Friday, 20 November 2015

Key Challenges Faced by CPO’s

Authored by Usama Shahid

Managing a budget is often a challenging task. For CPOs, they need to have a strong team across the end-to-end sourcing and procurement process to ensure costs are contained. Without a dedicated team to run a quality sourcing event, requirements are often not accurately captured or scrutinized and money is wasted on unnecessarily high-specification products and services. Without a dedicated team at the other end of the source-to-manage process, to manage supplier adherence to contract, scope creep becomes an issue. Finally, without the people, process or technology to measure and track current spend, there is an ‘overspend lag’, meaning that by the time anyone notices spend is going over-budget, it is too late. 

Visibility of Realized Savings A common complaint among CPOs is that savings that have been negotiated or forecast mean nothing to their Chief Financial Officer (CFO). They care about savings that have been realized and assert that pressure on the CPO. Not only do they want savings to be realized, they want them to be measured and tracked to the P&L, aligning sourcing successes to business outcomes such as earnings per share, working capital and operating profit. 

In the same way a marketing professional measures how many hits their website gets after their latest commercial aired so they can validate its success, a CPO needs to know how much has been purchased off their new contract so their success can be measured. Only when real savings can be measured and audited can the sourcing and procurement function truly become a fundamental part of the finance team’s annual budget planning process.

Compliance to Contracts An all-too-often overlooked responsibility of the sourcing and procurement function is to ensure compliance to contracts. CPOs know the importance, but ensuring that this message is delivered to the rest of the business, never mind that it is acted upon, is never easy. A most frustrating discovery for a sourcing professional is that the contract they sourced and implemented is being ignored in favor of another supplier that is delivering less value than the chosen supplier. As well as the direct forfeiture of savings, CPOs know they are also losing potential volume-based incentives from the preferred supplier and diluting their buying power in the market.

Effective Use of Sourcing Next CPO challenge is simply that they want their sourcing and procurement function to be used more and recognized as a value-generating shared resource by the enterprise. There is nothing more frustrating than having a well-oiled process, a team with deep sourcing expertise and world-class technology, only to find rogue sourcing. Almost the same is to be involved only at the last minute to negotiate the final contract once a supplier has been all-but selected. A CPO needs the authority and support from other executives to mandate the use of the sourcing and procurement function by the entire enterprise. In the same way that the Google algorithm evolves and improves every time you enter a new search, a sourcing operation will actually improve with higher utilization as greater spend volume, more market information, better collaboration and increased benchmark data take effect.

Delivering Market Intelligence Market knowledge, awareness of industry trends and ability to benchmark suppliers are all key to running a successful sourcing organization. But when an organization only has one contract in any given area of spend and when they will only source that contract once every two or three years (if that), how can they be expected to be an “expert” in that commodity? The answer is that they can’t and they aren’t. We constantly see the topic of market intelligence emerging in discussions with CPOs because, when they want to run a sourcing initiative, they have to effectively start from scratch and learn the business drivers in that market, who the suppliers are, what the offerings are or the consumption models and, most importantly, how much should they expect to pay.