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Over the past few months I have seen with increasing frequency, the long-anticipated shift within the global enterprise as it relates to the traditional roles of finance, IT and of course procurement.
The functional silos of each one are dissolving into a collective (some like to say holistic) understanding of the entire operation, including the respective impact each stakeholder has on the bottom line. As a result, the need to think outside of the proverbial box has never been more critical.
From the procurement perspective, these new developments perhaps pose an even greater challenge than they do to finance and IT professionals.
The reasons for this are many, and are all too familiar to those of us who have been in the procurement world for more years than we would care to admit.
So where do we in procurement go from here and what can we expect in both the near-term and longer-term future?
Joining me this noon hour to shed some light on the changes in the procurement world is Alpar Kamber, who is a Managing Partner with Denali Group and the Founder and Practice Lead of Denali Sourcing Services.
Today is Thursday, September 6, and I'm your host Jon Hansen. We have a great segment here with the PI Window on Business this afternoon. Over the past few months, I've seen with increasing frequency the long anticipated shift within the global enterprise as it relates to the traditional roles of finance IT and of course purchasing. Now the functional silos of each one are dissolving into what we call a collective, some like to say holistic understanding of the entire enterprise or operation across the board. This includes the respective impact that each stakeholder has on the bottom line. Yes, we are still focused on the bottom line here. As a result, the need to think outside of the proverbial box has never been more critical. So from the purchasing perspective, what do these new develops mean? Do they pose an even greater challenge than they do to those in finance and purchasing? Now the reasons for this may be many and some believe that they do pose greater challenges is that we are all too familiar who have been in purchasing world for many many years of the fact that some of us didn't actually choose to get into this profession, we sort of fell into it. We are now of course up and coming professionals. Of course, I have got the educational background and I have made a contentious choice to be in purchasing. So where do we in purchasing go from here with this mix that is still happening? Can we expect year-term and long-term future benefits and do we, will we get the opportunity to sit at the executive table finally once and for all? Now joining me this afternoon to shed some light on the changes in the purchasing world is Alpar Kamber, who is the Managing Partner with the Denali Group and the Founder and Practice Lead of Denali Sourcing Services. Now the further the length, let's welcome Alpar to the show. Welcome Alpar! How are you this afternoon?
I am great John, thanks for having me.
Well, you know, I will tell you and we talked a little bit and what I like to say is the virtual green room about sourcing and the changes and so the focus of today's show was going to be certainly on what exactly are we looking at in terms of the changes and the impact they have on purchasing and in the specific areas of functionality, but before we do that I think it's worthwhile to get a little bit of a background. Are you -- if I understand correctly looking at your bio, you're the managing partner with Denali group and the founder and practice lead of Denali Sourcing Services, but you have a long history in this industry. You've had management positions with firms such as Ariba, FreeMarkets, Diamond Technology Partners, and in going back the Ernst and Young. I mean that certainly gives you some great background in terms of I guess what you call on the Frontline?
That's correct. As you know, I'm fortunate to spend a lot of time in different perspective and various rules and certainly get different perspectives on procurement and how it's viewed in the organizations.
Well that's interesting because in 2011, the Supply and Demand Chain Executive named you one of the pros to know and I guess is it -- you know with the years you have been in this business and that recognition that comes from it, isn't that the marketing issue is finally capturing or catching up -- I don't know if that's the best way of putting it with the views that you have had, because I know when we talked previously, you have definitive ideas to what sourcing is about, what role purchasing has. I imagine has that changed or is that industry really just caught up with you?
Yeah, it's kind of interesting Jon, if I look at 10 years ago and today, I don't think that purpose of procurement as a function has changed. The purpose has always been to help improve company's profits, right and bottom line result, but what has changed is the perspective and the awareness of this purpose among the company executives as well as the tools and the resources that are available to get the work done. So today, procurement certainly takes up its place in the executive agenda and that's great to see we're seeing more and more companies you know having CPOs and even I've heard recently some CPOs are joining and earning scholars, right and making promises to the streets and commitments about taking cost out from the organization. This is significant. You know 10 years ago, you wouldn't have imagined that at all having a CPO role yet alone but committing that to the street and with some numbers especially with public companies. 10 years ago there was still procurement within the back office and today this is changing drastically at a fast pace. But I think going back you know what's sinking in, I go back to a quote from my father years ago once he told me that you make money while you are spending money. Now if you think about what that means everybody in the organization has a tangible quantified one-on-one impact on companies' inability, impact on companies' financial health and earnings, right? In terms of decision that we make in the organization, and I think as procurement -- and executives in procurement were kind of in a seat to be an evangelist for that and to be able to make sure organization understands what it means to make good sound in a business decision that are commercially liable as well as he is towards making companies' financial health better.
So in essence, the old analogy per your father is you have to spend money to make money. You just have to spend it wisely as what you are saying.
Exactly. Exactly. And then how much you spend obviously in fact your bottom line you can procure things or purchase things at a much effective way than you have that much money to play with in terms of income or earnings.
Okay. This is an interesting thought here because back in 2007, I wrote extensively about the CPO Agenda Roundtable and with senior management from major corporations such as Dannon Yogurt, major organizations, they came to the general conclusion that the best person to run a purchasing department bearing in mind again how to spend money and make money but do it wisely. The best person they suggested to run a purchasing department is someone who does not have a purchasing background. Now let me ask you this, I mean back then 2007, maybe we've come a long way but does that surprise you that that settlement even existed in the first place and to what agree does it still, is it still prevalent today?
You know if I look at -- if I assign a perfect role for a CPO, I kind of call it the coach of the procurement organization, right? So what they need to be able to do to run an organization affect the organization and they need to be able to pick good sourcing athletes, right? Good people who are good analytically will be able to write skill set to do the challenge and we will get in to some of the specifics of what makes the procurement organization turn and be effective but they'll be able to train them, put them in challenging activities and bring the right people for the right job. They also should be able to take risks, right? And it is really required in the world today as the procurement executive to be able to take risks, define a good strategy, commit to certain goals and objectives and then be able to deliver that. That's how you get in the executive table in terms of being able to commit the certain value and then be able to deliver that. Now going back, is that -- you know certainly we see a lot more finance professionals transferring into the procurement organization. Last year, I facilitated a fireside chats, that's been the Microsoft CPO and CFO from Microsoft kind of talking about how the two offices, the CFO and the CPO, collaborate to drive value for the organization and roll over some of the trends that they are seeing and one of the things they mentioned is that there has been quite a few transferees from finance into procurement and I look at that as a good skill set that's needed in procurement is being analytically-savvy and being able to understand numbers as you know ultimately the results are kind of reflected back in numbers and bottom line results. Now the challenge has always been for a CPO or for a procurement person is to be able to talk the language of the finance office and officers and that has certainly come a long way in terms of you know getting that influx from finance and being able to you know adapt that language, talk numbers, talk earnings, talk bottom line impact as well as you know budget impact which is often a struggle in terms of proving the value of procurement in organizations.
This is an interesting point now. You talked about the same language and again referring back to the 2007 Aberdeen survey seems like it was a busy year of 2007 in this area, but a survey of CFOs reported that too often, finance executives in corporate America simply don't believe that purchasing departments are really bringing in the savings that they claim and that's where it disconnects, but here is the thing I have to ask, the problem with this disconnect -- the problem with purchasing people not being viewed as understanding the numbers for a lack of a better term, is that because they weren't getting the proper education or training that is now taking place like which came first, the chicken or the egg? I mean now people who are coming up through the business and choosing to be purchasing professional, I see more and more curriculums incorporate a financial component to it which was absent seemingly from previous curriculum with the associations. So we are purchasing people, I don't want to say victim, but where they really a product of the education that they received or lack thereof and now that education and component has been put in or again you are looking at finances you are understanding you know __10:33__ wrote the five key things that purchasing professionals need to know in terms of finance, is that now what is empowering and addressing procurement professionals to be able to talk much broader in their perspective and is that going to erase or change the minds of people saying that maybe we need a finance person running purchasing?
Yeah, I mean if you look at again procurement you know I call it procurement more strategic procurement has put up pretty young organization I mean it didn't really exist at a strategic level before 10 years ago so certainly the education system is catching up you know a lot of some schools and then re-recruit ourselves at the schools prior organization but that they have specific supply chain and procurement focuses in curriculum that they bring some new athletes to the industry with certainly the right skill set, the right terminology and the language to be able to speak to it, but I think the transformation happen from a number of things. A lot of service providers consulting companies have spent a lot of time with executives over the last 10 years to explain to them the value that procurement can bring to the organization. So talking about putting business cases together and talking numbers and certainly the procurement organizations have learned quite a bit also by focusing on a programmatic effort being able to track or the need to track results and to be able to justify the funding that they received from different part of the organization, but to go back a year earlier I kind of comment about procurement not owning up to the savings. There is a number of ways to define this, but ultimately what finance is complaining about or worried about is not just that procurement can't deliver savings but where do they see it on the bottom line, where do they see it on the financials? Now, if you look back -- I mean finances certainly, the organization that defines or that authorizes different part of the organization to spend money and how much they can spend money on, which we call budgeting right?
And procurement still today is probably one of the drawbacks is not on the table when those budgeting discussions are happening and budgets are being committed. So let's say I'm a marketing executive and I get $10 million as a budget to spend for my organization. Now, my inclination is to do the most -- the most out of that budget and I'm going to spend it -- worse is if procurement is on the table and then procurement can do a lot of projects from organization but those savings are going to be just claimed savings. It's not going to really impact my budget unless it's being taken out of my budget which is not necessarily the best thing to do. So what really needs to happen and we've seen some organizations starting to do that today is be on the table when the budgeting discussions are done and let's say if marketing says, hey I need 10 million and the finance say, I'm going to give 9 million, try to do what you need to do with 9 million, 10% less and have procurement organization help you get there to make better use of it. And therefore that additional 1 million that you just literally took out of the budget isn't committed in the joint goal for both procurement and marketing. That's going to probably be the ideal way that procurements, numbers or values are going to be a lot of more tangible to finance that's credible for them to believe it.
Okay. So it's simply more than just in one of the things there was the biggest debate of purchase or cost avoidance and the fact that it couldn't be necessarily captured or recorded in the bottom line. What you're saying now is that if purchasing people are involved in the savings discussions, if they're involved in the budgetary talks, ultimately they will be able to weigh in on what is or is not achievable and thus they'll be able to own it, whereas in the past and correct me if I'm wrong Alpar, whereas in the past, they would basically be given their walking orders. They'd be given their paper saying this is what you have to do, do it. Don't worry about finding a way to do it, but just do it. I mean that's what it sounds like.
It is and I adapt to it a little bit maybe -- as I said, it's not like this is what you have been doing in the past or still today -- budgeting happens right and everybody is going, okay I got my 10 million, I'm going to run with it and you got others who like it in the organization and here I am as a procurement executive in organization trying to make my impact in the organization and you go and say, try to do a lot of the after-the-fact and -- hey, I can help you source this or since those decisions are still controlled out in a business especially in the indirect spending organization and the biggest challenge in fact today on procurement as well is to build toward relationships to be there early in the planning cycle so that there is enough time and you can always get enough resources to make better inform supplier decisions or help them better inform supplier decision in the organizations that they're working with versus you get involved at the very last stage or try to do after-the-fact support which doesn't give you the enough impact yet alone, the budget impact that you're looking for.
Now see, this is an interesting point, it really is, because it kind of brings impact to the full circle again of how purchasing is perceived with an enterprise, but if the roundtable agenda or the CPO Agenda roundtable, one senior purchasing executive made a comment that said, look when I was with the company previously, I was involved in the capital expenditure discussions. I was involved when there was an M and A for example. Now, and I think you made the move over to __16:36__ when you said now, and basically what you just said Alpar is that refer to -- is that I'm not really a consulting until the decision has already been made, the proverbial horse is out of the barn kind of scenario. How many companies would say or to what degree has this improved since 2007 because I know you're indicating that there has been some proving but has there been enough traction and improvement so that purchasing is in their right at the get-go?
Yeah. Certainly, I'm not going to say that it's enough because I think there's a lot more that can be done I mean even when -- I go out and speak at conferences and talk to a lot of executives and more and more. I'm not getting the right answers in terms of -- I think lastly sitting at roundtable with CPO. There is about 25 CPOs in that roundtable and I asked them, how many of you are early on at the beginning of the year or even before the end of the year sit down and when those budgeting discussions are happening are on the table and be able to influence it and I think about 5% said yes. I was there and I was able to understand what those goals were and took that back to my organization and then started working with it to deliver a plan for my next fiscal year to be able to help those organizations to achieve their budget goals, but there is still that 90+% which I think need to get there. I think it's getting better. It's happening maybe not holistically but what certain groups are more collaborative like IT and procurement -- probably a little more collaborative, getting more collaborative but still look at other functions -- engineering, marketing etc. which are a lot more self contained. They kind of do their own thing and not necessarily __18:24__ so finance needs to bring everyone together at the table. I think finance is a responsibility to say, okay, I'm kind of the control of the money right and -- this needs to be a planned out process where procurement certainly has a role in how you apply those funds towards your goals, business goals and then -- we can join to discuss how we get there so I think finance definitely has a big role on that.
Let me ask you -- sorry to interrupt, but I've got to ask you because this is an interesting point referring to what you said earlier where there is -- and let's call it a migration of finance, people getting into purchasing. To what degree has this influx of finance people in the realms or in the field of purchasing helped progress or move forward to what you're talking about? Have they ever played a role? Have they influenced purchasing people?
It's a good question. Yes, I think I can -- I mean I can just name at least several organizations that I've brought in controllers or finance professionals, executives into the procurement organization to better align those two organizations together and the purpose is kind of in essence similar in terms of managing companies, financial resources, but also we've seen a lot more kind of awareness education, retooling at the procurement organization towards to be more number driven, to be more analytical. Now, I also want to say that savings and bottom line result is not the only purpose of procurement. There is a lot more that procurement organizations are bringing into the companies today that I think would be missing if we didn't mention it so one is vendor management for example. If you think about the role of HR, right? What does HR do? HR manages companies, human resources right, unless you manage your human resources actively, their performance, their development, their goal, their career, they're not going to get a lot of innovation, they're not going to get a lot of value out of those employees so there is a function put in place to do that effectively then that's their full-time job. If you look at IT/CIO, the office of the IT, what do they do? They manage IT resources. So if you look at procurement, I think a big role -- a bigger role for procurement is managing company's external resources which are really your service providers, your suppliers, your third parties which I think is a big gap today because all the resources and money still being spent on trying to get savings, trying to influence suppliers the selection of decisions.
But a lot less is being spend on and focus on managing those resources going forward and you're only halfway, not even halfway there when you say, okay I'm going to work with this supplier for the next five years and here is a contract, but then the work is just beginning, who is going to manage that supplier day to day and certainly, the business, the budget holder is a big impact and responsibility, but procurement needs to be in the governance to be able to make sure those management happening, you're getting the value out of your third party resources.
So in essence, really purchasing procurement has to look outside of their normal, I guess, which we call functional silo. Have they ever brought a perspective to realize that the job just doesn't to go out there and execute order in selective supplier, it's also managing that relationship, which you see, so is this something where purchasing professionals have generally in the past been reluctant to move forward in this regard? Is it because -- we drop the ball in other words in terms of writing our own limitations because if I listen to you carefully, these have been longstanding opportunities for purchasing to make __22:27__ yet they're just now being acted upon. I mean why we dropped the ball?
It's a good question. I think it's kind of a -- it's a catch 22 so if you look at last thing, there's certainly procurement organizations even in the last five years, a lot more in a fast pace, got a lot more budget, a lot more resources from the party organization to do their job right? But in return for that, it's easier to show in our life for your organization when you say, okay my organizational budget is 10 million today and I have saved the company hundred millions in our life is kind of next for example. First is now use that 10 million to manage my suppliers, but where is the tangible? Where's the number? How much money did I save? I can't really say, but we got great suppliers. They're working really so it's a lot harder for procurement to justify the value of managing vendors than it is to justify how to save money. We were paying a million before and I did this project so we're now paying 800 so we save 20% of 200, 000 and that get that as a bottom line.
See, you just pointed out something surreal, but you just pointed out something that may have been a potential flaw with the Aberdeen 2007 CFO study. It's how you define the value that purchasing deliver because let's face it, if you look at it purchasing, if it breaks down, if it doesn't deliver any and we can get indirect material, direct materials, all of that to go to support the operation, but truth be known. If purchasing does not do its job, the breakdown may not be seen in the purchasing part immediately, but it will be felt in lost customers, lost revenue opportunities correct?
Absolutely, absolutely I mean certainly -- just using the analogy of an HR organization right? I mean, if all the focus was spent on negotiating salaries with the employees and how low you can get them in right and you lose the big purpose right and then if yes, they need to pay your market in fair market value, but at the same time, how do you incentivize them, how do you manage them, how do you develop them? So those are all important things in terms of performing and getting value out of those resources, same thing for vendors. Certainly, it's a little bit different, they are third party not your own, but I think we see a lot more and more relationship that are happening with the suppliers and companies that are more long term, that are more towards developing and innovating and big. We have been focused on this topic for quite a bit in the last few years in our executive forms, what is the value procurement, how do you define it?
And we see a lot more and more CPOs saying "Well I am tasked with innovation, I need to be able to drive supplier innovation for example, and take measures to do that or I need to be able to contribute to M and A since we are out there seeing and evaluating a lot of suppliers, need to be able to facilitate business transaction that make sense maybe for us to acquire companies. So certainly it's a lot more than savings and bottom line results but a lot more top line focus as well.
Now let me ask you because you know we could go at 20 different directions and I'd love to talk to you for an hour and a half, because I can remember standing in front of 200 senior executives on the automotive industry, bemoaning the emergence of the new sourcing tools and this is back in middle of 2005, and their biggest complaint was they go to the exercise having selected as a vendor of choice and in these particular area of the automotive industry which was power transmission, they found that in the US 37% of all purchasing were still maverick __26:03__ through suppliers who worked on the contracted agreement list and in account of it, number ballooned to 79% which talks about a problem there obviously in the disconnecting terms of selecting the suppliers and actually using suppliers with whom the purchasing people felt to do the best job. I'd love to delve into that a little bit further, but I guess maybe the best way to segue this is look, accelerating sourcing results, building sustainable capability and this is the focus of upcoming Denali Group Sourcing form starting in Pittsburgh and yes listeners all the details will and are in the Segment Show page with the links so there is still time, it's September 19th and 20th and there is another date for this in February in Seattle, but have these areas of practice now been influenced or have they evolved in understanding what accelerating sourcing results mean in __26:59__ at sustainable capability. Have this been a by-product of beginning to finally understand what exactly procurement can do from a strategic standpoint as oppose to a functional standpoint?
Yeah, I mean certainly it has to do with a designing value first. What is the value that procurement organization can bring to the table and two, what is the operating model to get us there, right? If you think about historically, a lot of organization had a shorter term focused on, and just going to do a project to uncover some value with the sourcing project here and then let us do -- let us bring in some consultants and address this area that we have not touched before or whatever. It has been a lot more sporadic and more targeted versus having a whole list that looks in a programmatic approach to uncovering value, driving value in a systematic way. To explain that more, our perspective is the operating model for procurement is changing. It is not back office anymore. It is not one person does it all anymore, so what that means is the resource model is changing the channels to reach your audience or stakeholders reaching. It is becoming a lot more customer centric and service orientated, it has to be because ultimately we in procurement are in the businesses influencing other people's money and budgets and decisions. To be able to do that, we need to have a very strong relationship management, stakeholder and management capabilities, right? It is a big sales job, not a lot more, because those views are being made outside of our organization and we as procurement need to be able to have those relationships and be on the table at the same time to be able to influence those. Now from an operating model perspective, it is interesting because today still but also more so historically, you had one type of resource in organizations that were responsible from hey go, talk to the marketing manager and understand how we can help them and two -- hey look, you need to know marketing so you need to be an expert on marketing and __29:12__ so you can talk intelligently to them.
And three, oh by the way, we got this 50 contract that needs to be rounded and signed and four, can you get NDAs with these new suppliers, you're not going to beat in nondisclosure agreements and by the way, we got this purchase orders that needs to be cut so if you look at these four or five things I have mentioned, all of them by nature are very different tasks and needs very different skill set to be able to execute properly so we see a lot more organizations being organized in three groups, but in procurement, one group I called and I see more and more especially in the last two years is a new roll call in business partner or relationship management. So your role is really, you're the salesperson, you're the relationship manager for the purchase organization to go out and build those relationships, understand their agenda and be able to offer up what procurement bring to them. The second function is what I called the category management function which forget about your stakeholders now, just understand your category, if you are spending a billion dollar in IT, your role is to understand how you're spending money, what's the best practices in, what are some trends in the industry that an IT is spending in IT development and what is our company as an overall strategy to manage that category overall? Do we standardize, do we not, which vendors do we manage, which one is do we not, etc so you're kind of the strategies of that category. And then third piece that's often overlooked is the execution which is a lot more transaction and a lot more repetitive but you need to be very efficient and you need to have the right level of capacity to be able to execute, so your relationship manager goes out and finds projects, the category strategies puts the strategy and then your execution team executes and you can do centralization and become a lot more efficient there.
So that is why -- I think when we talk more about it, the operating model is changing and then it seeds into what I call kind of the three objectives of a procurement, any procurement of the US today, what are the top three objectives? We hear a lot more, we need to be able to influence more spent and we call it "the reach". In your words, it's kind of that maverick spending that you can't influence that but how can you influence more, how do you improve your reach as an organization, that's one, which you know the answer to that is you need to put enough skill set and right resource to do that relationship management, right, and then two, once your reach that spending decisions, those sourcing decisions, what do you do with it? Can you derive effective strategies, tools, templates, processes? And the answer to that is your category management organization defines what to do and they give you a playbook to execute and then the third piece is how do you be efficient? Certainly, your resources are not unlimited and so can you efficiently execute on those projects, on those initiatives? So when you have those three pieces, you can increase your reach to become effective in managing that spend and then do it a lot cheaper and faster, so those are the three things that what's on top of the mind for any CPO.
So to close out realistically going back to what I mentioned at the top of the show is that in essence, the market is now or the industry and we are talking about the understanding of finance, we are talking about the understanding within purchasing itself has now caught up with the concepts that you have really been talking about all along. I mean is that really the best way to sum it up? I mean because what you are talking about is certainly concepts and ideas that are not necessarily new, but solid they have been around, but the industry just was not positioned to really understand and take advantage of it, I mean it's that the best way to say it?
Yeah I think so almost certainly and I think if I look at it, procurement professional today need to understand their audience and there are many of those audiences out there. You got the budget holders, you got the vendors, you got the executive, you got company shareholders, and these are all your stakeholders, right? And once you understand their agenda, and each have a different agenda, each need different things and different value, they need to focus on how do I create net customer values for each one of those groups and if I can do that without wasting time and optimizing my efforts then I think I have a good proposition as an organization and then lastly, I think we're seeing procurement adapting a lot more change, embracing change, championing changes, it's not a function were it used to be 10 years ago and there is a lot of new things that they need to be able to adapt and evangelize within the organizations.
I bet we probably both have the same level of passion for that which we do. So thank you for joining us today, it's very, very insightful. I do hope you will come back on the show again.
Thank you Jon. Pleasure talking...
And to you (inaudible) to say but I think it was very fascinating because the more we start (inaudible) is capable of doing and that is (inaudible) opportunity and make most of it. Now I want to remind everybody again on September 19th and 20th (inaudible) take place and yes there is -- I have a special interest on this because I (inaudible). You know, I have taken a little bit of high (inaudible) I'm glad to get back on it (inaudible) as a whole and again, the value that we can contribute to our respective corporations' bottom line. In the meantime, until I can match over the same virtual airways again as always, I will remain your host, Jon Hansen. Have a great day. Bye for now.
It's good to talk.