How can you tell if your strategy is aligned to what the board really wants?
By Alexander Arsath Ro’is
What are the issues that keep members of your board awake at night? Is smart procurement valued or considered merely a source of cost reduction? Can procurement deliver the goods when it comes to contributing to company-wide strategic goals? These were some of the most important questions that emerged from studies of annual reports of international public and private organisations.
With the rise of the role of the CPO in globalised business in the past decade, the need for alignment among C-level directors within organisations, whether private or public, is burgeoning. The requirement for CPOs to create value at the core of the business via procurement has also become apparent. But how can this change be incorporated into the DNA of the business? How can procurement become fully aligned with the boardroom? Even those who strive to achieve it have little help in the form of tools to go by.
As a result, the real understanding between procurement’s and the board’s values can be very weak. Although each can seem to accept each other’s priorities it can be little more than window dressing, rather than a genuine long-term commitment.
To try to close the gap between procurement and the board my colleagues at Benefit and I have developed a tool to measure alignment. We joined forces with two Dutch universities and an academic team led by Bart Vos, professor in procurement at Tilburg University, to validate the scientific aspects of the method. In 2008, Nevi, the Dutch Association for Procurement, became involved following the introduction of the tool among a number of Dutch top-100 public and private organisations. And most recently, CIPS in the UK has taken an interest and is engaging in a joint programme of work with Benefit and Nevi.
Boardroom alignment is not based on some random philosophy. It is linked to one of the most important issues for procurement: seeking alignment with the wider organisation and its objectives (see also The 7 habits of highly effective CPOs from CPO Agenda, winter 2009-10).
This raises questions such as:
What strategic issues are relevant to the organisation as a whole?
To what extent does procurement address these issues in a valuable way?
What is the board’s view on of the role of procurement?
How does the board’s view on procurement differ from the function’s own view of itself?
Are the priorities procurement aligned with the strategic priorities at board level?
This model systematically measures the differences in perception between the board and procurement. And a full understanding of the different perceptions is key to a constructive dialogue between procurement and management so that they can work more closely together to boost competitive advantage – which is the ultimate goal of the tool.
Procurement can increase its value not just by doing things right, but also by doing the right things. The degree to which board and procurement are aligned is determined for the following nine topics: cost reduction, agility enhancement, innovation, service orientation, risk reduction, core competences, corporate social responsibility, expansion and internationalisation.
These nine issues were recurring themes in the analysis of annual reports of companies and organisations, says Geert Mathijssen, director of Benefit. He adds: “The degree of alignment is based on the extent to which the board focuses on the independent topics.”
Subsequently, these scores are then measured against the following questions:
How does the board perceive procurement within the company?
How can procurement contribute to the board’s priorities?
What are the ambitions of procurement when it comes to these priorities?
Where does procurement stand now with regard to these priorities?
The results can then be charted on a graph, as in the example below:
The red line represents the board’s focus on the nine topics and the blue line procurement’s focus. The scores 0 to 5 are established by means of an interview-based assessment, where 0 stands for not relevant and 5 for highly relevant. The gap between the red and white lines reflects the degree of misalignment. This example shows a significant under-alignment of procurement on three of the strategic topics: service orientation, risk reduction and innovation.
The light grey line represents the board’s expectations for procurement’s contribution on the nine topics over two years, while the black line represents procurement’s own expected focus over two years.
Analysis of these results is a good starting point for dialogue between the board and procurement.
Validation of the model partly involved establishing whether it was regarded as relevant to business. To this end studies were carried out with Dutch top-100 organisations over a period of two years.
One of the biggest hospitals in the Netherlands took part in this study, with some surprising results. Even though its head of procurement is an experienced CPO who gained a nomination for Dutch CPO of the year for his work at the hospital, we found that there was some misalignment between procurement and board.
This was reflected across seven other hospitals. Board members and CPOs were interviewed based on the new procurement model. “I thought I knew exactly what the objectives of the board were,” said one CPO. “However, we turned out to be under-aligned in several respects, and over-aligned in others.” In the case of his hospital its biggest challenge was identified as the lack of focus on core competencies – the hospital’s board had expected procurement to contribute more to matters of outsourcing. Fortunately, the CPO in question was able to resolve this under-alignment fairly quickly thanks to the expertise of his procurement staff.
Furthermore, there was under-alignment with regard to internationalisation: the procurement function was expected to contribute more in providing procurement-related support to associated hospitals abroad. When it came to innovation, the board of directors wanted to see flanking initiatives: efforts by procurement to recognise important developments in the market and inform the business on these developments. Issues relating to corporate social responsibility and risk reduction, on the other hand, were slightly over-aligned: procurement focused more on these subjects than necessary according to the board. Meanwhile, there was proper alignment on cost reduction and agility.
The impact of this measurement exercise was significant. One CPO said the biggest benefit was that the function gained a good perspective on mutual views and goals of both the board and procurement and it established a structured dialogue between them. Another healthcare CPO said: “No matter how hard you try to be strategically aligned, it is still the chemistry between board and the CPO that determines whether or not you get the results you wish for.”
For another of the CPOs in the study the analysis definitely provided food for thought: “Some discussion existed on what topics should be focused on but this model helped us pinpoint expectations.”
For maximum effectiveness we found that organisations and procurement need to be ready to tackle this issue. Since it focuses on the added value of procurement it fits in with the next steps toward the professionalisation of purchasing.
One CPO involved in the study warned: “I’m glad we didn’t do this exercise three years ago. Now that I have streamlined my tactical procurement methods, we are truly ready for the big boys – the board and its sometimes unpredictable expectations.”
It’s with this point in mind that the model has been incorporated into Nevi’s curriculum.
The next step, however, is to apply the model on a larger international scale and examine how organisations in different cultures take on procurement boardroom alignment.
John Weinstock, knowledge manager and trainer at Nevi, says: “What still has to be has to be investigated is whether there is a correlation between the alignment factor and the board’s cultural mix. Whether a company has a hierarchical or non-hierachical culture, for example, might have an influence.”
Alexander Arsath Ro’is is a managing partner at Dutch procurement consultancy Benefit (www.benefitboardroomalignment.com)