THE STATE OF PROCUREMENT IN EUROPE - WHAT DOES IT MEAN DOWN UNDER?

August 2011

For those of you who like to know what’s coming around the corner, it’s worth taking a close look at what the procurement leaders and innovators are doing over in Europe – because there are signs that the market here is heading in the same direction.

You’ve probably heard it said that Procurement in the Northern European and US markets is maybe 5 to 10 years ahead of Australia – and there has been some truth in that. There is also – in all those other parts of the World – a real mix of good and bad procurement. The ‘bad’ is as bad as you’ll see anywhere: little understanding of spend, minimal procurement process or systems, under-resourced or even non-existent procurement functions...

But those old ways are disappearing pretty quickly. You won’t see them in the FTSE-100, the Dow 30 or the DAX anymore – and while you might find a couple in the next tier down, there are not too many left there either.
The biggest European firms have professionalised their Procurement big time. The European CPO is a fast-tracking strategic thinker who runs Procurement as a professional service, with the firm as the client. Cost cutting is no longer the focus – although it’s often a necessary outcome. The CPO is focused on increasing the firm’s profitability, and has helped to increase profits by hundreds of millions or billions. Stakeholders work with Procurement because they know they’re better off when they do. The reward – if you like – for the CPO, is a seat on the executive team.

At the leading edge, the top CPOs are working on an exciting combination of:

• How to generate maximum sustainable value from supplier relationships – not just around price, but also in terms of service, risk and innovation;
• How to provide measurable value to all areas of the business, no matter how complex, and
• How to ensure the value generated translates into an increased market valuation of the firm

A good example is Marc Engel, CPO at Unilever, who has been focused on enabling the business to meet its stated financial objectives. Marc’s CEO, Paul Polman, has committed to doubling revenues within a decade. To put that in perspective, that’s around another $50bn!! Marc has risen to meet the challenge by – among other things – increasing his leverage of the Unilever supplier base, aiming to tap into their considerable ability to innovate.

Marc’s approach to generating and sharing innovation is in itself pretty innovative: for example he employs specialists he calls ‘scouts’ who actively seek out, from across his supply base, innovative capabilities which could potentially be applied to the Unilever business.

On a separate front, Marc’s ‘Supplier Days’ bring his top suppliers together, not only with one another but also alongside a range of Unilever’s most senior officers – an approach which greatly broadens the scope of potential discussions and also serves as a demonstration of Unilever’s corporate commitment to the cause. At a recent London event, Marc reported that discussions with his top 30 suppliers yielded 100 usable innovations in a single day...a level a company might struggle to achieve in months or years via traditional supplier management behaviour.

At Procter & Gamble, procurement head Rick Hughes has been working on extending the reach of procurement into every corner. Rick’s work with Marketing on the $8bn (USD) spend area was awarded the overall prize from ‘Procurement Leaders’ last year – both for the new system of measuring performance, which demonstrates how much the company’s return on marketing & advertising investment was improved by the procurement work – and for the collaborative nature of the programme, which is acknowledged by both Marketing and Procurement teams to have significantly strengthened the relationship between them.

Also at the forefront of Procurement development in Europe has been Jon Kirby, until recently CPO of pharmaceutical giant AstraZeneca*. Jon pioneered the translation of procurement benefits achieved into improvements to the metrics valued by the financial markets, e.g. Revenue Growth, Net Operating Margin, Cash Flow, Return On Capital Employed, etc. Jon helped to brief the financial analysts who monitor the value of AstraZeneca and go on to recommend AZ as a buy/sell/hold to the markets. This process has proved beyond reasonable doubt the value Procurement is adding throughout the AZ business and helped Jon to expand its reach into the farthest and most complex functions.

These are some of the CPOs who are at the leading edge – but there are many others close behind – and many more again who have seen their successes and are working on bringing their firms on the same journeys.

Perhaps the biggest trend in the European and US markets over the past five years has been the move towards outsourcing strategic procurement (category management, sourcing, supplier relationship management) to specialist firms. Under this model the strategic procurement of (generally) the ‘indirect’ spend areas, which are common across different industries, is managed by external firms which specialise in developing and maintaining the best teams, systems and processes for procuring goods & services in those spend areas – and leaving the CPO to focus on the ‘core’ spend areas unique to their industry.

One of the pioneers of this approach has been global Oil & Gas exploration firm BG Group, which has worked continuously with a specialist procurement service provider for nearly 10 years, across all areas of indirect procurement. Since then the model has become commonplace in the UK, Northern European and US markets with firms such as Cadburys, Hertz, Goodyear and Prudential all outsourcing some or all of their strategic procurement in indirect spend areas.

Will these things happen here in Australia and New Zealand? It seems inevitable that they will: these developments add huge value to their firms – and the ‘gap’ that needs filling (for firms that are not already doing so) lies within and around the Procurement function.

Another giveaway is that, if you know where to look, you can see it happening already!

At the leading edge of procurement innovation in Australasia, you’ll find Westpac. At Westpac, Peter McCray has extended the reach of procurement into some of the most challenging areas, for example even into the high-profile area of strategy consulting. To ensure the procurement function has sufficient credibility to make this work, Peter has brought in a team of subject-matter experts and a suite of innovative tools & processes, specifically designed for managing the professional services category and its complex supplier relationships – and the results have been outstanding.

Westpac is also leading the way in demonstrating the impact of procurement work on business results, operating a suite of reports that calculate the actual value delivered via Procurement to the business, and which are tailored to provide regular business-critical information into a variety of senior procurement and finance leaders.

A few years ago, this would have been unheard of in the Australian market.

Another example worthy of attention is Mining & Chemicals giant Orica where Procurement, under Neil Hawker’s leadership, has a seat at the table when it comes to some strategic business initiatives. Procurement has been able to add significant value to the shareholder by being engaged with major capital investment decisions, including assessing make (i.e. building capacity) versus buy (i.e. external supply) options for major raw materials. Procurement has also been closely involved in merger and acquisition activity, including participating in due diligence and post merger integration activities – where Procurement was used to generate ‘quick wins’ to underpin the synergies of the acquisition. The traditional Procurement ‘targets’ such as cost reduction and supplier performance are taken as given, and the focus is all about adding strategic value and lifting profit in a sustainable manner.

So, the same trends are evident here – at a smaller scale – that have been growing in Europe: the extension of Procurement into the most complex corners of the business; a move towards using and leveraging external specialist expertise in non-core spend areas; a move towards optimising the value and innovation provided by suppliers, and a move towards demonstrating the value delivered by Procurement in a language that the financial world understands and believes in.

As in Europe, the trends set by the leading innovators are being picked up by the wider market, and the pace of the movement is exciting to see. Where maybe the best European Procurement was once 5 to 10 years ahead of Australia – now it’s maybe 3 to 5 – and the gap is closing.

All of this is creating an opportunity for visionary procurement heads to improve the results and reputation of the Procurement profession at their firm, and to help the firm understand why the role deserves the title CPO – and a seat on the executive team.

*Note: Jon Kirby recently became CIO at AstraZeneca, the new CPO is Ashley Readshaw

Dan Lieghio is a Director of Portland Group, based in Sydney. Dan moved to Australia in January from the UK, where he was Managing Partner at a leading European provider of strategic procurement services.