Hackett's research, leaning on benchmarking data from its latest Book of Numbers, finds that world-class IT organizations — those which achieve peak efficiency and effectiveness in Hackett's IT benchmark studies — spend 7 percent more per end-user on IT operations than typical companies. For a typical Fortune 500 company with a world-class IT function, this translates into increased IT spending of $29 million per year relative to their peers.
This investment more than pays for itself by enabling reduced cost and improved performance in finance, procurement, human resources (HR) and other areas of back-office operations. Hackett's research found that world-class Fortune 500 companies run these functions at lower operational costs of $134 million per year ($7.1 million per billion of revenue) compared to typical companies, and process automation and IT enablement play a very significant role in realizing these lower non-IT back-office costs. In addition to this efficiency impact of IT, a direct correlation was found between performance of the IT function and effectiveness in finance, procurement and HR.
Key IT Strategies
Hackett finds that in order to drive the maximum value from IT, leading companies pursue five key strategies:
- Standardize and Consolidate — Leaders streamline and simplify, and to ensure maximum return on investment (ROI) they take the critical step of standardizing master data definitions as they reduce the number of ERP systems and other applications.
- Focus on High Return Opportunities — Leaders take a differentiated approach to IT investment and do careful reward/risk analysis to identify areas that can reap the greatest benefits.
- Don't Indiscriminately Minimize Cost — Rather than focusing on across-the-board cost cutting, these companies take a very different perspective and seek to maximize value at the lowest achievable cost, in part by reallocating spending from technology infrastructure to application management.
- Maximize Value of Information Assets — World-class companies obtain the greatest possible return on their technology investment by maximizing the value of information assets to end-users through data standardization, rich metadata, online information access, analytical capabilities and alignment of the information architecture with business initiatives such as enterprise performance management.
- Outsource Selectively — Leaders outsource carefully, and they use outsourcing as a tool to improve effectiveness rather than efficiency.
Profile of a Typical CPO
According to the study "Chief Purchasing Officers' Mobility Compensation Benchmarks and Demographics: A Study of Fortune 500 Firms" from CAPS Research, the CPO community is predominately male (87 percent) and the average age is 49 years old. Total annual compensation is $366,000 ($418,000 if female), and the CPO has a staff of 247 associates. The average CPO has been in his or her current position for two or more years and reports to one level below the CEO.
Typical CPOs are responsible for an annual spend of $3.5 billion and have 19 years of purchasing experience. They have been with their current firms for less than six years, are the top purchasing executive for the entire firm and have a B.S. in business and an MBA.
According to the survey, average CPOs attained that post when their predecessors retired or they were the first CPO for the firm. They are not likely to be promoted to a level above CPO before retirement, and they have seen the value (in 2006) of their stock option plans and retirement funds fall since 2001 due to variability in the stock market. Other findings from the study were:
- CPO compensation, adjusted for inflation, has continued to rise over the time period studied.
- There are not discernable patterns of previous experience, education or other variables that were observed to be predictors that an individual would become a CPO for his or her firm, or another firm.
- Titles of CPOs have not homogenized over the time period studied, with a wide variety of titles resulting.
- The study's authors also found that, for a substantial number of CPOs, they were the first to hold the title of CPO in their firm.
There also continues to be a wide variety of factors that make up the goals a CPO must meet to earn their bonus, according to the study. Generally, however, CPOs reported they were satisfied with their compensation packages when compared to their peers in other functions in their firms.