Procurement faces a wake-up call as tectonic shifts in technology threaten to completely alter the function, leading eventually to its automation. Companies have three options for embracing this major change.
Today’s Procurement Technology Is a Failure
More specifically, it is an unqualified abject failure. Business users hate it, procurement users loathe it, and even the technology vendors treat procurement functions as second-class citizens. In fact, after nearly 20 years of technology deployment, most organizations still struggle to get a comprehensive view of their spend (and some struggle with simply generating a basic view of supplier and category expenditure). The systems are rigid, complicated, and only solve a fraction of procurement’s requirements.
Across the board, these systems curtail progress and hinder excellence instead of enabling it. For anything other than simple prespecified and pre-sourced catalog-based purchases, for example, they do not help the user specify what is required or choose the right supplier. They fail to support what the “should price” ought to be. And there is usually no systematic and embedded classification of what was actually purchased so that trends can be identified and managed in a timely manner. What emerges is an inability to effectively know where money is spent and with whom, much less an ability to strategically direct the spend. This puts procurement into a backward-looking mode, when forward-looking is of vital importance.
In fact, the digital future for procurement has arrived. Based on our experience working with dozens of companies’ procurement areas, most are automating some portion of their operations and looking to adopt intelligent technologies. One company we work with plans to go to 100 percent automation within five years. Soon, procurement staff will be vastly reduced, and those that survive will do so because they already possess or are willing to learn different skills than what is necessary today. This trend is already underway in other functional areas as automation adoption continues apace.
The Problem with Suites
How did we get here? Today’s procurement technology landscape is based on a linear concept of sourcing activities on the left and procure-to-pay activities on the right, with analytics and governance wrappers. It’s a nice neat package that looks great on paper. Unfortunately, it reflects little about the realities and complexities of day-to-day procurement.
Procurement’s technology evolution dates back to the early 2000s when a series of procurement start-ups, bolstered by the dot-com frenzy, sprang into the market to accelerate strategic sourcing activities. Companies such as FreeMarkets (reverse auction), Webango (RFPs), and diCarta (contract management) provided best-of-breed solutions that proved highly popular with users.
Then the great suite migration took over as companies such as Ariba (then a separate company), SAP, and Oracle sought to extend their enterprise resource planning (ERP) systems into procurement, which started an acquisition frenzy (see figure 2). In response, companies such as Emptoris started making their own acquisitions to offer a broader array of functionality. Then SAP bought Ariba and IBM bought Emptoris, which solidified a trend convincing people that bigger, broader suite solutions were the way to go. Best-of-breed solutions could no longer compete, though they often possessed better technology. Unfortunately, they lacked native ERP integration and could not provide more than one or two services, which the collective consciousness, and thus the market, deemed a negative. These dynamics put price pressure on the point solutions, killed innovation, and locked customers into big suite solutions, which ultimately led to the collective dissatisfaction so abundant today.
In the barren landscape left behind by the great suite migration (circa 2008–2010), smaller companies such as Iasta, Bravo, iValua, and Coupa continued to survive in the shadows of the giant players. But their market share and influence remained limited in scope. Meanwhile, newer solutions such as CombineNet, Trade Extensions, and emerging analytics companies started to open up possibilities and suggest that source-to-pay suites were not the promised panacea. Combined with procurement performance management, these new entrants created the wrappers that append the suite solutions.
In recent years, there has been a host of new acquisitions by Determine, Coupa, Zycus, and Jaggaer. They too have bolstered their suites so that the market now resembles a bunch of lumbering giants clubbing one another at the expense of the individual procurement user’s experience.
Successful procurement technology has one job: to provide a robust yet easy-to-use system for transforming needed goods and services into value for a company so it can excel at its own business.
Enterprises have paid, and continue to pay, for multimillion-dollar contracts and multiyear implementations for systems they hope will be “one and done.” If procurement later buys a new tool that isn’t embedded in the suite, whatever innovation it promised goes by the wayside. Thus, big suites end up woefully underutilized, based on old architecture, and functionally inadequate. Don’t blame the tech vendors entirely, however, because the collective procurement industry has turned a blind eye to the phenomenon. Even top-flight benchmarking firms base their market evaluations on a rigid and misguided framework focused on breadth of offerings and completeness of vision instead of looking at actual business user satisfaction (as represented with net promoter scores, for instance).
The One Requirement Above All Others
All of this technology has become a means unto itself, a way to justify its existence in the world instead of solving the one requirement on which all of procurement should be based. Successful procurement technology has one job, a north star: to provide a robust yet easy-to-use system for transforming needed goods and services into value for a company so that it can excel at its own business. Such a system puts the procurement power in the hands of the user, rather than the user being at the mercy of the system or a rigid and unnecessary procurement process. The more users are empowered with full transparency and analytic insights, the more likely they will adopt the desired behavior.
Most of us already know what this supremely helpful and responsive system looks like. As individual consumers, we shop on Amazon and Alibaba, which give buyers broad selection, product specification, visibility into price, shipping options, warranties, returns, and customer support. Buyers compare alternatives and make a decision based on their needs. They receive their deliveries instantaneously (such as digital content) or within hours or days with full accountability. Yet, these same users go to work and experience the most archaic, rigid, poorly thought-out systems that unsuccessfully make all of these decisions for them.
The Revolution Begins
Despite the bleakness of the suite solutions, a number of procurement technology start-ups have emerged during the past few years. Scout burst onto the scene in 2014 with a fresh take on sourcing tools built on modern architectures and updated sourcing concepts. The sourcing functionality compares to previous systems, but it is much more intuitive, faster, and easier to use. Then, building off the analytics revolution, advanced analytics companies such as Tamr began to apply machine learning to challenges such as spend management and complexity reduction. Consequently, the once-onerous analysis of tail spend is vastly sped up and simplified, potentially unlocking tens of millions of dollars in opportunity. These companies represent the most current and advanced technologies. We estimate collectively they have raised nearly half a billion dollars in investment funding with more likely to come.
A cynic might look at all these new start-ups and conclude that they will be gobbled up by the big suite companies. However, there is a fundamental reason this may not happen. The software- development industry has gone through its own transformation during the past decade, creating a new foundational architecture in the process. Based on cloud technology, it is designed around microservices supporting application programming interfaces (APIs). These microservices allow apps to seamlessly connect to one another. This enables the easy and seamless exchange of information across applications with no custom coding required.
These advancements give users the best possible functionality and the ability to quickly (and ideally cheaply) add and subtract it as needed. The traditional functions we framed out in the rigid linear process are now distributed through an extensible ecosystem that allows for very precise, and even overlapping, employment of best-of-breed technologies. For example, one might use Sievo for spend analytics but also employ Tamr for tail-spend management. It is important to note that traditional systems such as procure-to-pay (P2P) are still required and will not go away, but instead of being closed systems, they will open up into a broader more flexible ecosystem.
Basically, this architecture evens the playing field. The suites will have to compete on a best-of-breed basis instead of relying on arcane, non-value-add features such as ERP integration.
Further, underpinning the new architecture is an artificial intelligence (AI) hub that will serve as the integration point, provide a simple, comprehensive place for users to go, and drive the push toward automation. This will require the suite providers to change their long-term strategies, which will be counter to their short-term revenue models. However, there will be plenty of opportunities for them to not only survive but excel. Their individual components, especially those that they have invested significantly in, will still be relevant in the future. The crucial difference is that they will be required to play and compete in the open market and lose their ability to lock customers into their proprietary offerings.
Your Procurement Will Soon Be Automated
Based on feedback from many of our procurement clients, it is evident to us that operational procurement is well on its way to becoming fully automated through AI. Major components such as P2P are going in that direction, and so are even higher-value functions, such as automated buying, AI sourcing managers, and the chatbot supplier help desk. In that case, chatbot help gives inquirers an intelligent and automated way to check the status of invoice payments or ask questions about request-for-proposal (RFP) events.
AI is already embedded in individual applications, including services sourcing, where it guides buyers through supplier identification, the RFP event, and creation of statements of work. The tools empower users, freeing them to buy what they need without procurement’s interference. Instead, procurement’s value-add is that it engineered the system to deliver a seamless buying experience that fits within the enterprise’s strategic objectives. Similarly, AI can be embedded into predictive supplier-risk monitoring to read nascent signals and proactively take the appropriate action without human intervention. For example, if the system is monitoring a supply base and a particular supplier becomes embroiled in a bribery scandal on the other side of the world, the system can automatically score the initial risk, monitor it, adjust the risk score as more information comes in, and pull up all contracts and spend associated with that supplier so that the company can make decisions should the scandal grow. Going further, the AI system could also use natural-language generation to proactively draft (and post) press releases and social media content to manage the story.
Perhaps the greatest potential of these new technologies is blockchain. And perhaps the longest time-to-value of these new technologies will be blockchain. Smart contracts using blockchain can prevent money from being spent in the wrong place, which would eliminate all the effort in building spend cubes. Smart contracts can be programmed to monitor supplier performance and reconcile it against the agreed terms and conditions and then dispense payment as conditions are met. This technology could completely condense and redefine the entire contract management and P2P processes. It is important to note that blockchain is still in its infancy and still lacks an agreed-upon underlying technology protocol. However, assuming it comes to fruition, blockchain will change how contracts are negotiated and disrupt the traditional negotiation levers. Forward-looking procurement organizations will see benefits by riding this wave early while understanding that blockchain will require a lot of patience and investment.
Begin the Journey Now
There is no preexisting, off-the-shelf game plan for adopting these new procurement technologies and architecture. It is a journey that requires a CPO to have vision, passion, and the willingness to take a ride because technological progress is never a smooth path.
Many procurement organizations are deciding what to do now with their aging and underutilized procurement technology assets. They can choose one of three paths to follow. The first option is to make a like-for-like replacement with an updated core source-to-pay (S2P) system. If they own Ariba today they can switch to Coupa or vice-versa, for example.
Taking this path usually requires a couple of years and incurs expenditures in the seven figures. It is also a single-shot decision, where the business is committed to a specific technology for another generation or so.
The second option is to do a like-for-like replacement and keep the existing system while adopting individual best-of-breed solutions. This is the least disruptive path. One major global client that we are working with is taking this route. Knowing that their S2P platform will run out of life within the next couple of years, they are managing their risk by actively piloting new tools in line with the timeline in figure 2, while recognizing that the mosaic in figure 4 will be the future. Their expectation is that they may not implement an all-embracing S2P replacement, but rather a set of agile tools that connect with one another. We see many other companies that need to tackle the dilemma of being left with a white elephant S2P solution (despite investing millions of dollars) choose this option as a way to ease the transition to non-traditional providers and technologies.
The third option is to embrace the new architecture at the outset and work to adopt currently available individual solutions, updating them as they evolve. The third route lets companies enjoy the benefits of being a first mover and influence the evolution of these technologies. This path is actually the least risky in the long run because it avoids overinvesting in what will rapidly become outmoded technology. But it takes a certain type of CPO with unique leadership skills, one who is in it for the long haul, for it will take several years to fully realize the benefits. We believe, though, that this third option, when paired with significant automation, is increasingly going to be the right answer for more and more procurement functions.
When it comes to technology, procurement can order its own future—and it would be wise to do so. Otherwise, the future will order what it wants, and there will be no returns or guarantees.