The Evolution of the CPO: From Cost Control to Value Enhancement
The chief procurement officer needs to be able to address the full range of supply chain costs
In today's increasingly complex business environment, the role of the chief procurement officer (CPO) has evolved and expanded. Procurement is moving from a focus on price and cost to a more holistic orientation toward value. Along with this shift have come greater expectations of the CPO -- including the ability to engage with and influence a broader constituent base and to provide input on addressing the full range of supply chain costs. Business unit leaders look to procurement to drive incremental P&L impact and to proactively bring solutions to stakeholders as credible partners in managing the supply chain.
Given all that CPOs are contending with today, it's not surprising that the job is anything but stable: More than two-thirds of CPOs have been in their current role for less than three years, as discovered in a study conducted by Booz & Co.
To address this evolving dynamic, a new blueprint for a successful CPO has emerged. The CPO must lead a procurement organization in managing the supply base as an extension of the broader company. As a result, their responsibilities have increased substantially to include elements such as demand and risk management and supplier relationship management.
Their elevated role has brought heightened expectations for CPOs to deliver across a broader range of capabilities, while maintaining consistent results. External forces -- such as geopolitical uncertainty, regulatory changes and financially distressed suppliers -- combine with internal challenges, including talent shortages, stakeholder concerns and the need to build the capabilities to manage diverse supply bases, to make the CPO's job much more challenging.
CPOs Send Revolving Doors Spinning
Given all of these new responsibilities, pressures and challenges, it's not surprising that CPO turnover is quite high now, as noted earlier. A primary reason for this relatively rapid turnover is that many incumbent CPOs lacked the broad capabilities required to measure up to senior management's heightened performance targets, and to adequately shepherd change in the organization.
However, when companies seek a more capable procurement leader, only infrequently do they have an internal candidate to turn to, in part because the rapid evolution of the CPO role from transactional buying to strategic imperative has left many firms with a shortage of qualified talent. As a result, CPO positions are of late increasingly filled by respected non-procurement executives within the organization or by someone from outside the organization.
It's not unusual to see a CPO sign on at a fast-moving consumer goods outfit after a stint at an automaker or a consumer durables company. The most critical skills of the job are transportable, and global experience and prior success are attractive. That's not to say that hiring a CPO from another industry doesn't represent a degree of risk, but in our experience, if no clear-cut internal successor exists, the rewards usually outweigh the downside.
Towards a Blueprint for Success
Given the recent changes and challenges, a new blueprint for success has emerged for CPOs. A CPO must possess four distinct traits to address both internal and external pressures and to establish a credible and successful supply management function:
1. Interpersonal Skills and Organizational IQ Internally
The CPO must understand the needs and strategies of the organization to align with the expectations of leadership and to establish trust and strong relationships with business stakeholders. The ability to forge strong stakeholder relationships is a "make or break" skill for a successful CPO because it allows for the development of a "pull" model for engaging with the business units and functions.
Working collaboratively with business stakeholders in joint sourcing efforts yields better results than the more traditional model in which sourcing activities are in effect "pushed" on business units. The pull approach lets procurement influence the front end of the sourcing lifecycle before too many of the variables are set in place regarding demand and requirements.
2. Leadership Skills to Shepherd Transformational Change
CPOs must leverage their capabilities and experience to transform the procurement function into a high-caliber organization with not only the traditional supplier-facing procurement roles but also the new skills required to influence internal behaviors to deliver greater impact and value.
Skilled supply management professionals are in high demand, so CPOs must offer competitive compensation to attract talent. In addition, CPOs should establish programs for career progression that elevate the supply management organization into a place where employees can have a rewarding career and where high-potential employees can build on their experience and skills to advance within the broader organization. Establishing the appropriate organizational capabilities and operating model not only delivers value to the business, but also enables the CPO to apportion adequate time for stakeholder relationship management.
3. Broad Perspective to Deliver Value Beyond Price Reductions
A successful CPO today must pursue a robust spectrum of potential procurement levers to drive incremental impact and maximize value. This requires moving beyond traditional price and cost levers to explore demand and value levers, which have potential to yield significantly greater returns than the right-price/right-supplier approach to procurement. Managing demand and value levers is particularly critical because they tap into the inherent and structural cost aspects of a product or service.
Because upward of 70 percent of the total cost of a product or service is determined by inherent and structural decisions made before the procurement process even begins, to optimize the total cost of ownership, the CPO should actively work with the business teams to drive real value from these decisions that impact total delivered cost.
4. Market Savvy and a Keen Eye for Mitigating Risk
CPOs must understand and actively manage a range of potential risks from third-party suppliers of materials and services, including market risks related to pricing and supply capacity, business risks related to specifications and brand, operational risks related to quality, and natural risks related to supply chain disruptions due to natural disasters.
Successful CPOs should work with their teams to understand commodity exposure, supplier risk profiles, and the potential impact on the business of supply disruptions, pricing changes, quality mishaps, and environmental and political disturbances. The CPO can then collaborate with the broader organization to develop appropriate mitigating strategies for these risks.
Implementing the New Approaches
Once the desired blueprint has been established, it is crucial that CPOs bring incremental and strategic value to their organizations through the procurement function. In order to do so, CPOs must first eliminate historical procurement weaknesses by challenging their teams to move beyond the tactical execution of price-focused sourcing events to a more holistic approach to managing total cost across the entire supply chain.
In order to achieve this new approach, CPOs need to focus on building out functional and commercial capabilities within the organization by shifting from a pure purchasing skill base to a more diversified talent portfolio, including: engineering, finance, risk management and strategy. This can be done through a number of strategic talent imperatives, such as: blending high-quality external talent with existing internal knowledge; creating rotational stops in procurement for the organization's top general managers; and building a robust training program to enhance the current talent.
Once the talent development process has been refined, CPOs must change the engagement model by quickly building stronger and more strategic relationships with their internal stakeholder base and be viewed as true partners in achieving business unit objectives. Changing the engagement model cannot be done by procurement alone. It requires business units to have "skin in the game" in procurement initiatives and actively collaborate across functions.
Finally, CPOs must shift the internal perception of the sourcing organization from a necessary evil needed to manage spending to a key business enabler and a destination for talent. The capabilities drive the performance of the organization and the internal perception. To be successful, there must be an attraction model for internal and external talent. Looking forward, promises made to stakeholders must be fulfilled and stakeholders should have a clear understanding of the CPO's vision for the future as well as how he or she plans to carry out that vision.
Meeting and Surpassing Expectations
The evolution of the CPO is expected to continue as the role takes on broader supply chain management functions and greater responsibility across the company's total value chain. CPOs are no longer simply asked to "show me the money." Instead, they are required to drive nothing less than incremental and sustainable value. The expectations for them are clear; whether they meet these expectations could depend on how successfully they follow the blueprint for the new CPO.
By James Davis, Russell Reynolds Associates and Martha Turner, Booz & Company
Jim Davis is a managing director at executive search firm Russell Reynolds Associates and leads its supply chain practice in the United States. He conducts senior executive and board director recruiting efforts for clients in industrial, manufacturing, and distribution industries.
This article was adapted and reprinted with permission from "Evolving Supply Management Leadership: A Blueprint for CPO Success," by Martha D. Turner, Rohit Singh and Bruce D. Thelen of Booz & Co., and Jim Davis of Russell Reynolds Associates, published by Booz & Company Inc.