Interview: Procurement should not be the police department
(Pic Courtesy: Thomas Nash)
Thomas Nash, Chief Procurement Officer (CPO) of the American Red Cross, does not believe in the “command-and-control” structure that places emphasis on the purchasing team owning the spend and quoting the procurement policy to stakeholders.
He cited General Dwight D. Eisenhower, leader of the Allied Forces in World War II, who said that, “the art of motivation is getting people to do what you want them to do because they want to do it.” Tom notes that he and his team have found this to be sound advice.
It was 10 a.m. in Washington D.C. when Tom received Beroe’s call, and for over an hour, he spoke at length about the “Purchasing Influence Model,” which is critical to his success as a Procurement leader.
American Red Cross is the single largest blood provider in the U.S. It is approximately the same size (on an annual revenue basis) as a Fortune 600 business and spends nearly $1.5 billion each year with suppliers.
The Red Cross has three main business units:
- Blood Products/Biomedical
- Training Services
“The Red Cross’ spend with suppliers is 45–50 percent of its annual revenue. In other words, the third-party spend -- the checks going to suppliers -- is the second largest expense the Red Cross has after salaries and benefits,” Tom told Beroe in an exclusive interview.
Stakeholder Advisory Board
Tom, a Procurement veteran with over 30 years of experience in four different industries, instituted the Stakeholder Advisory Board (SAB) soon after he joined the Red Cross in 2015. He said that the Advisory Board is designed to ensure that Procurement and Business are aligned in solving real business problems, and thus, work collaboratively to improve business performance.
To be fair, there were some skeptics when he embarked on his plan to create the Board.
“This is not done lightly. Some were rightly concerned that Senior Business Leaders would not find the time to attend such meetings,” he said.
Tom asked the CFO, his boss, to be the Chairman of the Board. There are 12 other senior executives on the Board, including the Business Unit President, numerous Senior Vice Presidents, the CIO, Treasurer, VP HR, VP Legal, etc., and of course, the CPO.
The Board meets on the third Wednesday of each month and the calendar is set a year in advance.
“When the CFO attends, it indicates how important this is. We start 45 minutes before the normal work hours. The business day begins at 8.30 a.m., but the Board meets at 7.45 a.m., and we keep it to an hour by being crisp and respectful of everyone’s time. The agenda is sent three days in advance of the Board Meeting and reads like a Board of Directors briefing book. The important thing is that this Board is a decision-making body,” Tom explained.
If a Board Member decides not to attend the meeting, they have two options: to send a delegate but be careful as the delegate carries that President’s decision-making authority; or to be absent, and the Board Member has five business days from the time the Board Meeting Minutes are sent (within 48 hours of the Board Meeting) to say “yay” or “nay” to any decision.
“If we don’t hear from them then we take it as an endorsement that the decisions are good to go -- we do not check any further. Interestingly, in the four years the Board has been in operation at the Red Cross, I can count on one hand on how many times a Board Member has missed a Board Meeting -- they almost always attend. That’s the power of getting this aligned with the Business; it shows how this governance process helps the Business improve its key initiatives from a commercial opportunity and supply risk perspective and thus, helps the Business solve real business problems,” Tom said.
Tom said this level of “Purchasing Influence” is challenging to execute because it takes a different mindset and skillset than what most Procurement organizations have been built around. Moreover, based on his experience, only 10–20 percent of large, global organizations (e.g., Global Fortune 500 companies) have implemented this type of collaborative governance model in some form or the other.
According to Tom, the “command-and-control” style of “telling people what to do” is neither effective nor sustainable in getting things done in any organization. The simple reason is that using command and control goes against human nature. Nobody likes to be commanded.
Tom’s team members work collaboratively with the Business to create written Category Purchasing Strategies to help the Business and Functions improve their performance and solve real business problems. In addition, it is the Business stakeholders who actually present these proposed strategies at the Board Meeting for endorsement.
“Why do stakeholders present the strategies and not Procurement? Because it is their spend and their money. They have to be accountable for that. When they have that level of accountability, they want to ensure that everything is fine,” Tom said.
The role of Supply Management/Procurement in many organizations is to propose and facilitate such strategies in collaboration with the Business. In other words, Procurement will propose alternatives, category strategies, identify pros and cons, present various options with the help of Market Intelligence, and then facilitate that with the Business.
“The role of Business is to decide and own the agreed strategy. The world is a much better place when the Business is accountable for their operations and their money spent with suppliers. When this occurs, it enables a much more teamwork-based relationship with Procurement rather than just asking Procurement for a contract,” Tom elaborated.
Any Business initiative involving suppliers that is greater than $250,000 annual contract value must garner Board endorsement.
“We typically have 60–70 initiatives that are greater than $250K in an average year. Most transactions -- like in any other company -- are way below that. Each Board Meeting on an average sees 4–6 submittals. The strategy being presented to the Board has to be crisp, executive-minded, and to the point. The agenda is sent three business days in advance. The respective business leader presents the initiative, and after a robust debate either we say “yay” or “nay” to the plan.
The Board aims to ensure that the organization makes good business decisions. This means each decision involving suppliers must maximize commercial opportunity, minimize risk, and harness innovation from suppliers, including diverse suppliers,” Tom said.
A category strategy/initiative first comes to the Board as a request for strategy endorsement. Once that strategy is endorsed, the negotiation plan and/or RFX plan (including RFX criteria and weights) will also be endorsed by the Board to ensure full transparency upfront. Lastly, before a supplier is chosen and a contract is signed, the results of the fact-based negotiation (based on negotiation plan previously endorsed) and/or results of the RFX are reviewed by the Board to ensure everything is in order and gain executive/Business agreement.
“Once the results are endorsed, the Business and Procurement at the lower level work collaboratively to execute the agreement and monitor how well it is doing, and we keep the Board informed of any major issues,” Tom added.
He clarified that the Board submissions are made throughout the year and that they are “load-leveled” in such a manner that “one meeting doesn’t have 18 submissions while the next one has just two -- which is not sustainable.”
The Business is expected to involve Procurement upfront in all supplier-based initiatives to ensure maximum commercial opportunity and minimum supply risk. Tom’s team provides the Business with category market analysis and various scenario planning analysis.
“With the Board in place, the Business sees Procurement as a helpful colleague with whom they can jointly develop strategies to solve real business problems. We do things together and do not go off and do things without the other side being right there,” Tom said.
Measuring Procurement Performance
Tom said the most important measure is return on investment (ROI), which is at the heart of the Balanced Score Card.
“ROI is the bull’s eye and is very simple: how much do I cost, and how much do I help deliver? If my total budget to run Procurement operations is $10 million, and if I am facilitating with the Business to deliver $20 million in P&L benefit, which is validated by Finance -- that is 2x ROI. In other words, I am helping deliver twice what I cost.
The average Procurement Organization produces 2–3 times what they cost. A world class Procurement Organization would typically produce 5–10x what they cost. Hence, if one is world class and delivering 5–10x of its cost of $10 million, one would be delivering $50–$100 million of improvement year-over-year to the P&L. To put that in further perspective, this amount of positive P&L impact from Procurement-facilitated initiatives could exceed the net income for the company. That is huge,” Tom said.
He further added that such an ROI approach that focusses on contribution to company Net Income is not lost on senior management, including the CEO and CFO.
The question then is how can Procurement convince Finance to sign off on the savings delivered?
“This is also an area, like the Stakeholder Advisory Board, that takes a different mindset and skillset. Because unfortunately, in many organizations, agreeing on the number that will be classified as positive P&L improvement to the company financials can be challenging for several reasons. To make this process smoother, it must be done with influence and collaboration.
We do this by holding a call every quarter with Finance and the Business to review each item result to the P&L and ensure that all on the call are comfortable with the calculations. If not, that item is removed from the list of P&L impact until everyone becomes comfortable on that particular item.
We don’t call it ‘cost savings,’ which is more ‘procurement speak’ but instead, ‘Positive P&L Improvement’ to match the language of the Business. We have each item on the list described as to what the item was, how much it was, and who validated it from the Finance organization. There is only one version of the truth and that’s Finance saying they can see the ‘improvement’ in the P&L. When Finance validates the number, that is the one version of the truth and any arguments over who delivered what improvements evaporate quickly,” Tom explained.
Sixty Million Dollar Question
When asked why more organizations do not adopt this successful approach, Tom said, this is the $60 million question and the answer is “Because this is not how many Procurement organizations have been built or taught.”
The Stakeholder Advisory Board model will apply in just about any company, but with some modifications, Tom said.
“You have to make it fit-for-purpose. At one of my earlier companies, we called it ‘The Global Procurement Board.’ When I was in the healthcare sector before I came here to the Red Cross, we called it the ‘Customer Advisory Board’ because that was the mentality that company had as they were talking about enabling ‘internal customers’. So, ensuring the ‘Influence Model’ that fits with the company’s culture is an important first step,” Tom said.
The Stakeholder Advisory Board requires an “Executive mindset” approach, not simply a Procurement mindset or tactical approach. Most organizations never get around to asking the key question -- “how can I best influence stakeholders to help the company improve its performance?”
“A lot of my peers simply want to ‘command-and-control’ because that is how they were taught, and that is what they know. They believe the CPO should be the policemen and policewomen and quote the company Procurement Policy of ‘thou shall’. I don’t do that. I influence people. I submit that if one can influence easily and well, the stakeholder will feel more comfortable with new ideas and be grateful for Procurement’s help in improving Business performance. It simply doesn’t get any better than that,” Tom concluded.
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