How Performance Metrics are Changing for CPOs

The traditional way of understanding and measuring value for chief procurement officers (CPO) and their organizations has been buying “more products for less money.”

However, new metrics and ways of creating and measuring the value of procurement organizations are taking center stage.

Deloitte’s annual Global Chief Procurement Officer Survey is in its tenth year. The results from the 2021 survey are now in. And, they show that new priorities for procurement organizations and chief procurement officers are entering the picture.

For the first time ever, the top priority in 2021’s report is driving operational efficiency. What has changed?

Well, a lot has changed in the past 18 months. The business environment has been volatile. Supply chains have been severely affected by the Covid-19 pandemic.

And, issues including climate change, geopolitical stability, health, and corporate social responsibility have become important matters in the minds of consumers and business stakeholders.

Their impact? Supply chain risk has increased and operational efficiency has become a top priority for procurement organizations.

If that isn’t enough, other challenges such as cybersecurity risk, intellectual property rights, and widening competitive pressure have placed huge demands on CPOs to develop new capabilities to manage risk and to forge alliances with strategic suppliers and business partners.

The reality is that CPOs are increasingly important in delivering on the overall strategy of the business.

The CPO’s expanding circle of influence

Businesses are realizing a competitive edge by executing on well-researched and actively managed networks of high performing suppliers.

And, these businesses are realizing new sources of value through timely deliveries, preferential prices, and better management of demand and supply shocks.

These realizations have expanded the circle of influence for CPOs and increased the number of priority areas for their organizations to now include:

• Influencing demand
• Driving innovation
• Collaboration with strategic suppliers
• Driving commercial compliance
• Accelerating speed to market
• Facilitating M&A integrations (or divestitures)
• Enabling continuous process improvement

These new focus areas expand on the traditional goals and metrics for cost savings.

Deloitte points to the fact that the best performing CPOs tend toward a wider set of metrics. Some of the new metrics tracked by high performing CPOs are environmental Impacts, corporate social responsibility, and governance.

One of the reasons for the emergence of these new ESG priorities is the realization that improved efficiency stems from enhancing stakeholder relationships and enabling more active engagement.

Supply chain visibility is a key for managing risk

One metric that has remained constant in the list of the CPO’s priorities is risk management.

Although many businesses report that risk management is important, Deloitte’s survey highlights that the capacity to detect, assess, and manage risk is still a big challenge for CPOs.

In 2020, 56% of surveyed firms reported that at least one key supplier went bankrupt. 32% of firms reported they had lower revenues as a result of supply shortages. And, 11% of those surveyed reported damage to their brand image resulting from failing to fulfill orders for their clients.

These challenges contribute to missed targets and negative outcomes including increased costs and lower margins, reduced working capital, and lost sales revenue.

While 70% of respondents reported good visibility in their direct suppliers, only 26% of the CPOs could confidently predict risk for their direct or tier 1 suppliers.

And, only 15% of CPOs had visibility into tier 2 suppliers, resulting in even lower predictability of risk.

Deloitte’s study shows there is clearly a need for CPOs to have better visibility and understanding of their end-to-end value chain networks.

Building agility in procurement processes

Agility in procurement enables value creation and value capture for the business.

Gaining agility is commonly the result of improvements including process simplification and standardization, proactive responses to market changes, and the ability to adjust internal processes to changes in supply and demand.

Another important way of building agility in high-performing organizations is through greater application of digital technologies to manage the growth and complexity of procurement and supply chain relationship management processes.

Leading CPOs report they are turning to agility-enabling technologies that deliver:

• Advanced analytics to identify and understand opportunities or issues.

• Collaboration and data exchange – Next-gen platform technologies connect the digital ecosystem and enable information sharing for a wide range of business processes.

• Process automation (sometimes called robotic process automation (RPA) that help automate repetitive tasks and facilitate work between groups.

• Predictive analytics that leverage machine learning, artificial vision, and natural language processing technologies to highlight opportunities and issues.

• Blockchain technologies that provide data encryption, protection & immutability, and shared visibility of public data and transactions.

These leaders report the top three benefits they are realizing from enabling technologies are increased process efficiency at 65%. 50% report increased process effectiveness. And, 50% report increased agility.

This focus on improving efficiency comes as no surprise because it was the top-cited enterprise priority for 2020.

The differences in technology adoption is glaring between high-performing teams and low-performing teams.

Most of the procurement organizations report they spend between 12% and 15% of their annual budget on technology.

High performing organizations, however, report they spend an even greater percentage of their budgets on technology.

Where to turn

The influence of the CPO will continue to grow as uncertainty in the business environment will continue in the future.

CPOs will need to focus on building capabilities that contribute to competitive advantages for their companies.

And, they will need to enable agility in their organizations through hiring and skill set development, a focus on adaptability, and technologies that deliver insight and make business processes more efficient.

Deloitte calls out the need for CPOs to have a strategy for digital transformation that connects the increasing circle of influence of the procurement organization.

For more detail you can download the survey results with this link.