As savings tend to zero over time, does the growing environmental, social & governance (ESG) agenda present an ideal new role for procurement practitioners? Jonathan Dutton FCIPS considers the possibilities for Supply Clusters Members:
The global outsourcing movement achieved real traction during the decade of the 1990s. Top C suite managers saw that the supply side was a good place from which to manage risk. Why make things yourself in which you are not expert and are not core business? Cannot expert suppliers fulfill their core business better, faster, cheaper than us? If so, do we and our consumers not benefit more by outsourcing to them?
The development of professional procurement 1990-2020
This strategic thinking offered a spur to the procurement profession which expanded and professionalised relatively quickly. In Australia, then New Zealand, the profession developed quickly over the next 20 years from the year 2000 onwards, accelerated by the formation of the local arm of the global peak body – CIPSA: The Chartered Institute of Procurement & Supply which acquired the local AIPMM in 2004.
The searchlight of professional procurement swept across all the principal INDIRECT expenditure categories during this time – stripping cost from our largely service based economy. Subsequently, procurement addressed most local DIRECT categories and a many capital expenditure projects as well.
Yet, after repeated trips to market, available savings have gradually reduced – indeed, they have increasingly tended towards zero over recent years in all the core spend categories. And along the way, procurement has truly become known primarily for one thing – a myopia on cost.
Ultimately, procurement now risks becoming a victim of its own success at saving money and driving cost avoidance – ultimately creating a new challenge; navigating a weaker Procurement value proposition when we over rely on cost savings as our reason d’etre – as less savings are possible over time:
“Why carry permanent overheads in the procurement team to manage cyclical spend offering limited savings.” CFO of major Melbourne based company
Yet throughout this time, procurement has strived to get stakeholders to acknowledge other benefits they can bring beyond just savings – such as increased quality, timely delivery, reduced risk, supplier performance, contract management and better supplier relationships. More latterly, strong process, compliance and more sustainable procurement outcomes – even using procurement as an instrument of policy. Yet few other benefits beyond cost seem to have struck a chord with distracted stakeholders focussed more on core business and their consumers.
However, one area of benefit from professional procurement achieved traction within the profession itself and was beginning to become recognised as adding value by stakeholders – sustainable procurement. That is in its widest sense, not just the environmental side of sustainability.
Indeed, the new global ISO 20:400 standard for Sustainable Procurement (May 2017) framed ‘sustainable procurement’ in a much wider context.
Yet, the arrival of Covid in its commerce-shattering mode, around March 2020 in Australia & New Zealand, stopped the growing momentum of sustainable procurement almost dead in its tracks, it seemed. As one Chief Procurement Officer (CPO) remarked privately at the time, “… and who cares about that now? We have a business to save.” Latterly, another CPO added, “It is a shame we are now just in box-ticking mode on sustainable procurement; but we have other priorities all of a sudden.”
Post-Covid research on procurement priorities
However, post-covid research in the procurement industry suggests a comeback. That the passion behind sustainable procurement initiative is more resilient than our laconic CPOs observed. The Grosvenor Performance Group, a consultancy, surveyed 200 Australian procurement teams several times during the last 18 months to gauge their changing priorities:
Mercifully, the age-old number one priority of COST had been usurped by RISK MANAGEMENT early in the crisis – although true to type, had been quickly replaced by COST again as organisations reached to survive and start fiscal repair just a few short months later as the pandemic dragged on.
Yet, by Christmas 2020, both public and more anecdotally private sector procurement teams had re-engaged with the sustainable procurement agenda according to the research.
This message is consistent with the procurement culture in the ANZ region and its perceived enthusiasm for sustainable procurement causes – common also amongst millennial staff.
It is also borne out in recent global research by The Hackett Group, a US based consultancy, who survey hundreds of international CPOs in Q1 2021 to determine that, unusually, sustainable procurement issues had been newly rated an improved 9th place on their Top 10 Procurement KEY ISSUES Report listing.
Neatly, this trend fits well with another corporate trend – the rise and rise of environmental, social & governance (ESG) purity as a measure of organisational worth in an increasingly sensitive and concerned ‘woke’ society.
No longer CSR but ESG
Only a few years ago, the accepted corporate phrase for post-charity worthy contribution was ‘CSR’ – corporate social responsibility. Coined by famed management guru Michael Porter (of ‘five forces’ fame) back in 2006 with a seminal work … “Strategy and Society: The Link Between Competitive Advantage and Corporate Social Responsibility”, Harvard Business Review Porter, M.E. & Kramer, M.R. (2006). They followed up this work in 2011 with “Creating Shared Value” also in Harvard Business Review.
Today, a broader ESG trend, offers a wider perspective on corporate virtue and compliance and a wider measure than the old CSR – which seemed more optional/less mandatory in nature. An essential difference, really, as ESG includes much more of the mandatory and the corporate strategy relevant as well as meeting community & stakeholder expectations – not so much the nice-to-have perhaps.
ESG matters today. It matters to society, its citizens, voters, consumers, shareholders, investors, boards and bosses. Increasingly so … indeed a European based leader of a major international superannuation fund investment company put it best:
“A CEO recently told me that, a year or two ago, ESG was the last question that would come up in an investor meeting, if there was time. Now those meetings start with that question.”
Charles Emond, President of global super fund CDPQ
Corporate ESG priorities
The topics within the ESG mandate can be self-explanatory – and they vary by jurisdiction and by brand, by needs, by circumstance and over time:
The Top 9 x ESG priorities right now for procurement managers are dictated by a broad range of stakeholders, and might typically include things like:
- Achieving NET ZERO emissions – often by 2030 for many organisations
- Recycling waste safely
- Visibly contributing to managing climate change
- Forging demonstrable supplier diversity targets
- Creating jobs for both indigenous Australians and disadvantaged Australians
- Supporting your SME supplier base and buying local
- Working to eradicate modern slavery within your supply chain – MSA 2018
- Visibly paying corporate taxes and not notably avoiding/ minimising local tax
- Complying with recent supply-side relevant legislation such as:
- Payment Times Reporting Act 2020
- The Chain of Responsibility laws and regulations – post 2018
- The Unfair Contract Terms Act 1977 – updated 2015
- Federal and State govt temporary Covid pandemic relief measures
Procurement due diligence as part of ESG
This quick list (above) gives an obvious impression of the gravity of some of these issues for stakeholders and, therefore, their organisations.
To this list you can easily add hard commercial considerations, often based around sensible but often overlooked supply-side risk management strategies, that present compelling procurement-governance questions:
- Global media and search-engine monitoring of strategic suppliers
- Corporate ownership networks mapping of both key suppliers and important bidders
- Detecting supplier fraud and corruption – often with rouge employees co-operation
- Tracing sub-contractor value chains
- Checking certifications on insurances, licencing & import/export compliance
- Evaluating supplier financial viability as a going concern
- Overseeing supplier collaborations
One small example of supplier due-diligence risk was explained by a participant in a recent PASA CPO Roundtable, “We had four bidders for a technically sensitive contract. Only by an initial piece of luck did we subsequently determine that three of the bidders were actually owned by the same holding-company, tracing back to China.”
Few procurement teams invest anything like enough resource into proactive supply side due diligence. Increasingly, it feels, examples like those listed above risk real consequences. And, should they be unearthed, it is easy to blame procurement for the oversight.
The real opportunity for procurement
The opportunity for procurement lies at the crossroads of ESG and supply side risk. And it presents a symbiosis of needs – both of the corporate and professional; the needs of the business to comply with both the law and expectations and the needs of the procurement function to be relevant and worthwhile. Ultimately, cost-cutting was never a strategy, only a help. Truly, it marginalised procurement as much as it made them temporary heroes.
“You cannot cost-cut your way to greatness” Ruth Porat
ESG is not a strategy, but a requirement. Table-stakes, really, for the modern large organisation. It does not win you many sales. But it sure loses them when you get it wrong. The cost of brand reputational damage can be huge. Sometimes irreparable. Risk management reduces the chances.
Where ESG immediately intersects with risk management is in the re-balancing of INBOUND supply-chains post-pandemic. Many procurement teams are working to re-balance RISK and COST today. To review some one-eyed purchasing decisions of the past to perhaps source their widgets a fraction cheaper from far-flung suppliers around the world. But at the risk of them not arriving reliably to sustain production from Milan or from the Dominque Republic – two real examples offered in the PASA CONNECT CPO Roundtable during the lockdown.
Reviewing these previous PRICE driven decisions in the framework of security of supply, keeping supplies running and keeping production working, is usually far more important than the few shekels saved at the time of purchase. Yet balancing risk -v- cost is often a judgement call when not calculable.
So, why not map your supply chain to rebalance risk -v- cost and, at the same, time map your supply chain for modern slavery risk? A rare opportunity for procurement to strike twice with one resource.
The reality of savings tending towards zero over time is as clear as the economic law of diminishing returns – there is only so many times you can tender the stationery supplies and expect a market driven saving. So, in the long run, what else could procurement tangibly contribute to the organisation?
The confluence of the momentum and drive behind sustainable procurement initiatives on the supply side and the emergence of the corporate ESG agenda within the ‘C suite’ is more than just a happy coincidence. The overlap is clear and the strategic drivers common.
An additional driver is that stakeholders are nowadays increasingly interested in corporate provenance – where things come from and how they got here? Moreover, they want a say in it.
Embracing their inbound supply chains and their many complexities, as well as their inherent risks and opportunities is a welcome responsibility for professional procurement – and can be a very valuable contribution. Yet taking this responsibility on, without corporate sponsorship, risks taking the blame when things unravel.
However, if procurement leaders can master this ESG opportunity and win the argument for both support and resources for the supply side, an ideal new role does await the procurement profession – balancing not just risk -v- cost but also balancing the service your internal customers desire with the governance and risk management that your external stakeholders demand.