Chief Procurement Officer (CPO)
According to Business Dictionary, the Chief Procurement Officer, or CPO, is “[An] executive level employee whose responsibilities include sourcing, supply management, and procurement for the organization. Generally, the CPO reports directly to the Chief Executive Officer (CEO) of a company.”
And according to Wikipedia, a CPO is, “typically the executive of a corporation who is responsible for the management, administration, and supervision of the company’s acquisition programs. They may be in charge of the contracting services and may manage the purchase of supplies, equipment, and materials.”
These definitions are both vague and redundant because the procurement industry lacks common definitions. Procurement is a business function focused on supply management, which by default includes sourcing – beyond day-to-day supplier management and transactional activity.
Ultimately, the procurement function is what develops and executes supply chain management processes, whether the resources used to perform the processes report to procurement or not. This means the CPO is the highest-ranking person in the company with the authority to influence the supply and the spending required to acquire the supply, throughout the entire company. The procurement policies and procedures determine which purchases require procurement’s input, and which ones are handled by end users. Generally, the purchasing department must play a role in any complex, long-term, or expensive purchases, while end users are allowed to handle one-off transactions that are simple and low cost.
Evolving CPO Role: New Responsibilities and Opportunities
As the CPO’s mandate continues to evolve and grow, CPOs will soon need new skills to match. The next generation of CPOs will be called upon for innovation, digitalization and to help steer the organization through volatility and complexity. They will continue to demonstrate strategic, innovative, determined and results-oriented leadership traits, as well as further develop their political savvy and influencing skills.
CPOs of the future need the skills to address the following areas:
- Innovation: The procurement function is becoming more strategic, and CPOs need to fill those bigger shoes. This means understanding the overall business drivers, having a longer-term view and innovating the way the function is running. Currently, the most common leadership traits in procurement are acting as a role model, collaborating internally and externally to deliver value and delivering results. Conversely, strategic leadership traits such as positive disruption, leading digital transformation and innovation are not commonly found among today’s CPOs but will need to be developed quickly.
“I’m out there looking for ways to keep improving and keep adding value. I spend 25% of my time there speaking with other CPOs, leaders from industry and technology companies, so I can find out how they’re thinking around these challenges and how they’re motivating their teams.” —Bob Murphy, CPO of IBM
- Building Ecosystems" Organizations can no longer afford to operate in isolation. Instead, they function as part of an enormous global network. CPOs must navigate a complex web of stakeholders, including suppliers, customers, internal colleagues, and external organizations and partners. The route to sustainable advantage lies in exploiting the strengths and competencies of various stakeholders to achieve greater responsiveness to market needs. As a result, best in-class CPOs have shifted to “systems thinking” and use their skills in relationship building and influencing to partner with suppliers and sometimes even competitors.
- Driving Sustainability and Understanding Risk Management: Today’s multinational organizations are part of multitiered global supply chains linked together in complex webs of relationships traversing multiple jurisdictions. These intricate networks can mask dangerous vulnerabilities: A problem in one area can quickly ripple up and down the supply chain, leading to severe reputational damage. Companies are also facing a growing number of regulations and an increased awareness among consumers around the sustainability of the goods they buy. Consumers and regulators today hold companies responsible not only for their own practices, but also for those of their suppliers. To meet their demands, CPOs must be prepared to increase transparency of the sustainability and compliance of their suppliers.
- Digital Advancement: While prospects of a digital transformation in procurement look promising, the reality is that most organizations have not yet captured the opportunities those tools will deliver. Procurement leaders need an understanding of how they can capture the benefits of those new tools for their own functions and across the organization. Beyond the procurement function, CPOs will increasingly be called upon to enable digital efforts across the organization, including honing an ability to source in-demand digital products like robotics and artificial intelligence.
- Future Ready Teams: Procurement leaders of the future will need to lead a different type of organization. New technologies could reshape what current procurement teams look like and how the procurement organization is structured. New roles are being introduced to the firm, and talent with an analytical or data science background is entering procurement teams. Unassisted, or cognitive, procurement holds the potential to also replace elements of traditional procurement teams.
Embracing the new direction of the CPO is no longer an option due to the competitive forces in every industry today. It is imperative for leaders to assess how they leverage the procurement function and where they are in terms of maturity of the function, as shown in the Figure below.
Technology Helps CPOs be more Strategic
The role of the chief procurement officer is changing. According to LinkedIn Economic Graph Research, CPO ranks 11 on the list of fastest growing -C-Suite titles of 2020, with 15% growth (as a proportion of total C-suite hires last year). The need for more — and more critically thinking — CPOs is accelerating, said Pettis Kent, assistant professor of supply chain management at Loyola University Chicago Quinlan School of Business. That’s especially true for "multinational companies where they need someone to stand at the intersection between what we need internally and what’s available externally," he said. "The CPO is the man or woman who manages that entire organization." More strategy, collaboration, and perhaps diversity and inclusion lies ahead for this expanding, and increasingly important, role.
Traditionally, CPOs have had one job and one job only: drive down costs. They’ve largely been successful at that, said Alex Zhong, supply chain lead at IBM Sterling, and it can be seen especially in the lower cost of consumer goods. But forward-thinking CPOs have already moved past the bottom line and "saw that only focusing on cost is definitely not sufficient. They need to step up even more in a strategic position to really support the business growth from a revenue perspective," he said.
Technology advancements have helped make that happen. Instead of the CPO being a mostly technical role, artificial intelligence and machine learning have automated many rote procurement processes, such as vetting vendors and negotiating prices. That has allowed the CPO job to become a more a "qualitative or communication or a leadership function," said Abe Eshkenazi, CEO of the Association for Supply Chain Management. It frees the CPO up to do risk-scenario planning, reduce total lifecycle and ownership costs, and encourage innovation in procurement and beyond.
CPO and CFO Relationship
The procurement process is often not an easy one to handle, with several moving parts to consider. However, having a strategic procurement process in place will equip your organization with one of the most important tools to maximizing its value and priorities. In many ways, the most important working relationship in an organization is that of the CPO and CFO. Many of their priorities and financial responsibilities overlap and if both Finance and Procurement are to be successful in achieving their goals, strong collaboration between both must exist.
According to The Deloitte Global Chief Procurement Officer Survey 2018, the likes of cost control, risk management and technological advancements are some of the key issues being treated as priorities by both CFOs and CPOs. With global inflation pressures easing in most regions, CFOs are adopting a strategic approach and shifting their focus towards the longer term as revenue growth improves. Such common priorities highlight an opportunity for CPOs and CFOs to work together to align organizational and procurement strategies.
- Include Procurement in Strategy Process: For strategic procurement to truly work, it is vitally important that procurement teams are involved in the early stages of overall strategy planning for the organization. Everyone needs to be fully aware of what their roles are, what the goals of the business are and what is defined as valuable. From there, procurement teams can then work on aligning their KPIs. CPOs should work with CFOs to develop a balanced procurement performance scorecard, with sensible targets for the team agreed upon. CPOs are in a strong position to influence and control suppliers while also providing strategic insights to the CFO around the types and capabilities of available suppliers. This takes procurement away from the traditional savings-related metrics and focuses attentions on total cost, performance and innovation.
- Optimize Working Capital: Given that procurement teams work directly with suppliers, they are in a strong position to influence their organization’s strategic procurement process through the management of working capital. By managing stock levels and negotiating advantageous payment terms with suppliers, procurement teams can enable the CFO and treasury to accurately forecast cash flow. Positive cash flow puts you in a more stable position with better buying power and opportunities for growth. Supplier relationships are also enhanced as a result.
- Utilize Technology to Reduce Costs: Establishing cost saving opportunities has always been a fundamental part of procurement and amongst the top priorities for businesses. The Deloitte Global Chief Procurement Officer Survey 2018 found that this is very much still the case. CFOs and CPOs now have access to a wide range of innovative technologies and advanced analytics systems to support their cost-saving efforts. It is important that CFOs are supportive of investment in technologies that procurement teams need in order to implement a strategic procurement process. Technologies can be leveraged to better monitor performance, ensure contract compliance and analyze supplier activities. E-Procurement systems can continually scan data and alert to opportunities for savings such as better rates offered by different suppliers and reduction in maverick spending. While technology investment will greatly improve a CPOs ability to carry out their procurement process in a strategic manner, CFOs will also leverage the power of spend analytics. The data produced through this analysis will influence cash flow management, product or market development and expansion for the overall business.
- Talent Development: Technology and data are key to establishing a strategic procurement process, but CFOs and CPOs need to work together to ensure that they invest in the correct talent and training with which to capitalize on such assets. The skill set required to work in a modern procurement team is constantly evolving. For example, more so than ever before procurement professionals require strong data management and analytical skills. These skills fuel smarter spending, supplier relationships and risk reduction. Strategic procurement is now more so about data-based decision making rather than simply squeezing cost savings out of suppliers. However, talent development is very much an issue for CFOs and CPOs when it comes to developing their procurement strategy. The Deloitte report found that only 49 per cent of CPOs believe that their current procurement teams have the required levels of skills to successfully deliver on their organization’s procurement strategy. This percentage has improved in recent years but is still remarkably low. It is critical that procurement teams establish a strong working relationship with the CFO. If talent development in certain areas of procurement continues to be an issue, then outsourcing should be considered. Such a move will allow the internal procurement team to focus their attentions on using their company knowledge and strategic depth in different areas of the business. The external party could play a more specialist role in their dedicated area establishing the ideal blend of expertise and skills internally while also opening up the organization to the outside world.
- Open Communication: None of the previous points are likely to come to fruition, however, unless there is an open line of communication between the CFO and CPO from the outset of establishing a strategic procurement strategy. The CFO needs to be fully behind the work of the CPO. Business financials need to be regularly communicated to the CPO and procurement function so that conversations can be had over procurement’s role in driving the business forward. It is also important for CFOs to understand all areas of the business, particularly procurement. They need to be made aware of any potential roadblocks for the procurement function or any potential issues, ideally in advance of them occurring. Having such knowledge will allow the CFO to establish which area requires the highest levels of support and investment.
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