the growth agenda
May 22, 2015 9:59:00 AM
Growth is back on the agenda. Actually, in an increasingly lumpy economy, for many businesses it never went away, despite the vicissitudes of national and regional economies. (“Vicissitudes”? Well, the UK grew robustly in Q4 2014, then posted its slowest GDP gains for three years in Q1 2015…) And with the ongoing prevalence of risk in many markets, we’re in a period where organisations want to expand, but just don’t seem ready to invest, spend and grow in the way that macroeconomic data suggests they should.
In other words, there’s tension in the system. We should be growing. But we’re worried about doing so.
It is still true that a rising tide lifts all boats though. GDP growth might not exactly be setting the world on fire here in the UK, but some fascinating M&A activity (forecasts are for 8% more activity in H1, year-on-year) and even some radical structural changes are creating a sense of real opportunity for many businesses. Quite apart from anything else, everyone is global now. So if growth in one market stutters, you can be sure there will be growth somewhere else to take up the slack.
So while it’s important not to gloss over the “risk” mentioned above – seriously, the world remains a dark and frightening place full of uncertainty – it seems perverse to issue a warning about the perils of individual companies growing.
But, there’s a reason that more companies go bust during an upturn than a recession. Once companies start to get busy, once they’re growing revenues and undertaking more activity, they scale up everything. And if “everything” includes problems like poor cash flow management or lax controls, they’re building up monsters easily capable of bringing them down. Big new order? Great. Sudden over-exposure of a third party manufacturer? Not so great.
That is particularly true of procurement. It’s a bit clichéd to talk about how every process has to become a “platform” if it’s to scale properly. But in the case of procurement, that’s spot on. If your procurement function is a set of contracts or negotiations; even if it’s a set of rules around particular product categories - and especially if it’s a set of processes for sourcing and signing off external purchases - it’s just going to get horribly complex and bloated as you grow. If it’s a mindset, a set of behaviours, or a conceptual objective? That’s got limitless capacity to support all sorts of growth and innovation.
Even the best behaviours among spending departments - and, let’s face it, with an average of 70% of revenues being spent with external suppliers, every department is a spending department today - will turn out to be useless unless they’re also part of this cultural approach to spending that can inform their transition to new heights.
We need to avoid, “we buy from this supplier” or even “we buy to this specification”. The trick is to start thinking about outcomes: “we buy to create this solution for our clients’ needs.” That frees an organisation up - both to source sensibly however it grows, but also to eliminate toxicity like complexity and empire-building wherever it pops up during a growth phase.
But the best bit is that if those scary risks do crystallise, a smarter, more strategic, more cultural approach to procurement turns out to scale well the other way, too. No one wants to consider the prospect of a new recession – or a stock market crash, or an EU exit, or a currency crisis. Or, indeed, massive sectorial disruption, as a new competitor enters the market.
But if those things do happen, having a procurement mindset focused on the right commercial answers for the toughest business questions is the only logical way to go. (Similarly, having a strong and connected procurement culture is even critical in non-commercial environments, like government.)
Think of it this way: if your procurement is predicated on volume savings that flatter the bottom line as revenue grows, you’re going to feel very exposed in the event of a collapse in demand. But if your procurement efforts are geared around what we might describe as “commercial excellence” - engineered to deliver the outcomes that make your business special - you’re much more likely to find ways to thrive whether risk crystallises on the upside... or the downside.
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