Be risk aware, not risk wary

Procurement should focus on its purpose of “securing optimal supply to meet business needs” instead of limiting itself only to lowest cost and meeting compliance requirements.

Is the procurement process becoming a hurdle to your business success?

The procurement function has evolved to manage spend and avoid uncertainties in supply. However, this has to some degree led to the undesirable side effect of it becoming overly compliance-driven and standardisation-focused to the detriment of the organisation’s objective and purpose.

Following this, procurement needs to better understand risks and leverage risk management within the function to enhance its role as a business partner to the organisation, from an organisational as well as a behavioural perspective. Without a balanced view of cost, risk and business impact altogether, procurement may limit itself to performing a role of procurement compliance and cost control.

Where procurement performance and targets are centred on managing spend, there is little leeway to examine trade-offs between short-term commercial savings and possible long-term costs from increased risk exposure. Procurement often does not have a clear alignment to the corporate risk profile and appetite. This results in an intolerance for any risks and therefore assumes that risks should be reduced to 0%.
Also, a rigid supplier compliance policy or process reduces the organisation’s ability to capture business opportunities through procurement and may leave innovative suppliers out.

From our point of view

• Procurement should focus on its purpose of “securing optimal supply to meet business needs” instead of limiting itself only to lowest cost and meeting compliance requirements.
• Procurement needs to be a creator of business value; whose services enhance the overall organisation’s purpose.
• Risks are not just something to be avoided. They are a natural part of taking action and should therefore be understood and managed accordingly.
• Procurement is a critical influencer on the organisation’s risk portfolio, with the ability to balance risk and opportunity in the supply base. However, this is often not seen as Procurement’s role.
• The procurement process should facilitate good practice without being prescriptive. It should enable and empower professionals to make the “best” decision that delivers the right balance between cost, risk and business impact. For this to be achieved, all three factors need to be understood holistically.

7 actions you can take in your organisation

1. Clearly define Procurement’s purpose – i.e. cost reduction, innovation, risk mitigation.
2. Empower procurement professionals to create business impact and adjust performance metrics accordingly. 
3. Evaluate tolerance ranges for different risk types and categories – what is acceptable for one may be a no-go for another!
4. Design the procurement organisation and process with a view of the business objective in addition to procurement efficiency.
5. Build flexibility into all sourcing processes to allow acceptable risks.
6. Regularly reassess your risk landscape depending on business needs, i.e. “new risks due to new supplier operating models”.
7. Consider both cost and risk when defining selection criteria.

Interested in finding out more? We look forward to supporting you in balancing your risks and opportunities in procurement.