How Procurement should leverage Risk Management to become a Business Partner

Procurement professionals have been fighting for a long time to be recognized within their own organization as a Business Partner. In order to achieve that recognition they are working on automating their Procurement processes (Source-to-Pay), on capturing innovation through dedicated sourcing strategy and on improving the quality of service delivered to the end user in addition to cost-saving and supplier management.

There is another way to become a Business Partner: leveraging risk management and apply its methodology to the end-to-end Procurement process. By identifying and assessing Procurement risks and deploying dedicated action plans, Procurement leaders will increase the added business value they can deliver to their organization.

By using a common language – Risk, the Procurement professionals will be able to engage with CEO, CIO and other C-level stakeholders, provide relevant insights, and be actively involved in the company global strategy.

Risk Management and Procurement

When it comes to Procurement, risks are immediately considered as coming from an external factor: the primary vehicle for bringing risks into the organization is the supplier. Risk of bankruptcy, risk of having a supplier using child labor force, risk of inventory shortage… On the one hand, it is not wrong and indeed suppliers are a major source of risks given the complexity of the tier N relationships and globalization of the economy. But on the other hand, reducing Procurement risk to Supplier risk equals missing the big picture. Who signed the deal with the Supplier that is today calling for bankruptcy or is caught in a child labor force scandal?

Whether the business bypassed Procurement because of a weak Procurement policy or because the buyer is not well-trained regarding negotiation or basic due diligence procedures, everything starts within the organization. The Procurement process, starting with the need analysis and ending with the supplier relationship management is a complex process with a lot of interactions. Procurement is a key entry point throughout the sourcing activity during which the company is entering in contact with external providers to do business and capture innovation. For instance, when an RFP goes out to the market, multiple risks have already occurred:

  1. Risk of having buyers not well trained (negotiation, file manipulation, …)
  2. Risk of having buyers overwhelmed by the issues raised by the prescribers
  3. Risk of buyers not being consulted by prescribers
  4. Risk that the company’s purchasing policy is not defined
  5. Risk that the procurement function is not aligned with the company’s Corporate Social Responsibility policy

Risks are everywhere across the company, and Procurement owns a major part of them. But depending on how you manage them, there are not always threats but can become opportunities.

Assess Procurement Risks and Mitigate

Taking action entails risks and costs but they are much less than the long-term risks of comfortable inaction. Because risks are there, the best course of action is to recognize them and mitigate them.. Depending on the risk appetite of your organization (how risky is your company) you could put in place a robust risk management approach following this classic methodology. Scope, assess, analyze, deliver. That iterative process, if executed within a comprehensive framework, can help you mitigate your Procurement risks and turn a threat into business opportunities.

Scope: Using your knowledge and experience as a Procurement expert, you will list the key risks that are common in your business, type of activity, main categories…. You cannot work at the same time on all the risks you are surrounded by so start with a campaign focused on a specific area like a category, a process or sub-process, a Business Unit….

Assess: Assess the risks you have selected (Frequency, Impact and Control efficiency). Don’t forget to add details such as description, relevant examples: any key information you would like to keep on record.

Analyze: Once your risks are assessed, start building the strategy for mitigating your critical risks using the exposure matrix. For each selected risk, create action plans, rate the difficulty to execute them and list associated costs to support your budget request to implement your Risk Management Strategy.

Deliver: When the budget is validated, it’s time to deliver. Thanks to the action plans defined at the Analyze step, you are now in a good position to deliver those action plans and mitigate your procurement risks.

Procurement leaders are now charged with strategically prioritizing both cost savings and risks in order to protect the businesses and drive innovation. The opportunity for Procurement has never been greater, signaling an evolution for the Procurement departments and professionals to become a Business Partner.

Are you willing to take that risk ?

Romain Rousseau (Director Axbility Consulting)

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