Countless corporations have centralized their procurement operations over the past several years. Typically, the switch from a local or regional procurement structure to a centrally led organization headed by a chief procurement officer (CPO) has occurred in global, established industry leaders in manufacturing's high-tech, industrial, and consumer sectors. But now, more and more nonmanufacturing, service-driven companies are also adopting this approach.
Through our recruiting work for Spencer Stuart's Supply Chain Practice, we've observed a recent trend toward CPO searches by organizations across many of these industries, including financial and service organizations, insurance and real estate companies, banks, health care providers, gaming industry leaders, and hospitality firms. The reason for their interest in centralizing oversight of procurement is that, despite their best efforts, they have found it challenging to grow or maintain their top line during the economic downturn. Looking to preserve their margins, they are reassessing their operational efficiency and the effectiveness of their supply chains like never before.
It's not unusual for many of these companies to initially have only a general idea of their overall organizational spend. We have been engaged by some that can only estimate their spending, telling us, for example, that it is "somewhere between US $2 billion and $3 billion." Needless to say, the strategic application of centralized procurement in these corporations represents a huge opportunity.
When creating a new chief procurement officer role, some of these organizations initially view it as a "cost of doing business" function. Only later do they recognize that the CPO is capable of achieving much, much more. These new CPO roles in service-driven organizations focus not only on spending across marketing, travel, information technology, consulting, real estate, security, transportation, and similar areas but also on enhancing customer satisfaction, quality, and on-time delivery. In many cases, the chief procurement officer has become a key strategic leader and advocate for greater operational effectiveness in everything from inventory to manufacturing, product design, cash flow, outsourcing, workflow, quality, and customer service.
Leadership skills required
Given the strategic role that CPOs are now playing, where are companies looking for the leaders to fill these positions? We are seeing people enter the procurement function from a variety of backgrounds: from finance, from general management, from broader supply chain roles, and even from the sales or commercial side of the business. Typically, however, companies recruit talent at the CPO level from best-in-class procurement organizations at other leading industrial, manufacturing, technology, or consumer organizations.
These stars of procurement are drawn to newly created CPO roles because they see an opportunity to effect dramatic organizational change. In organizations that are just establishing centralized procurement, a CPO can experience the challenge of building a procurement organization from the ground up. He or she can also make changes that have the potential to transform an organization's effectiveness, contributing millions—or even hundreds of millions—of dollars annually to the bottom line.
It is not a given, however, that a CPO will succeed in making such a huge organizational impact. A switch to centrally led procurement represents a profound change in the role procurement plays in the organization. Instead of being brought in after business decisions have been made and tasked with implementing them cost-effectively, the CPO is a strategic business adviser and an integral member of the senior leadership team.
To successfully effect this transformation to
centrally managed procurement, the CPO
needs a number of critical capabilities,
Armed with these skills and with their functional expertise, chief procurement officers are having a dramatic impact on the overall efficiency and short- and long-term profitability of many companies. A centralized model may not be the answer for every organization. But the recent embrace of this approach to procurement by a multitude of companies that had not tried it before signals the emergence of a powerful trend. It's something that all companies of significant scale should at least consider closely, or risk finding themselves at a competitive disadvantage.