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Taking a Risk-Based Approach to Procurement to Slay Organizational Dragons

November 4th, 2021
Hannah Tichansky

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You may have heard of business warriors, but have you heard of procurement wizards? There’s a new breed of champion in the enterprise – a stronger, more empowered, more dexterous procurement function, set to navigate the journey to greater organizational resilience.

But let’s put our own spin on the definition of wizard first:

wizard [ wiz·ard ] \ [ wi-zərd ]

Noun

Aravo definition of wizard:

A very clever or skillful person who casts resilience over an enterprise through the right combination of holistic management of risks, attention to detail of third-party vendors, and involvement in overall company strategy. Procurement wizards set the bar for high performance in taking a risk-based approach to both daily activities and long-term goals and initiatives.

Wizards are a special breed – they have the ultimate combination of Strength, Dexterity, Constitution, Wisdom, Intelligence, and Charisma. And they combine these attributes to weave their ‘magic’, safeguard their cohorts and fulfil their quests.

Let’s take a look at these attributes as they relate to the procurement wizard.

The Changing Role of Procurement

Charisma and strength. The procurement wizard builds relationships, captures innovation and influences outcomes.

Procurement professionals have more recently become closely involved in, and integral to company operations and resilience. This increased recognition is seen across all industries, and according to Deloitte Insights,

“CPOs are successfully navigating… complexities while delivering across a greater breadth of KPIs. Although they are still heavily focused on costs, they have expanded their value propositions to influence demand, drive innovation, and work closely with strategic suppliers and partners to foster commercial compliance, increase speed to market, accelerate M&A integration/divestiture programs, and drive continuous improvement.”

Deloitte Insights

The procurement team is at the interface between the enterprise and the extended enterprise: the organization and its suppliers. No one knows what’s happening with suppliers as intimately as procurement. Procurement professionals are in the position to understand the risks and the wider ecosystems their suppliers operate in. They, like no other function, can make predictive connections between these (e.g. they may have early line of sight that a semiconductor chip supplier is struggling to deliver – and be able to quickly identify if this is specific to this supplier or more endemic to the wider ecosystem, and quickly pivot alongside the business accordingly).

And it’s not just risk, but procurement can capture opportunity and innovation and capitalize on them for the enterprise, such as through identifying new products, materials, capabilities and offerings.

With this greater inclusion of procurement professionals into organizational strategy, CPOs and similar roles need to begin to reframe how the function can best serve the organization, and how other departments can serve them. One key to this new way of thinking is framing procurement around risk management, particularly when it comes to managing third parties, suppliers and the supply chain.

The Magic of Taking a Risk-Based Approach to Procurement

Intelligence and wisdom. Wizards are adept at calculating risks, and have the wisdom to be adaptive to changing conditions.

But what does it mean to take a risk-based approach to procurement, and why is it so important to rethink the procurement role at all? It’s important to understand the shifting role of procurement professionals, and why this shift is so critical to overall organizational resilience.

Procurement officers were often traditionally separated from other departments (and not always included in overall company strategy) but have since become organizational heroes (or wizards) during the COVID pandemic when companies scrambled to secure and manage suppliers, procure needed PPE for employees, and place greater scrutiny on investments. From isolated workers to white knights, procurement professionals have gone above and beyond to secure the kingdom from external threats.

This shift in procurement influence is even changing job responsibilities. While the old approach to procurement related to margin impact and onboarding vendors and technology, these more short-term responsibilities are changing to a need to focus on long term strategy and impacts. No longer can procurement be focused on only cost savings, they must also be in-tune and contribute to risk management efforts.

Top Procurement Threats CPOs Need to Slay

Just as the role of procurement personnel is shifting, so too are the challenges that they face. Several of these include:

New and elevated risks:

Supplier risks that have emerged during and after the recent pandemic are (for obvious reasons) a critical component of new and elevated risks facing procurement professionals. Lack of awareness of supply chain risks has been exposed, and perceived level of risk has continued to rise. According to Axios research, 75% of businesses reported a supply chain disruption related to the pandemic.

These types of disruptions can often arise from lack of information and lack of risk awareness surrounding third-party vendors. According to Aravo’s benchmarking research, which exposed gaps in third-party management that could lead to supply chain disruption:

  • 51% of organizations are not assessing the business continuity risk of their vendors
  • 62% of organizations are not assessing the financial viability of their vendors
  • 52% of organizations are not assessing the operational risks of their third parties

Hidden risks throughout supply chain:

According to Deloitte’s 2021 Chief Procurement Officer Survey, only 18% of CPOs had formal tracking processes in place to determine direct (tier 1) risks within their suppliers, and only 15% were aware of risks further down their supplier base. In addition to the vendors that you have direct contracts with, it is also important to know your fourth parties and nth parties- i.e., your third parties’ subcontractors. Without this understanding, companies leave themselves vulnerable to issues such as cyberattacks, supply chain disruptions, and penalties. With a greater focus on new initiatives such as ESG (explored later in this blog post), risks further along your supply chain must be identified and managed proactively.

Isolated or siloed procurement functions:

As mentioned, traditional procurement departments weren’t usually centralized and were focused on short-term initiatives like the sourcing and transactional onboarding of suppliers, cutting costs and other relevant financial decisions. Organizations that still exemplify these silos face challenges when it comes to thinking holistically and managing risks from all angles.

Driving strategic projects and collaboration between departments is a critical way to begin to eliminate these silos, while still managing a daily workload of financial responsibilities. According to Deloitte Insights, high-performing CPOs spend 63% of their time on operational and transactional tasks, spending the rest of their time on more strategic, long-term work (CPOs who are not as high-performing spend a higher amount of time, 74%, on operational/transactional tasks).

Digital technology not being agile enough:

Just as overall procurement functions need to change with the times, so too does the digital technology that procurement uses. Vendor risk management (VRM) software should be optimized to not only provide a holistic view of all third parties and the individual risks they can bring, but also provide visibility to management and executives. Traditionally manual processes do not provide this level of detail, and are not scalable with procurement’s shift to a greater role in company strategy.

Risk-Based Approach to Procurement: A New, Agile Quest

Dexterous. The procurement wizard is agile – able to adapt to changing risks and dynamic business environment.

With this shift it can be difficult to prioritize how to get started, and what to focus on first. While not everything will be implemented immediately, there are agile practices that should be on a procurement wizard’s agenda, including:

Thinking holistically:

CPOs should be focusing on collaboration and influence across job functions, not just as a spend relationship. Being involved in the entire third-party/supplier relationship management process ensures agility. This allows prioritization of suppliers who may pose higher risk to an organization, rather than relying on a one-size fits all procurement strategy that could allow risks to fall through the cracks.

Company strategy:

By shifting primary focus to long-term initiatives and goals, procurement professionals can gain a greater foothold in wider organizational strategy. This includes determining risk management priorities, and working with risk, legal, executive, and other teams to better manage supplier onboarding, relationships, and supplier risks. By being in-tune with company strategy and thinking of procurement activities from a risk-based approach, procurement teams step out of the shadows and into more collaborative roles.

Digital transformation:

While it’s not a magic spell, a key step is to build scalable practices rather than one-off pilot programs. By prioritizing data clean up and investment in TPRM tools that can build efficiency, CPOs can see positive impacts across the organization that supports overall risk management.

If there are challenges with incorporating digital procurement technology into an organization, gaining executive sponsorship is a critical way to garner support and investment in the tools that will assist in procurement and supplier data. Emphasizing both short and long-term goals and wins, and how these technologies will drive organizational resiliency and agility can be critical when approaching executives.

Defeat process silos throughout the organization:

Just as the procurement role has (in many cases) been siloed from other organizational functions, so too has procurement-related processes. The risk of this isolation is increased vulnerability to supplier risks and lack of visibility into what is being purchased (and how this maps to critical products and services), what vendors are being onboarded, and what risks they bring to the table. By integrating or centralizing formerly siloed processes such as supply chain, third-party risks, travel expenses, procure-to-pay, and more, procurement professions lead greater organizational resilience and security.

Environmental, Social, Governance (ESG):

While this certainly could be housed under “new and emerging risks”, the magnitude of environmental, social, governance (ESG) regulations and compliance is reshaping how organizations manage suppliers, affecting not only procurement, but legal, compliance, risk functions, executives, and more. With concerns such as climate change, eliminating human trafficking and modern slavery from supply chains, identifying and eliminating corruption, etc. procurement must take a driving role in ensuring that third-party vendor relationships are aligned with ESG initiatives.

Empowerment:

Perhaps the most important quest to undertake is to embrace the power that procurement wizards hold within an organization. The white knights of the pandemic, CPOs and their teams fought challenges to protect their kingdoms, and executives of the castle (or office) have taken notice. Don’t be afraid to insert yourselves into company strategy and products that matter, build teams to better combat emerging risks, and find ways to drive positive change.

Procurement Wizards to the Rescue

Constitution – the constitution of the procurement wizard has increased, as they have carried more responsibility, wielded more organizational clout and taken a more agile, risk-based approach to procurement.

With these trends, it is becoming more and more apparent that CPOs and procurement professionals are becoming resilience wizards, helping companies to manage supplier risk and incorporate this mindset into overall strategy. And the benefits are already being seen. According to Deloitte research, high performing CPOs are 70% more likely to be a part of all organizational decision making, including risk-related decisions and financial planning.

It’s clear that the best procurement professionals – the wizards – are those empowering fresh, more strategic approaches to succeed in new and dynamic risk landscapes. The ones focused not purely on cost-savings, but on saving (and growing) the business through laying the foundations for better organizational resilience.

Large, organizational changes are not always the easiest to implement, but the benefits to taking a risk-based approach to procurement are evident. Not only do procurement professionals feel more empowered, but company cost savings are generated, and everyone has a better understanding of supplier risks and steps to take to build resilience and slay those dragons. If you are interested in learning more about how to take a risk-based approach to procurement, feel free to reach out to one of Aravo’s experts at any time!

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