Aaron, this is truly a great question. It made me think of the “elevator speech” that business books encourage all of us to develop: what would we say if we were in an elevator with the CEO for a minute or two?
Back to your question, the first thing I’d suggest is that the CPO needs to think about his or her audience and corporate culture.
What is the company’s strategy and how can Procurement support it?
You have to consider what the need is. A CPO who touts cost reduction alone in a fast paced environment with fat margins is going to be perceived as an out of touch nuisance.
Because of that, the three answers can very well be different based on the business you’re working in.
But for MOST CPO’s in most situations, here are three suggestions:
- Procurement ROI. There are a few ways to calculate it; the one I’ve used most frequently is:
- Tangible Value Add divided by the fully loaded cost of the team
- The Value Add is a measurement of the financial benefit that procurement brings in a given time period. Cost reduction, of course. But also profit gained because of procurement intervention by taking action or leveraging suppliers – clearing a supply chain bottleneck, for example.
- In many firms, cost avoidance would be allowed as well, as long as it’s very concrete. I am aware of one company that was about to pay $500k on a software true-up; procurement intervened and is negotiating with the supplier for a lower number.
- If the invoice is in hand and headed to Accounts Payable – and the Procurement teams stops it or reduces it – it’s a contribution that should be included.
- Speed. A measurement of how Procurement is influencing the speed with which processes happen, either via re-engineering or automation. It can also be a measurement of how procurement is making things easier by making work go away.
- Innovation. An example of how the supplier community is being leveraged to innovate or otherwise contribute to the company goals or strategy. The other two measurements are numbers. This may require a sentence or two.
But more and more, procurement is really the keeper of an ever-changing network, and its important to show that you’re driving value with that network.