Welcome back to another weekly installment of Whitepaper Wednesday here on the Purchasing Certification Blog. Today, I will review a whitepaper entitled “The CPO’s Agenda: Smart Strategies for Tough Times” from Aberdeen and Ariba.
This whitepaper is based on a recent survey of over 200 chief procurement officers. This survey was conducted to learn what is top of mind for today’s CPO’s.
This whitepaper revealed many interesting statistics. While it is no surprise that “identifying cost reductions” was the top issue pressuring CPO’s (at 91% of CPO’s reporting this is a “top three pressure”), I find it quite intriguing that the whitepaper notes that “across a decade of global supply management research, Aberdeen has never seen the pressure to find savings reach this high level.”
In case you’re curious, the other top CPO pressures were:
- Mitigate supply risk – 47%
- Improve processes – 26%
- Optimize working capital – 24%
Speaking of cost savings, the whitepaper goes on to distinguish between best-in-class procurement teams and the rest using two metrics: spend under management and cost savings as a percentage of total spend. The whitepaper indicates that the best-in-class have 88% spend under management and have cost savings that are 8.5% of total spend as compared to an industry average of 64% and 5.2%. The whitepaper also shares metrics for the “laggards” whose spend under management is 23% and their cost savings are 3.7% of total spend.
These statistics I find to be a slight bit puzzling. Especially in light of the following excerpt describing them: “[M]anaging a high percentage of spend does not in and of itself guarantee efficient or effective management; but, over years of benchmarking thousands of procurement departments, Aberdeen has identified a high correlation between high percentages of this metric and high performance in other KPI’s.”
Those words make sense. If a procurement department has earned the right to manage more spend, it probably does have the capability to deliver more savings per dollar of spend. But let’s consider transforming a laggard procurement department to a best-in-class procurement department using Aberdeen’s numbers.
I’ll use a total spend of $1,000,000 to make this easy.
The laggard procurement department would then manage $230,000 of spend and save $37,000. Thus, the laggards’ savings as a percentage of managed spend (not total spend) is 16%.
The best-in-class procurement department would then manage $880,000 of spend and save $85,000. Thus, the best-in-class’ savings as a percentage of managed spend (not total spend) is 10%.
At face value, this seems to contradict the foregoing claim by Aberdeen – it actually seems that performance suffers as a result of managing more spend. My guess here is that Aberdeen meant that the savings-as-a-percentage number was a percentage of the spend that procurement is responsible for, not total spend (only a portion of which procurement is responsible for).
When a whitepaper confuses me, I generally stop reading it and that’s exactly what I did here. The whitepaper does go on to have sections on supply risk management, benchmarking, and recommended steps to success. So perhaps you will find them valuable as they are all relevant topics. And I have an extremely, extremely high amount of respect for the work of the author – Andrew Bartolini – so maybe it’s just me…
If you want to download your own copy of the whitepaper, you can do so from Ariba’s Resource Center.
To Your Career,
Charles Dominick, SPSM
President & Chief Procurement Officer
Next Level Purchasing, Inc.
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