The next BriefingsDirect digital business insights interview explores the successful habits, practices, and culture that define highly effective procurement organizations.
We'll uncover unique new research that identifies and measures how innovative companies have optimized their practices to overcome the many challenges facing business-to-business (B2B) commerce.
To learn more about the traits and best practices of the most successful procurement organizations, please join Kay Ree Lee, Director of Business Analytics and Insights at SAP Ariba. The interview was recorded at the recent 2017 SAP Ariba LIVE conference in Las Vegas, and is moderated by Dana Gardner, principal analyst at Interarbor Solutions.
Here are some excerpts:
Gardner: Procurement is more complex than ever, supply chains stretch around the globe, regulation is on the rise, and risk is heightened across many fronts. Despite these, innovative companies have figured out how to overcome their challenges, and you have uncovered some of their secrets through your Annual Benchmarking Survey. Tell us about your research and your findings.
Lee: Every year we conduct a large benchmark program benefiting our customers that combines a traditional survey with data from the procurement applications, as well as business network.
This past year, more than 200 customers participated, covering more than $400 billion in spend. We analyzed the quantitative and qualitative responses of the survey and identified the intersection between those responses for top performers compared to average performers. This has allowed us to draw correlations between what top performers did well and the practices that drove those achievements.
Gardner: What’s changed from the past, what are you seeing as long-term trends?
Lee: There are three things that are quite different from when we last talked about this a year ago.
The number one trend that we see is that digital procurement is gaining momentum quickly. A lot of organizations are now offering self-service tools to their internal stakeholders. These self-service tools enable the user to evaluate and compare item specifications and purchase items in an electronic marketplace, which allows them to operate 24x7, around-the-clock. They are also utilizing digital networks to reach and collaborate with others on a larger scale.
The second trend that we see is that while risk management is generally acknowledged as important and critical, for the average company, a large proportion of their spend is not managed. Our benchmark data indicates that an average company manages 68% of their spend. This leaves 32% of spend that is unmanaged. If this spend is not managed, the average company is also probably not managing their risk. So, what happens when something unexpected occurs to that non-managed spend?
The third trend that we see is related to compliance management. We see compliance management as a way for organizations to deliver savings to the bottom line. Capturing savings through sourcing and negotiation is a good start, but at the end of the day, eliminating loopholes through a focus on implementation and compliance management is how organizations deliver and realize negotiated savings.
Gardner: You have uncovered some essential secrets -- or the secret sauce -- behind procurement success in a digital economy. Please describe those.
Five elements driving procurement processes
Lee: From the data, we identified five key takeaways. First, we see that procurement organizations continue to expand their sphere of influence to greater depth and quality within their organizations. This is important because it shows that the procurement organization and the work that procurement professionals are involved in matters and is appreciated within the organization.
The second takeaway is that – while cost reduction savings is near and dear to the heart of most procurement professionals -- leading organizations are focused on capturing value beyond basic cost reduction. They are focused on capturing value in other areas and tracking that value better.
The third takeaway is that digital procurement is firing on all cylinders and is front and center in people's minds. This was reflected in the transactional data that we extracted.
The fourth takeaway is related to risk management. This is a key focus area that we see instead of just news tracking related to your suppliers.
The fifth takeaway is -- compliance management and closing the purchasing loopholes is what will help procurement deliver bottom-line savings.
Gardner: What next are some of the best practices that are driving procurement organizations to have a strategic impact at their companies, culturally?
Lee: To have a strategic impact in the business, procurement needs to be proactive in engaging the business. They should have a mentality of helping the business solve business problems as opposed to asking stakeholders to follow a prescribed procurement process. Playing a strategic role is a key practice that drives impact.
They should also focus on broadening the value proposition of procurement. We see leading organizations placing emphasis on contributing to revenue growth, or increasing their involvement in product development, or co-innovation that contributes to a more efficient and effective process.
Another practice that drives strategic impact is the ability to utilize and adopt technology to your advantage through the use of digital networks, system controls to direct compliance, automation through workflow, et cetera.
These are examples of practices and focus areas that are becoming more important to organizations.
Using technology to track technology usage
Gardner: In many cases, we see the use of technology having a virtuous adoption cycle in procurement. So the more technology used, the better they become at it, and the more technology can be exploited, and so on. Where are we seeing that? How are leading organizations becoming highly technical to gain an advantage?
Lee: Companies that adopt new technology capabilities are able to elevate their performance and differentiate themselves through their capabilities. This is also just a start. Procurement organizations are pivoting towards advanced and futuristic concepts, and leaving behind the single-minded focus on cost reduction and cost efficiency.
Digital procurement utilizing electronic marketplaces, virtual catalogs, gaining visibility into the lifecycle of purchase transactions, predictive risk management, and utilizing large volumes of data to improve decision-making – these are key capabilities that benefit the bold and the future-minded. This enables the transformation of procurement, and forms new roles and requirements for the future procurement organization.
Gardner: We are also seeing more analytics become available as we have more data-driven and digital processes. Is there any indication from your research that procurement people are adopting data-scientist-ways of thinking? How are they using analysis more now that the data and analysis are available through the technology?
Lee: You are right. The users of procurement data want insights. We are working with a couple of organizations on co-innovation projects. These organizations actively research, analyze, and use their data to answer questions such as:
- How does an organization validate that the prices they are paying are competitive in the marketplace?
- After an organization conducts a sourcing event and implements the categories, how do they actually validate that the price paid is what was negotiated?
- How do we categorize spend accurately, particularly if a majority of spend is services spend where the descriptions are non-standard?
- Are we using the right contracts with the right pricing?
As you can imagine, when people enter transactions in a system, not all of it is contract-based or catalog-based. There is still a lot of free-form text. But if you extract all of that data, cleanse it, mine it, and make sense out of it, you can then make informed business decisions and create valuable insights. This goes back to the managing compliance practice we talked about earlier.
They are also looking to answer questions like, how do we scale supplier risk management to manage all of our suppliers systematically, as opposed to just managing the top-tier suppliers?
These two organizations are taking data analysis further in terms of creating advantages that begin to imbue excellence into modern procurement and across all of their operations.
Gardner: Kay Ree, now that you have been tracking this Benchmark Survey for a few years, and looking at this year's results, what would you recommend that people do based on your findings?
Future focus: Cost-reduction savings and beyond
Lee: There are several recommendations that we have. One is that procurement should continue to expand their span of influence across the organization. There are different ways to do this but it starts with an understanding of the stakeholder requirements.
The second is about capturing value beyond cost-reduction savings. From a savings perspective, the recommendation we have is to continue to track sourcing savings -- because cost-reduction savings are important. But there are other measures of value to track beyond cost savings. That includes things like contribution to revenue, involvement in product development, et cetera.
The third recommendation relates to adopting digital procurement by embracing technology. For example, SAP Ariba has recently introduced some innovations. I think the user really has an advantage in terms of going out there, evaluating what is out there, trying it out, and then seeing what works for them and their organization.
As organizations expand their footprint globally, the fourth recommendation focuses on transaction efficiency. The way procurement can support organizations operating globally is by offering self-service technology so that they can do more with less. With self-service technology, no one in procurement needs to be there to help a user buy. The user goes on the procurement system and creates transactions while their counterparts in other parts of the world may be offline.
The fifth recommendation is related to risk management. A lot of organizations when they say, risk management, they are really only tracking news related to their suppliers. But risk management includes things like predictive analytics, predictive risk measures beyond your strategic suppliers, looking deeper into supply chains, and across all your vendors. If you can measure risk for your suppliers, why not make it systematic? We now have the ability to manage a larger volume of suppliers, to in fact manage all of them. The ones that bubble to the top, the ones that are the most risky, those are the ones that you create contingency plans for. That helps organizations really prepare to respond to disruptions in their business.
The last recommendation is around compliance management, which includes internal and external compliance. So, internal adherence to procurement policies and procedures, and then also external following of governmental regulations. This helps the organization close all the loopholes and ensure that sourcing savings get to the bottom line.
Be a leader, not a laggard
Gardner: When we examine and benchmark companies through this data, we identify leaders, and perhaps laggards -- and there is a delta between them. In trying to encourage laggards to transform -- to be more digital, to take upon themselves these recommendations that you have -- how can we entice them? What do you get when you are a leader? What defines the business value that you can deliver when you are taking advantage of these technologies, following these best practices?
Lee: Leading organizations see higher cost reduction savings, process efficiency savings and better collaboration internally and externally. These benefits should speak for themselves and entice both the average and the laggards to strive for improvements and transformation.
From a numbers perspective, top performers achieve 9.7% savings as a percent of sourced spend. This translates to approximately $20M higher savings per $B in spend compared to the average organization.
We talked about compliance management earlier. A 5% increase in compliance increases realized savings of $4.4M per $1B in spend. These are real hard dollar savings that top performers are able to achieve.
In addition, top performers are able to attract a talent pool that will help the procurement organization perform even better. If you look at some of the procurement research, industry analysts and leaders are predicting that there may be a talent shortage in procurement. But, as a top performer, if you go out and recruit, it is easier to entice talent to the organization. People want to do cool things and they want to use new technology in their roles.
Gardner: Wrapping up, we are seeing some new and compellingtechnologies here at Ariba LIVE 2017 -- more use of artificial intelligence(AI), increased use of bringing predictive tools into a context so that they can be of value to procurement during the life-cycle of a process.
As we think about the future, and more of these technologies become available, what is it that companies should be doing now to put themselves in the best position to take advantage of all of that?
Lee: It's important to be curious about the technology available in the market and perhaps structure the organization in such a way that there is a team of people on the procurement team who are continuously evaluating the different procurement technologies from different vendors out there. Then they can make decisions on what best fits their organization.
Having people who can look ahead, evaluate, and then talk about the requirements, then understand the architecture, and evaluate what's out there and what would make sense for them in the future. This is a complex role. He or she has to understand the current architecture of the business, the requirements from the stakeholders, and then evaluate what technology is available. They must then determine if it will assist the organization in the future, and if adopting these solutions provides a return on investment and ongoing payback.
So I think being curious, understanding the business really well, and then wearing a technology hat to understand what's out there are key. You can then be helpful to the organization and envision how adopting these newer technologies will play out.