World-class procurement organizations remain highly focused on achieving optimal performance. Technology has always played an important role in enabling world-class performance, but procurement is now at an inflection point. World-class organizations can continue to reduce costs by embracing digital technology, while the peer group can leverage the same technology to catch up faster at less cost.
Digital transformation differs from previous approaches to technology-enabled change in the following ways:
- Digital transformation creates new ways of doing things. In the past, technology-enabled change predominately aimed at replacing manual processes and making them faster and more efficient. While the push to reduce cost and increase efficiency is on-going, as we move into the digital era, technologies like predictive analytics, social media, robotic process automation (RPA) and artificial intelligence (AI) are not only changing the speed and efficiency of processes but creating entirely new avenues for doing things.
- Digital transformation is customer-centric. Past technology-driven transformations automated processes within and between enterprises. In contrast, digital transformation uses technology to engage internal and external customers through interactive cloud-based tools and portals, to provide better service to stakeholders, and to leverage big data and predictive analytics for better, faster insight.
- Digital transformation increases the velocity of change. Not only have the speed and nature of technological change accelerated as new types and combinations of technologies are launched at a fast pace, but the speed of adoption has also risen dramatically. Today, companies pilot and adopt new tools in a matter of weeks and months, not years.
The Digital Transformation Imperative
- Cloud-based infrastructure and applications, virtual business and technology networks, and business analytics are converging with employees and consumers who are increasingly comfortable with new mobile technologies and business models. This has created tremendous opportunities for procurement organizations to apply digital technologies to transform service delivery. Increasingly, digital technology is the platform for delivering a whole new class of services, such as predictive analytics to guide decisions. Moreover, digitally-enabled processes reduce errors and make information easier to access.
- Technology spends per procurement FTE in world-class organizations is often higher than in the peer group, reflecting greater investments in areas such as process automation. These, in turn, deliver productivity advantages. For example, the cost per order at world-class procurement groups is 71% lower than that of the peer group. More important, extensive use of automation allows procurement staff to devote a greater part of their day to talent development and activities that boost business performance.
Raising the Bar on Performance
Delving into 2017 benchmark database, it has been calculated that the additional cost savings that world-class and peer-group procurement organizations could accrue from the adoption of digital technologies.
Although achieving world-class performance can take five or more years, companies are likely to see marked improvements after just two years. Those who continuously pursue change have much to gain. First, new technologies will dramatically accelerate the pace at which the peer group can approach world-class performance levels.
Second, new digital tools will enable world-class procurement organizations to further improve their performance (measured by cost) by at least 35%, allowing them to break through a cost plateau that has lasted for several years.
While digitization will create huge opportunities for performance improvement, this is not to say companies can abandon their ERPs and technology landscape rationalizations. Nor will technology alone deliver these results. The new procurement transformation model relies on technology to lead the way, but it must fit within a larger strategy, one based on a well-designed service delivery model that includes not just technology but processes, information, talent and organization redesign. The new digital technologies (e.g., cloud, mobile, RPA, analytics) at its core will allow procurement to significantly accelerate headcount reductions. It may use the resulting savings to fund more technology investment while redeploying or hiring new resources for higher-value activities.
Below are the top imperatives for improving procurement’s performance and supporting the business strategy over the long term.
- Accelerator #1: Digital customer engagement, or using digital tools to optimize and integrate the procurement customer experience.
World-class organizations are service-oriented and customer-centric in their approach to procurement delivery. They actively measure the results of their efforts through formal service level agreements for internal customers.
The result is far better customer experience. Self-service is a prime example of the difference this approach can make. Most self-service is designed to render processes more efficient, rather than enable the user to be more productive. World-class procurement organizations report high usage of both employee and manager self-service, largely because they create these offerings with the customer experience in mind.
- Accelerator #2: Using robotic process automation to perform rule-based activities previously handled by people.
RPA has made a rapid entry onto the agenda of procurement and purchase-to-pay organizations. In the latter, 23% of companies are at the earliest stages of adoption, i.e., either in pilots or partially rolled out. Despite RPA’s relatively low adoption level today, 45% of purchase-to-pay organizations believe it will become one of the areas with the greatest impact on the way its work gets done in the next decade.
It is not the specific business process that determines a good candidate for RPA, but rather the characteristics of the process, such as the need for data extraction, enrichment and validation. Activities requiring integration of multiple screens as well as self-service inquiry resolution are also ripe for RPA. The key is that RPA is best deployed in a stable environment where no changes to processes are on the horizon.
- Accelerator #3: Analytics-driven insight, or a procurement function that relies on big data and advanced analytics to drive insight and bolster decision-making.
The hallmarks of information-centric, world-class procurement organizations are the presence of a sophisticated information/data architecture that makes effective data analysis possible; planning and analysis capability that is dynamic and information-driven; and performance measurement that is aligned with the business.
World-class procurement organizations spend 17% more on technology per FTE and invest a greater proportion of their budget than the peer group on systems and tools to enable analytics capability. Without an advanced information management capability, agility is impossible. Agile operations require a “sensory” system that monitors external conditions, plus analytical capabilities that comprehend this data within the business context. This flow of feedback information is the basis for business decision-making.
- Accelerator #4: Modern digital architecture, such as cloud-based applications enabling procurement activities.
Results from recent Hackett Group research on the benefits of various software tools are encouraging. In the case of supplier discovery software, the top benefit found was a reduction of up to 31% in the time it takes to find and qualify a new supplier. This is due to the use of system-recommended suppliers based on pre-defined criteria and preferences; faster searches based on specific documentation; product and service requirements; and having access to rankings and feedback about suppliers from other companies.
The research also noted the benefits of e-sourcing software, including the ability to reduce overall cycle time by 30% by using standard templates to reduce data-collection errors. The reported benefits of contract lifecycle management (CLM) software include reducing the amount of time required to find a contract by 52%, trimming the number of lapsed contracts by 39%, and increasing the use of standard terms and conditions to ensure compliance.
Getting Started With Digital Transformation
Traditionally, procurement transformations began with process redesign, and only later identified the right technologies to enable the new processes. Digital transformation turns this model on its head, by looking for opportunities to use new technologies and creating new processes around them that are customer-centric and efficient and permit step changes in performance.
Rather than undertaking a single, giant transformation project, digital adopters start with individual, well-defined initiatives. They look at areas where there are opportunities for improvement and select technologies that can bring about change, such as cost savings and new sources of revenue.
To succeed, procurement organizations must embrace the principle of continuous improvement. They must be ready to fail and try again. Digital technologies evolve quickly, so what may not work today may work tomorrow. Companies must continuously scan the market for new ideas and solutions to test, implement and scale, before moving on to another area in need of improvement. Stasis is not an option.