Businesses could be taking huge risks by not recognising the value of the procurement function, according to research from 1st Executive. Input from James Tucker, Managing Director.
The analysis by the leading procurement and supply chain recruitment consultancy found that, while many firms recognise procurement as a business critical function, it’s still not being given the authority it needs to be able to mitigate risk in a surprising number of mainstream organisations. The research, which looked at levels of external spend by subtracting headcount from a range of businesses’ total costs over the last three years, found that around half of their overall expenditure is on external products and services. However, many of these organisations do not give the procurement function an overall mandate for both ensuring that external spend achieves value for money and that the business partners with suppliers that are financially sustainable.
As we all know, the procurement function is truly critical to organisations, there’s no doubt about that but it is surprising that there are still many firms that don’t allow the function to take complete control of external spend which, as our analysis revealed, can account for as much as half of all costs. This is worrying as, without careful management, those costs could soon turn into over-spend which obviously exposes organisations to unnecessary financial risk. But it can also cause long term damage to supply chains – individual departments putting excessive pressure on suppliers can cause real issues for ongoing relationships – and supplier relationship management is one of the key skills of a good procurement function. There is also a balance to be struck between the ‘quick win’ of short term savings and longer term delivery improvement which is where the strategic sourcing skills of procurement come in to play. There needs to be consistency across the entire organisation’s spend, not just on an individual category basis.
Understanding spend at an organisational level rather than departmental or geographical level simply makes good business sense – but if that’s to become endemic then the procurement function needs to be valued far more than it is currently. Ultimately, for spend to truly deliver value for money, efficiency and improved service delivery, someone has to see the big picture – and that’s the procurement function. This brings to light the much disputed argument of why there are not more CPO’s sitting on main Boards, as this is the only way of procurement taking complete control of external spend.