Securing a Board Level Seat for Procurement: Challenges and Opportunities

Address to the CIPS Nigeria South South Branch, Port Harcourt 24^th September 2008, at Shell Residential Area

Good evening, everyone, I am very pleased to be here and appreciate the honor extended to me by the Chairman, Executives, and Members of the CIPS Nigeria South-South Zonal Branch in inviting me to deliver this address tonight. Being a Fellow of the Institute myself, I feel very much at home and am excited by the atmosphere of this event and commend the organizers.

I applaud the efforts of the Zonal Branch Executives and encourage them, along with the national branch, to lead the CIPS Nigeria Branch with purpose, zeal and develop the professionalism of members, and become a key voice on relevant topical issues in moving Nigeria forward

For example, I read yesterday of the President of the Trade Union Congress, making several comments on the proposal to amend the Procurement Act, and I asked myself, where is the President of the CIPS Nigeria Branch? What is the view of the CIPS Branch on the proposal?

Also, where is the CIPS Nigeria Branch voice in ongoing efforts in the National Assembly to pass the bill on Nigerian Local Content? What is the position of the branch on all the contents of the Bill? Should the Branch not have contributions and papers to the public debates on Power? How about the Privatisation program and the BPE activities?  One can go on and on.

The CIPS branch must drive to exceed the contributions of other professional associations including NBA, NSE, ICAN, etc. This is possible and will bring pride to members and will also help attract new members, especially the younger ones.

On the topic for this evening, let me start with a bit of reflection on our world today

The world has witnessed unprecedented changes in the last few decades and we are living in peculiar times. Let me give you a few examples

-       There has been a rapid explosion in Information Technology and Telecommunication, including the Internet that has redefined new frontiers in communication and commerce, and the world has become a global village with wireless communication, satellites, cable television, offshoring that keeps the world working 24hrs and connected, voice and video over the internet, and even recently we have seen Facebook, etc.

-       Creation of tremendous wealth which has improved the quality of living in countries like China, Japan, Korea, and Asian countries, and the growing demand for better quality life and luxury goods, at lower prices and with faster innovation.

-       The population of the world has more than doubled to over 6 billion people, creating a huge human capital resource as well as a huge market for goods and services.

-       Mega countries like the old USSR, Yugoslavia, etc have split into several countries and capitalism has become a common approach post-cold War.

-       Demand for Energy has grown in several multiple folds and energy prices have reached unprecedented levels which have had a significant impact on the global economy.

-       Global warming and CO2 reduction have become key issues for world leaders and this presents a tremendous challenge (or opportunity?) for mankind.

-       Stock markets have soared in the last decades but so also has the global economy witnessed the shock of the credit crunch and the failure of reputable financial institutions (Lehman Brothers, Northern Rock, Freddie Mac, and Mea, etc)

-       Transparency in businesses is being driven especially by the Western world like the USA through Sox and the FCPA driven by the US Senate and DOJ, and we have seen the prosecution of individuals and huge fines of companies like Vetco Grey, Siemens, and Panalpina. 

-       Locally, in Nigeria, Power Generation and Distribution, Eradicating Poverty, Local capacity development, transportation, and Corruption are topical issues for which solutions are required to move the country forward. The efforts of the EFCC and ICPC have been a little whimper and we can only look forward to these institutions becoming better established to drive this very important issue across the nation.

You may be asking yourself, how do all these issues have any impact on the topic of Securing a Board Seat for Procurement?

That is exactly the issue - it is these types of larger issues that Procurement must become connected to and which must be addressed in the development of Procurement strategies and approaches as these are the sort of issues that occupy the attention of the Board.

Getting a seat means being able to influence key decisions about managing risk and maximizing returns for the business.

So what do those who seat on the Board do?

The last few decades have witnessed the ascendancy of shareholder value as a driving force on business and the aim of most publicly listed companies is to increase the value of the shareholder’s investment.

Shareholder value is both a short and long-term concept as shareholders want to earn returns on their investment today, but also to ensure the business remains a competitive going concern.

Shareholder value is about maximizing the market capitalization of a company, increasing the wealth of the shareholders in terms of dividend and stock price, and outperforming certain benchmarks including the cost of capital i.e. shareholder’s money is used to earn a higher return than they would themselves if they invested in another asset with same risk.

The Board has the goal of providing strategic direction to its company, ensuring that the company objectives are achieved, ascertaining that risks are managed appropriately, and verifying that the organization’s resources are used responsibly. The Board must ensure that the company’s overall aspirations, analytical techniques, and management processes are all aligned to help the company maximize its value by focusing management decision-making on the key drivers of value.

The Board has two dimensions i.e. conformance and performance.

In economic terms, the Board is concerned with the percentage annual sales growth rate, operating profit margin, cash income tax rate, incremental fixed capital investment rate, investment in working capital rate, planning horizon, and cost of capital

Procurement must understand the need to maximize value to shareholders, minimize risk, and position as a strategic outfit and not a tactical organization. Procurement cannot afford to limit itself in a cocoon as the “sourcing expert outfit” responsible for supplier selection, tendering, award, and expediting, and controls. Some of these are clerical roles which could sometimes come in the way of meeting company objectives and fall short of what is expected at the board level.

Procurement already has a head start being involved in 80% of spend on goods and services in most organizations and with such immense potential for cost savings through supply chain management. The question is does procurement’s contribution to the 80% spend help clearly add to shareholder value? Or is it merely a process outfit that has little impact on the bottom line? Does the procurement activities lead to increased output and ultimately increase income or does it lead to a significant reduction in cost which will improve the overall profit of the organization, improve project schedule, and beat the competition?.

In addition to maximizing shareholder value, Boards also have a role in corporate social responsibilities and preserving human value. Whilst this is not usually a direct interest of shareholders, experience over time has shown that this can impact the long-term profitability and competitiveness of a company in the long run, and in some businesses, it does have an impact on the license to operate.

So what does Procurement have to do to get a seat on the Board?

Let me start first by saying that Procurement already occupies a seat on many Boards across the globe. This has been a result of procurement's role growing more strategic over the past few years following Globalization, Low-Cost Country Sourcing, Supplier Market Risk, Compliance pressure, and Automation.

More than 20% of Chief Procurement Officers now report to the president or CEO of their company, especially in organizations where procurement executives have established agendas for organizational transformation to bring more spending under management and to increase both internal and external collaboration.

Organizations that have Procurement seating on the Board cut across several industries and include companies such as Walmart, ABB, B&Q, Carlsberg, DHL, Woolworths, BT, Bombardier, Citizens Bank (USA), Johnson and Johnson, Novartis Petrocanada.

So what are the key issues for Procurement to be able to get seats on Boards of more companies across the world:

1. Value-based management

Procurement must understand and drive value-based management, by ensuring that the interests of shareholders are paramount in procurement business decisions. Although this is built into the legal premise of most companies, many either do not know or act in the opposite. I will not ask for a show of hands, but how many in the room tonight fully understand what the shareholders of their companies want, for example in terms of what % returns on investment are expected? Do Procurement decisions get taken against such benchmarks?

2 Innovations

Many business innovations are being undertaken by enterprises for which Procurement has the potential to add tremendous value. Because of its natural involvement with contractors, many of who are working on innovations, but require launching platforms, Procurement can play a key role in bringing in ideas and enabling the development of innovation. Procurement can help bring the right people to the table to help assess the risks and accelerate the project. The well-connected procurement executive can therefore enable business innovation by bringing internal and external skills to the table to determine a risk strategy.

Innovations can redefine the business model of an organization and Apple had such an experience with iPod, which was actually an innovation of one of its contractors but is now marketed by Apple, which has enabled the maximization of shareholder value. The unprecedented success of the Apple iPod and Motorola Razr has shed light on how critical, supply chains have become in the success of companies.

Let me also mention that it is also key for procurement to be innovative and stop being a processing unit where everyone needs to come to for a bureaucratic process to obtain goods and services. Procurement must also work to simplify, automate and empower the organization.

3. Ethics

Ethics & transparency are absolute essentials for any business to succeed and we have seen the impact FCPA and Transparency International can have on the competitiveness of an organization and its ability to source funds. Procurement plays a key role as custodian for 80% spend on goods and services and it must ensure that people with the highest ethical integrity are attracted to the function and that appropriate systems and processes are put in place to ensure the highest ethics and transparency in the organization. It is not good enough to be unaware when ethics are being breached in the company and it does not matter if those breaches are within Procurement or in other departments, as long as they are within the supply chain, procurement has a key role in tracking these down and getting them properly addressed and more importantly, ensuring that seamless systems and processes are developed to prevent future breaches.

4. Playing in the External Turf

Understanding the external and bigger issues and playing in that turf is very key as in most organizations, the external issues have much bigger influences over what happens internally. Being proactive about the external will enable much more strategic input into procurement planning and strategy development in the company. Procurement sits at an advantage here as its very nature connects it to the external regularly. What does Procurement do with that opportunity, knowledge, and intelligence? Does Procurement bring such an external perspective to increase shareholder value?

5. Integrated relationship management

Procurement is in a unique position in that it naturally works with many people right across the entire global enterprise and has a view into many different areas and projects. Procurement must become more integrated as part of the business and not an “enemy” to the business. How involved is Procurement in business planning processes? How much intelligence does procurement bring into the strategic planning of the company? Is Procurement even aware of when those planning processes occur? How much does procurement influence the business on issues like standardization and total cost of ownership? How much relationship management does procurement drive? Is Procurement able to bring external and internal resources together and aligned to deliver solutions for the enterprise?

6. Understand and use Technology 

Technology has changed the world and provides significant opportunities for the procurement business. Automation, e-commerce, offshoring, market intelligence, etc, are examples of what technology can provide. It is important for the Procurement organization to maximize the usage of technology to drive the business forward and MRP systems have also become commonplace for Procurement to bring cost under management. Procurement needs to stay at the leading edge of technology and utilize it to maximize its contribution to the business

7. Professionalism

Clearly, procurement must deepen its professionalism and be able to articulate the niche and the value it brings uniquely to the table. Modern concepts such as category management, supplier relationship management, e-commerce, etc are providing such a deeper level of professionalism and creating the opportunity, but it is also very important to deliver to meet the company's business objectives. Such professionalism must not be “procurement for the sake of procurement”, but it must be for the sake of the business. The procurement function must ensure risks are minimized and value is maximized.

 

8. The language

Getting one’s message heard across the enterprise requires one to speak the language of the business. Procurement must learn the language of the business and communicate with each group in terms that they can relate to. Procurement terms will not resonate with business people but instead needs to speak in terms of value add and risk management. If Procurement doesn’t speak business language, then it would not be perceived as a valuable contributor or partner in the business but rather a skill that comes in to deal with sourcing-type issues, only to be called upon when decisions have been made.

So as individuals what do you need to do?

Bill Clinton speaking at a Supply Chain Executive Conference in 2006 stated that “The supply chain in the 21st century is a lot more than supply and demand; it's about matching capability and opportunity”. He stated that in his view "helping people make connections, is what procurement does for a living."

As individuals So what do Individual needs to become Board level members?

1.    Understand the business in terms of what the business goals are and respect the business needs of others in the company.

2.    Be clear about your purpose in the organization, as not just about procurement, but also about adding tangible value to the business.

3.    Don’t work in isolation, build alliances and take the business along. Know when to bring in users and executives into negotiations and get buy-in.

4.    Establish your credibility by focusing on what you're good at and ensuring that you deliver clearly to P&L benefits.

5.    Learn from colleagues, as you do not have a monopoly on ideas. Get outside your comfort zone and forge relationships with people who understand the things you don't.

6.    Being seen as a trusted person by demonstrating tangible delivery and transparently.

7.    Do things for the right reasons by having substance behind what you're trying to achieve. Believe in it yourself as it instills trust.

8.    Don't be afraid to make mistakes but learn from them. Once people know it was for the right reasons and you did your best, mistakes are acceptable. 

9.    Know your audience. To get people to listen, you've got to understand what kind of personality they are and how will they react.

10.  If you can demonstrate passion and confidence, you'll find it a lot easier to win the hearts and minds of others

Most of all, have fun!.

Thank you.

Babs Omotowa, FCIPS