Insights & Ideas

Preparing for leaner times: An opportunity for procurement teams

For the last 30 years, North American and European corporations have enjoyed the longest and strongest stretch of rising profitability. From 1980 to 2013, corporate net income grew more than 50% faster than Global GDP from 4.4% of Global GDP in 1980 to 7.6% in 2013. These two regions alone capture more than half of global profits. This rate of growth and prosperity is likely to change as new rivals put these companies on notice. Many point to the emerging markets as the biggest threat but I would also add that competition is coming from next door: new technologies and models are disrupting traditional ways of doing business. 

To appreciate how we are likely to best survive, it is important to understand why we are where we are. One of the biggest triggers to this period of incredible growth was deregulation and privitization which introduced private sector competition to huge areas of a global business that had been run by the state. Between 1980 and 2013, these businesses went from generating c.$1Trillion of revenue to $10 Trillion. Alongside this, there was a tectonic shift in urbanization and industrialization which created huge new consumer markets and vast capital projects. As for who has been best positioned to benefit, it has been the large multinationals who have the scale, the global presence and falling costs where their biggest source of benefit has come through lower labor costs.

Despite the outlook for global revenue remaining healthy, the forecasters are less encouraged with profitability metrics. Consumers in western markets and workers in emerging markets appear to be well positioned to be big winners. It is not surprising, but I find it interesting to see that half the growth is expected to come from lesser known cities in the emerging world. For companies in developed economies, it is time to be vigilant and aware of the less than favorable business conditions. 

To illustrate this, I did a simple study looking at the pre-tax margin in a list of sectors and what they had to sell to generate 1 million in pre-tax profits: 

Sample data

Data set source: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/margin.html 

Procurement are in a vitally important position to help defend their companies from this incredibly complex and tough environment. Optimizing the organization's cost base and working with the business to ensure capital is being deployed in the most efficient manner is going to be critical. Procurement teams need to take a more strategic and holistic view of their role and start to consider how they themselves can radically self-disrupt. Overcoming the fear of adopting a new approach and the short term inertia that grips teams will be esstential to realising longer term benefits

At the heart of any change should be the focus on building new intellectual data assets. All the new disruptive businesses and models are idea-intensive and their value is increasing - we need to replicate that in procurement. Assets such as analytics-ready spend data, event-driven spend analytics as opposed to spend reporting, self-service functionality, predictive algorithms, benchmarking, adding in firmographics and risk data whilst creating networks of suppliers and partners that will drive open innovation and opportunity deep into the organization will all need to be considered.

Lastly, we need to go to war on talent. I have said for years that the procurement organizations of the future is going to resemble a financial asset management business where category managers are going to be more like fund managers. Someone who goes deep into a category, mangaging the risk and opportunity as it presents itself whilst taking advantage of volatility to generate alpha (their profit, your savings). With a world that is so much more interconnected, where ideas and market adjustments happen at the speed of light, our organizations and the procurement teams that support them sit on either the biggest opportunity of a generation or extinction. 

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