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Innovating to meet the challenges of sustainable procurement

I've just been reading an interesting article headlined "Why sustainability is now the key driver of innovation" in the September issue of Harvard Business Review (subscription required). In it, leading management thinker C.K. Prahalad and his two co-authors argue that the notion that introducing green practices and products means putting social concerns ahead of financial ones is nonsense. In fact, their research among 30 large companies suggests that costs can actually be reduced and revenues increased as a result of better products and new businesses. 

"We find that smart companies now treat sustainability as innovation's new frontier," they write. "Indeed, the quest for sustainability is already starting to transform the competitive landscape." Pioneers in this space include HP, Cisco, GE and FedEx.

Companies typically go through five stages on the path to becoming sustainable, they suggest. First, viewing compliance as an opportunity; second, making value chains sustainable; third, designing sustainable products and services; fourth, developing new business models; and fifth, creating next-practice platforms (ie, pushing the boundaries of innovation). 

At stage one, conforming to the most stringent standards in the world can reduce sourcing costs through economies of scale and optimise supply chain operations. The authors cite the example of HP developing an alternative to the anti-corrosion – and potentially cancer-inducing – coating hexavalent chromium and then transferring the technology to a number of vendors to ensure competition.

At stage two, meanwhile, firms need to work with suppliers to develop more eco-friendly raw materials and components and reduce waste by either offering them incentives or, as in the case of Wal-Mart, using its purchasing power to insist that suppliers (eg, in China) improve their performance.

Prahalad and his colleagues acknowledge that recession has slowed movement towards more sustainable practices, but insist that those companies that have seized the initiative will emerge stronger from it. "The key to progress, particularly in times of economic crisis, is innovation," they write.

This message will resonate with a growing number of procurement leaders. At the hotel group NH Hotels, for example, CPO Pedro Martinez has started an initiative called the NH Sustainable Club. Launched in June, it brings together key suppliers such as TV manufacturer Philips and non-food consumables distributor Bunzl, to discuss ways to help NH meet its targets of 20% less consumption of water, less energy spend, less waste and lower carbon emissions by 2012. The programme has the full backing and involvement of the hotel group's CEO, Gabriele Burgio, as this YouTube video illustrates. 

Pedro tells me that "the Club is a way to 'distill' innovation into NH Hotels, and among suppliers, in order to conduct business in a more sustainable way". He adds: "I didn't expect such a good results. I think we, buyers, need to move on this direction."

I couldn't agree more. And a recently published report by the HEC, a Paris-based business school, suggests that after a slow start procurement organisations are beginning to play their part. Its survey of 75 large European companies found that sustainable development was ranked third in the list of priorities behind direct and indirect cost cutting, with 90% of respondents rating it "critical" or "important" – up from 60% in 2005. More than a third said the resources allocated for sustainable procurement would be greater in 2009 (although I would be a little sceptical about whether this has proved to be the case as the research was actually conducted at the end of last year). Avoiding risk to brand image and complying with regulations topped the list of drivers – in other words, most CPOs are operating at stage one of Prahalad & Co's model. However, a third cited developing "innovative green products", which suggests that some companies are further down the track and are looking to procurement to deliver value at stages three or even four.

Significant challenges must be faced at each stage, note the authors of the HBR piece. For procurement, these include balancing short-term and longer-term cost-cutting initiatives, baking sustainability goals into buyers' objectives and finding appropriate supplier metrics. Overcoming these challenges will require both hard work and some innovative thinking on the part of CPOs. But I have to say I'm more optimistic about their chances of pulling it off than I was just a couple of years ago.  

Siemens' CPO Barbara Kux ranked sixth in global businesswomen power list

Opening the latest issue of Fortune at the breakfast table this morning, I am interested to see that Barbara Kux, head of supply chain management at German industrial giant Siemens, is number six in the magazine's annual ranking of the most powerful international businesswomen (outside the US). Kux missed out last year because she was in the process of moving across from Philips, but prior to that, in her role as its CPO, she had climbed steadily up Fortune's league table from 26th in 2004 to 24th in 2005 to 21st in 2006 and then 19th in 2007.

But her sixth place in 2009 is a massive jump, taking her ahead of female business leaders such as Marina Berlusconi, daughter of Italian prime minister Silvio and chairman of his media company Fininvest (the global list is again led by Anglo American CEO Cynthia Carroll). So what explains Kux's meteoric rise in the eyes of this most revered of American publications? 

A quick look at its website gives a few clues: for starters, there's the fact that she's the first female Siemens board member in its 160-year history, not to mention the only woman on the board of any DAX 30 company in Germany. Then there's the $55 billion annual spend she's responsible for – more than double the budget she had at Philips. Lastly, Kux also holds the position of chief sustainability officer at a firm where a quarter of its sales in 2008 (some $27 billion) came from green technologies (at Philips, where she had a similar role, they accounted for 15 per cent in 2007).

All very impressive. But, as I found out when I attended Kux's presentation at a press conference in Berlin back in April, she has plenty of work to do if she's to propel Siemens into the premier league of best-practice procurement. Like many other big companies, its various divisions have traditionally operated a decentralised model, with the result that its supply base has sprawled (to 370,000 accounts with 100,000 different suppliers, according to Kux) and opportunities for cross-company leverage and efficiency have been missed. 

Kux has refused to declare a savings target in public, but if she can deliver the number agreed with her CEO Peter Loscher (reckoned by analysts to be around the €2 billion mark), then who knows, perhaps she'll break into the top 5 on next year's list.

A sobering experience for Nestlé's ousted CPO

Corporate culture is a subject that has fascinated me for many years. The way that values, attitudes and behaviours become ingrained in huge international companies over time – and are exhibited on a daily basis by employees from the most senior to the most junior levels – offers powerful insights into human nature. In some cases, this culture is embodied and driven by one person at the top of the organisation (a great example being Larry Ellison, boss of US software company Oracle). 

The benefits of a strong culture are many, but they include a shared sense of purpose, resilience in the face of adversity, consistent decision-making and actions, and a real commitment to people development. But there can also be downsides, not least an inward focus and a resistance to change – characteristics that in today's global and fast-moving markets can be a liability rather than an asset. For CPOs recruited into such an environment from the outside, rather than having been promoted from within after many years of loyal service, it can be a sobering experience.

A recent example of this appears to have taken place at the Swiss food giant Nestlé, a 143-year-old company that is renowned for its strong tradition of developing managers internally and keeping them for life. In 2006, upon the retirement for its long-serving procurement boss, the then CFO Paul Polman – a career Procter & Gamble man who is now the CEO of Unilever – opted to hire externally and chose Malcolm Harrison, who at the time was CPO of the brewer InBev in Belgium. 

Harrison set about upgrading the company's procurement capabilities and practices, creating the Nestlé Procurement University to equip hundreds of buyers with basic technical skills in areas such as strategic sourcing and negotiation; developing a more systematic approach to the purchasing of commodities such as milk and coffee beans; and building a strong senior leadership team for the global procurement function. 

But at the end of June, Harrison was shown the door. His efforts to instill a more co-ordinated approach to procurement appear to have gone against the grain of what remains a very decentralised group. Of course, disagreements about policy, objectives and style are commonplace at the senior executive level of big companies – and they invariably result in a swift departure (albeit one softened by a decent payoff). For without your boss's active sponsorship and support, driving change in the corporate world is virtually impossible, making it a risky environment in which to operate. In that sense, Harrison joins the thousands of executives every year who fall victim to a clash of personalities or cultures.

However, in this case I think the upward march of procurement has probably taken a knock too. The sort of things that Malcolm was trying to do at Nestlé were those that any good CPO at a major company lagging behind best practice ought to do. Not earth shattering or even fast, from a change point of view, but necessary for the long-term prosperity of the business. I therefore wish Malcolm the best of luck in finding a new role – whether as a CPO or in other areas of management. I'm sure that, since he hasn't even hit 50 yet, he's got a lot more to contribute to the development of this profession in the next few years.     

Why procurement is badly served by researchers

This time last week I had lunch with my friend Jason Busch, the pioneering American blogger and editor of SpendMatters, who was over in the UK for a few days. One of Jason's regular fixtures on his blog is the "Friday Rant", which he often uses to vent his spleen at whoever or whatever happens to have pissed him off that week. (Today's posting is the rather more gentile but still opinionated Rebound or Not, Now is the Time to Shine.). Well, taking a leaf out of Jason's book, so to speak, here's a rant of my own that I've been meaning to post for several weeks now but somehow haven't got around to. It concerns the quality of published research in the global procurement community.

Basically, I think that most of the research being conducted right now is pretty poor – and that's putting it mildly. Whether it's academic studies, consultancy surveys or research from supposedly independent analysts, my assessment having read numerous of their reports over the past few years is that most serve CPOs and the cause of procurement development rather badly. There are various reasons for this, in my view, and they vary according to which providers you are looking at. 

Let's start with the academics. Unlike some procurement practitioners, I happen to think that intellectually and methodologically rigorous research has its part to play in this profession. Indeed, business academics at their best make sense of the corporate world in a way that nobody else can. The trouble is that there aren't many really top-notch academics specialising in procurement. In most cases, what they end up producing from a research standpoint is either of little practical interest to those outside the academic community or it's the sort of basic survey that the big consultancies get their most junior employees to knock out in a fraction of the time that academics take. (Why it takes six months-plus to publish a short report with the findings of a simple online survey of 100 CPOs, such that it's already out of date, I don't know! Perhaps it's my journalistic mentality, but to me when it comes to fast-changing issues like the global recession, timeliness is everything.) 

But if academics are guilty of being slow and inwardly focused, management consultancies are often just downright sloppy. Badly designed questionnaires, unclear objectives, unfathomable charts and a failure to display even the most basic grasp of statistics (eg, the difference between a percentage increase and a percentage point increase) are just some of the common failings I've observed in recent years. Add to that a "me too" research agenda and a reluctance to scratch much below the surface of the companies (read: existing or would-be clients) surveyed – at least publicly – and much of what the consultancies produce today adds little to our knowledge and understanding of procurement issues. 

Lastly, we have the analyst and specialist research firms. While I don't doubt that there are some highly capable and experienced people working for these, in general I find their reports too narrowly focused on process and/or technology, and – in some cases – blatantly swayed in their terms of reference by the business goals of their sponsors (the same criticism also applies to much of the research commissioned by software vendors and other service providers). And let's face it: there aren't that many analyst or research houses specialising in procurement, so there's a dearth of quantity as well as quality.

Despite these failings, the need for data and intelligence in procurement, along with the skills to analyse and translate it into meaningful strategy and decision-making, is growing rapidly. Whether it's information about industries, supply markets and categories, investigations of current good practice or more forward-looking assessments of where the profession is headed, CPOs need the research base – in all its forms – to support them with high-quality, practical and timely insights. My contention is that, at present and in most cases, they are poorly served.

McKinsey survey points the way to economic recovery

One year on from the collapse of Lehman Brothers, those looking for signs of an end to this global recession will find some solace in the findings of McKinsey's latest economic survey (registration required). Conducted last week among almost 1,700 executives worldwide, the poll found that for the first time since the Wall Street bank fell more respondents believe their company's profits will rise in the short term than think they will fall. This optimism, which is in line with stockmarket gains in recent weeks, is reflected in executives' expectations about growth: overall, 40 per cent think their country's GDP will increase in 2009 – up from 26 per cent in July.

This relatively buoyant mood carries through to respondents' future outlook, with almost three-quarters saying their companies will be in a stronger position in five years' time than they were before the financial crisis began. But it is tempered by the finding that a majority believe the recovery will be slow and steady. Only a fifth are pinning their hopes on a fairly quick turnaround and believe the upcycle has already started. And even in China, where 82 per cent of executives expect GDP to increase this year, only 30 per cent think it will regain pre-crisis levels in 2010. Perhaps not surprisingly, given the fragile state of consumer demand, manufacturing companies are generally in a worse state than those in the services sector and are forecasting a slower recovery.   

In terms of current corporate priorities, although operational cost-cutting still tops the list (45 per cent are doing it), significant minorities of respondents said developing new products and services, seeking new markets and long-term strategic planning were high on their agendas. More than half believed that innovation was now more important to growth than before the recession, and innovation was seen by executives as the second most significant structural change likely to affect their industries over the next five years (after industry consolidation). 

From a supply chain perspective, the trend towards globalisation - stalled to some extent during the crisis - is expected to increase between now and 2014. A quarter of respondents foresaw a greater reliance on low-cost suppliers during this period, against just 9 per cent believing that they would switch back to local suppliers in a bid to cut supply chain risk.

What does this mean for CPOs? Well, as I've written in this blog previously, those who have been thinking and planning ahead during the recession will not have used the economic environment as an excuse to bully suppliers for short-term gain but will have cut costs intelligently with the recovery firmly in mind. At the same time, they will have continued to invest whatever time and resources they can spare to upgrade their function's capabilities in areas like risk management and supplier relations, develop closer working relationships with internal stakeholders, and upskill their people. 

I firmly believe that CPOs who have shown strong leadership of this kind during tough business conditions will be well positioned to take advantage of the (hopefully) happier times that lie ahead. 

How the CFO's predicament mirrors that of the CPO

Reading the business press, it's easy to get the impression that chief financial officers (CFOs) are all powerful. Not only do they control the purse strings - a valuable role in these difficult economic times - but they also seem to get promoted into CEO and president/COO positions with a regularity that makes this progression seem natural, or even inevitable. Think of John Varley at Barclays, for example, or Olli-Pekka Kallasvuo at Nokia. (For one explanation of this trend, which appears to have become more pronounced in the past decade, see this article by CFO magazine).

It's certainly the case that CFOs are given the top job more often than CPOs (recent examples of the latter include Bo Andersson, formerly of General Motors, and Peugeot-Citroen's Jean-Philippe Collin - both in the automotive industry). Nevertheless, a new global survey of 450 CFOs for the Association of Chartered Certified Accountants (Acca) found that their power and influence is not as great as many journalists would have you believe. The main thrust of the report, entitled The CFO's New Environment, is that the shift in many companies from "maximising profits to managing cash flow,  working capital and liquidity" has "put the spotlight on the CFO".

"This seems to be a blessing and a curse," the report continues. "On the one hand, the CFO has achieved more internal recognition, is perceived to be more valuable, and receives more support from the boardroom. On the other hand, CFOs have arguably never been so stretched."

You could quite easily substitute CPO for CFO in that paragraph and it would still ring true. But the parallels between the two functions don't end there. "For many CFOs, the downturn has been a chance to get back to some of the basics of running the finance function," it states. Check. CFOs see risk management both as the area where they have become more hands-on of late (80% agree with this statement) and one that will be a top priority in the next five years, but two-thirds believe they and their teams need more training if they are to handle it effectively. Check. "Supplier risk is now a big focus... whether it's reviewing existing contracts or making sure they're not overly reliant on any one supplier". Check. Better communication and leadership skills are also seen as vital if finance's influence is to grow further. Check.

According to the report, CFOs are more involved in shaping their companies' strategies than they were a year ago. In order to do this, they are having to engage far more with business units and other colleagues around the organisation, with customers and with suppliers. This is all a far cry from the traditional bean counting role. "In finance you tend to have people who are very technically strong," says one CFO, "but sometimes lack the ability to communicate effectively and also get buried in the details." Meanwhile, Kevin Monahan, CFO of Pitney Bowes, a multi-billion-dollar US mailstream firm, says that key metrics need to be less rearview mirror and "better predictors of what may happen in the business going forward".

This all sounds pretty stretching, but Acca's report concludes on an upbeat note - despite the demands, "this is a golden age for the CFO", it argues. "The challenge will be building on this level of influence and prestige when economic conditions improve and ensuring that the CFO's voice continues to be heard loud and clear across their organisations." Now where have I heard that before?

 

Improving the relationship between finance and procurement

When I moved from the worthy, but somewhat fluffy, world of HR journalism to cover procurement a decade ago, I knew very little about how the function worked. But one thing I was fairly confident of was that procurement and finance people would get on famously, given their shared interests in saving money. How naive was I?! It didn't take me too long to realise that most finance people simply didn't believe the numbers that were being claimed by their procurement departments, let alone actually see them hitting the bottom line. What on the surface appeared to be a walk in the park - namely, calculating cost savings - actually turned out to be a minefield.

Although many companies have made good progress on resolving this issue, and in developing the relationship between finance and procurement more generally, there is still some way to go, as a recent report from the Finnish purchase-to-pay software company Basware illustrates. Its survey of 550 CFOs and senior finance executives in Europe and the US found that only 30% felt that the two functions were "tightly integrated". Although just over half felt procurement was becoming more strategic, for more than a third it was still largely an administrative function. Less than 3 out of 10 CFOs thought procurement made a positive contribution to either enterprise profitability or growth.

That may or may not be an issue for CPOs, depending on their outlook (and one could argue that many finance types do little to contribute to these goals either). But perhaps of more concern is the gaps that the report highlighted between expectations and performance. Identifying cost savings opportunities was ranked most important by 88% of CFOs in the current climate, yet just 54% gave procurement a satisfaction rating of at least 7/10 in delivering against this objective. Similarly, curbs on non-essential spending showed a gap of 76% versus 50%; delivering on cost savings targets 76% versus 54%; negotiating better prices from suppliers scored 74% versus 59%; and managing contracts to ensure compliance showed a gap of 11 percentage points (64% against 53% satisfaction). 

Only in the area of developing closer relationships with suppliers did satisfaction outweigh importance by more than one percentage point (54% satisfaction versus 51% saying it was a priority). In other words, the only area where CFOs perceive that procurement is overperforming at the moment is one that they don't see as particularly important. Personally, I think that is a short-sighted view. However, it reflects the fact that short-term cost-cutting and cash flow management is high on the agenda of most CFOs - and their executive colleagues - right now.

In my experience, many CPOs don't like reporting into finance (Basware's report found that 27% have a finance specialist as their boss, which is close to the c30% I've found in the past). One reason is that they believe CFOs have a rather blinkered - some would say narrow - view of procurement's contribution. However, just as procurement's agenda is broadening over time, so too is finance's. So while the relationship between the two functions will continue to be less of a love-in than I expected all those years ago, current economic conditions do mean that CPOs have probably the best chance they will ever get to build a closer relationship with their CFO and senior finance community - and to capitalise on the influence that they command in their organisations. Successfully doing so will surely help CPOs to improve their own prospects for the recovery.

Taking the case for SRM into the mainstream

It's always pleasing (if still somewhat rare) to see mainstream newspapers carrying articles about procurement and supply chain issues. So congratulations must go to my friend Alan Day, owner of the consultancy State of Flux, for getting a bylined piece in Australian paper The Melbourne Age. The article, subheaded "Don't force your suppliers into extinction in the downturn", argues that procurement functions cannot afford to focus only on cost and cash in the current climate. They also need to boost their supplier relationship management (SRM) capabilities in order to make sure their companies are well positioned for the economic recovery and the supply shortages that are likely to accompany it.

The article draws on a recent survey of over 220 procurement executives conducted by State of Flux. This found a certain amount of confusion as to what SRM is - not least, the belief that it is primarily about monitoring and enforcing supplier performance. In Alan's view, this is too narrow a definition since it suggests a rather one-way relationship and eschews the greater value that can be generated from a more collaborative engagement with your most strategic suppliers.

This is certainly a view I endorse. But while I see evidence of a growing number of practitioners in the procurement community buying into a broader strategic agenda, my sense is that a large proportion still really don't "get it". This is partly a question of mindset - many are simply more familiar, or feel more comfortable, with the more one-dimensional approach, it's what they've always done - and partly a question of competencies: managing relationships requires a different skillset than aggressively negotiating on price.

State of Flux's research report, which draws on both the survey findings and a series of practitioner workshops to discuss them, confirms my impression that many procurement professionals take an opportunistic and tactical view of SRM. This was brought home to me at the beginning of 2008 when I took part in an SRM conference in Geneva. Talking to some of the attendees, it became apparent that the main reason they were there was because the power balance in the commodity markets they bought in had shifted significantly in favour of the suppliers and they were struggling to know how to respond.

Suffice to say that once prices began to slide, their interest in SRM waned. The same event for 2009 was first moved back to later in the year and then shelved by its organisers. That's what a buyer's market does for you!

However, as I've argued in previous posts, there's a pretty good chance that commodity and other prices will begin to climb again during the next 12-18 months as demand tightens and companies begin to experience the consequences of reduced investment and capacity decisions made during this recession. Indeed, key commodities like oil have already seen price rises in recent weeks. I wouldn't be a bit surprised to see a sudden revival of interest in SRM among some sections of the procurement community next year!

But as the State of Flux report makes clear, smart CPOs see SRM as far more than a reaction to changing market dynamics and are continuing to invest in improving their teams' skills and capabilities - and in making (the sometimes difficult) business case to senior management for a more sophisticated approach to strategic supplier relationships.

Why I've become the latest member of the netbook generation

I don't know about you, but when I travel on business I like to pack as little as possible and keep the weight of my carry-on bag, in particular, to a minimum. Yet it never ceases to amaze me the stuff that some people haul around with them. Take laptops, for example. Whenever I enter an airport terminal, I can guarantee that I'll spot at least three people who have, for reasons best known to themselves, opted to lug the biggest, heaviest, ugliest laptop they could possibly lay their hands on. I can only assume that they either don't travel very often (and therefore that this beast is, in fact, their primary computer) or else they just enjoy being weighed down by several kilograms of metal, glass, silicon and plastic  - and probably half of the world's problems to boot.

More recently, however, I've also been spying a growing number of more savvy folks in the departure lounge. They are members of the fast-growing "netbook generation" - mobile workers who have realised that a £300/$450 mini-laptop will actually do most of the tasks they need to do on the road (e-mail, web browsing, word processing, spreadsheets, simple presentations, etc) and in a much smaller and lighter package. I've even noticed the occasional CPO and procurement academic among these trend-setters.

I confess I've always been a bit of a sucker for gadgets, especially miniaturised ones. So when the nice folks at Asus, the Taiwanese computer maker that pioneered the netbook category with its Eee PC in late 2007, offered to send me a review copy of its latest model, the 1000HE, I jumped at the chance. At first it was a bit of a novelty, but in the past three weeks since leaving my job at CPO Agenda and having to hand back my company-owned Lenovo (a relatively compact 12-inch model that cost more than twice the price of this Eee PC), it's been my sole computer. This therefore seems an opportune moment to comment briefly on it, in case you are considering buying a netbook yourself.

The 1000HE has a 10-inch screen, which is fine for many tasks (although I wouldn't go any smaller), runs Windows XP and has a battery that Asus claims will last 9.5 hours. In practice, with wireless enabled, I've found it's closer to 7 hours, but that's still pretty good compared with most laptops and means you can often leave the power pack at home (or in your checked baggage). It comes with 1GB of memory, a 160GB hard drive, all the ports you'll need (including three USBs and an SD card slot) and a reasonably sized keyboard that you can touch type on. It also feels pretty well made and while it may not win the most coveted design awards, it's certainly not an ugly duckling.

Usage wise, it starts up and shuts down quickly and, overall, seems pretty zippy. I have deliberately not installed too much software (which you have to download, it doesn't have a CD drive), but it runs Apple's Safari browser and my contact management program well. Pre-installed software includes Skype and StarOffice - Sun Microsystems' free version of Microsoft Office. This allows you to open, create and save documents in Word, Excel and PowerPoint format, and in my experience as long as you don't need to work with native Office 2007 files it works perfectly well.

My main gripe about the 1000HE is that, at 1.45kg, it's a little heavier and chunkier than some of its netbook rivals, and hence the advantages versus higher-end portable laptops aren't as great. But if that's an issue for you, Asus last month launched a lighter (1.1kg), slimmer and similarly specced model, the 1008HA, otherwise known as the "Seashell", which looks pretty appealing.

So would I use the Eee PC permanently as my main computer (albeit hooked up to an external monitor and keyboard when in the office)? The answer is probably not. This is partly because I suspect that once you loaded all manner of other software (iTunes, photo editor, etc) and tried to run multiple applications simultaneously, its Intel Atom processor would start to struggle; but mainly because at heart I'm an Apple man and have my eye on a shiny new MacBook Pro. But for £350, I'd definitely recommend it as a second laptop for travelling with when you don't actually need Microsoft's bloated software and all the other detritus that clogs up what was once a perfectly happy PC.

And let's face, why would you want to look like a big dork at the airport when you can be a cool and trim member of the netbook generation?