The next BriefingsDirect business innovation thought leadership discussion focuses on the heightened role and impact of
procurement
as a strategic business force.
We'll explore how intelligent
procurement is rapidly transforming from an emphasis on cost savings to
creating new business value and enabling supplier innovations.
As the so-called digital enterprise adapts to a world of increased collaboration, data access, and
business networks, procurement leaders can have a much bigger impact, both inside and outside of their companies.
To learn more about the future of procurement as a focal point of integrated business services we’re joined by
Kurt Albertson, Principal of Advisory Services at
The Hackett Group in Atlanta, and
Dr. Marcell Vollmer, Chief Operating Officer at
SAP Ariba and former Chief Procurement Officer at
SAP. The discussion is moderated by me,
Dana Gardner, Principal Analyst at
Interarbor Solutions.
Here are some excerpts:
Gardner: We're looking at mobile devices being used more
and more for business. We have connected business networks. How are
these trends impacting procurement, and why is procurement going to have
a bigger impact as time goes on?
Vollmer:
I see a couple of
disruptive trends, which are very important and are directly impacting
procurement.
We see how
smartphones and
tablets have changed the way we work on a daily basis, not to forget
big data,
Internet of Things (IoT),
Industry 4.0. So, there are a lot of technology trends out there that are very important.
On the other side, we also see completely new business models taking off.
Uber is the largest taxi company without owning a single cab.
Airbnb is basically the same, the largest accommodation provider, but not owning a single bed. We see also companies like
WhatsApp,
Skype, and
WeChat. They don't own the infrastructure anymore, like what we know from the past.
I could mention a couple more, like
Alibaba. Everybody knows it was the
highest IPO
in history, with an initial market capitalization of around $230 billion, and
they even don’t have an inventory. What we're seeing are fundamental
changes, the technology on one side and then the new business models.
We
now see the impact here for procurement. When business models are
changing, procurement also needs to change. Companies intend to simplify
the way they do business today.
Complex processes
We
see a lot of complex processes. We have a lot of complex business
models. Today it needs to be "Apple easy" and "Google fast." This is
simply what millennials expect in the market.
But
also, we see that procurement, as a function itself, is transforming
from a service to function. And this is definitely one trend. We see a
different strategic impact. What is asked of procurement from the lines
of business is more important and is on the agenda for the procurement
function.
Let
me add one last topic, the evolution of the
Chief Procurement Officer (CPO) role, by saying that
seeing the different trends in the market, seeing also the different
requirements indicated by the trends for procurement, the role of
procurement, as well as the CPO role in the 21st Century will definitely
change.
I believe that the CPO
role might evolve and might be a
Chief Collaboration Officer role. Or,
in the future, as we see the focus is more and more on the business
value, a
Chief Value Officer role might be the next big step.
Gardner:
Kurt, we're hearing a lot from Marcell about virtual enterprises. When
we say that a major retailer doesn’t have an inventory, or that a hotel
rooms coordinator doesn’t have any beds, we're really now talking about
relationships. We're talking about knowledge rather than physical goods.
Does that map in some way to the new role of the CPO?
How has the virtual enterprise impacted the procurement process?
Albertson:
Marcell brought up some great points. Hackett is a quantitative-based
organization. Let me share with you some of the insights from a very
recent
Key Issues Study
that we did for 2016. This is a study we do each year, looking forward
across the market. We're usually talking with the head of procurement
about where the focus is, what’s the priority, what’s going to have the
biggest impact on success, and what capabilities they're building out.
Let me start at a high level. A lot of things that
Marcell talked about in terms of elevating procurement’s role, and more
collaboration and driving more value, we saw it quite strongly in 2015
-- and we see it quite strongly in 2016.
In 2015, when we
did our Key Issues Study, the number one objective of the procurement
executive was to elevate the role of procurement to what we called a
trusted adviser, and certainly you've heard that term before.
We
actually put a very solid definition around it, but achieving the role
of a trusted adviser, in itself, is not the end-game. It does allow you
to do other things, like reduce costs, tap suppliers for innovation, and
become more agile as an organization, which was in the top five
procurement objectives as well.
Trusted advisor
So
when we look at this concept of the trusted adviser role of
procurement, just as Marcell said, it's about a lot of the procurement
executives across multiple industries who are asking, "How do we change
the perception of procurement within the eyes of the stakeholders, so
that we can do more higher value type activities?"
For
example, if you're focusing on cost, we talk a lot about the
quantity of
spend influence, versus the
quality of spend influence. In fact, in our
forum in October, we had a very good discussion on that with our client
base.
We used to measure success of the procurement
organization by cost savings, but one of the key metrics a lot of our
clients would look at is percent of spend influenced by procurement. We
have a formal definition around that, but when you ask people, you'll
get a different definition from them in terms of how they define spend
influence.
What we've realized is that world-class
organizations are in the 95 percent range and 90 percent plus on the
indirect side. Non world-class procurement organizations are lagging, in
the 70 percent range in terms of influence. Where do we go from here?
It has to be about the quality of the spend influence.
When we look out in the market, there are a lot of companies that don't
have line-item level detail or they don't have 90 percent or 95
percent-plus data quality with respect to spend analytics.
And
what our data shows very clearly is that world-class organizations are
involved during the requirements and planning stages with their internal
stakeholders much more often than non-world-class organizations. The
latter are usually involved either once the supplier has been
identified, or for the most part, once requirements are identified and
the stakeholder already knows what they want.
In both
cases, you're influencing. But in the world-class case, you're doing a
much better job of quality of influence, and you can open up tremendous
amounts of value. It changes the discussion with your internal
stakeholders from, "We're here to go out and competitively bid and help
you get the best price," to, "Let’s have a conversation with what you're
trying to achieve and, with the knowledge, relationships, and tool sets
that we have around the supply markets and managing those supply
markets, let us help you get more value in terms of what you are trying
to achieve."
We've asked some organizations how we
become a trusted adviser, and we've built some frameworks around that.
One of the key things is exactly what you just talked about. In fact, we
did a forward-looking, 10-year-out procurement 2025 vision piece of
research that we published a few months ago, and big data and analytics
were key components of that.
When we look at
big data,
like a lot of the things Marcell already talked about, most procurement
groups aren’t very good at doing basic spend analytics, even with all
the great solutions and processes that are out there. Still, when we
look out in the market, there are a lot of companies that don't have
line-item-level detail, or they don't have 90 percent or 95 percent-plus
data quality with respect to spend analytics.
We need
to move way beyond that for procurement to really elevate its role
within the organization. We need to be looking at all of the big data
that’s out there in the supply networks, across these supply networks,
and across a lot of other sources of information. You have PDAs and all
kinds of information.
We need to be constructively
pulling that information together in a way that then allows us to marry
it up with our internal information, do more analysis with that,
synthesize that data, and then turn it over and provide it to our
internal stakeholders in a way that's meaningful and insightful for
them, so that they can then see how their businesses are going to be
impacted by a lot of the trends out in the supply markets.
Transformational impact
This
year, we asked a question that I thought was interesting. We asked
which trends will have the greatest transformational impact on the way
procurement performs its job over the next decade. I was shocked. Three
out of the top five have to do with technology:
predictive analytics and forecasting tools,
cloud computing and
mobility, the global economy and millennial workforce.
Mobility,
predictive analytics, forecasting, and cloud computing are in the top
five, along with global economy and the millennial workforce, two other
major topics that were in our forward-looking procurement 2025 paper.
When
we look at the trend that’s going to have the greatest transformational
impact, it's predictive analytics and forecasting tools in terms of how
procurement performs its job over the next 10 years. That’s big.
Consider
the fact that we aren’t very good at doing the basics around spend
analytics right now. We're saying that we need to get a lot better to be
able to predict what’s going to happen in the future in terms of
budgets, based on what we expect to happen in supply markets and
economies.
We need to put in the hands of our stakeholders toolsets that they can
then use to look at their business objectives and understand what’s
happening in the supply market and how that might impact it in two to
three years.
We need to put in the hands of our
stakeholders tool sets that they can then use to look at their business
objectives and understand what’s happening in the supply market and how
that might impact it in two to three years. That way, when you look at
some of the industries out there, when your revenue gets cut in more
than half almost within a year, you have a plan in place that you can
then go execute on to take out cost in a strategic way as opposed to
just taking a broad axe and trying to take out that cost.
Vollmer: I couldn’t agree more what Kurt said about the importance of the
top priorities today. It's very important also to ask what you want to
do with the data. First of all, you need technology. You need to get
access to all the different sources of information that you have in a
company.
We see today how difficult it is. I could
echo what Kurt said about the challenges. A lot of procurement functions
aren't even capable of getting the basic data to drive procurement, to
do spend analytics, and then to see that it really links this to
supply-chain data. In the future this will definitely change.
Good time to purchase
When
you think about what you can do with the data by predictive analytics
and then say, "This is a good time to buy, based on the cycle we've seen
is this time-frame." This would give you a good time to make a purchase
decision and go to the market.
And what do you need to
do that? You need the right tools, spend visibility tools, and access
to the data to drive end-to-end transparency on all the data what you
have, for the entire source-to-pay process.
Gardner:
Another thing that we're expecting to see more of in 2016 is
collaboration between procurement inside an organization and suppliers
-- finding new ideas for how to do things, whether it’s marketing or
product design.
Kurt, do you have any data that
supports this idea that this is not just a transaction, that there is,
in fact, collaboration between partners, and that that can have quite an
impact on the role and value that the procurement officer and their
charges bring back to their companies?
That helps procurement category managers raise their game and really be
perceived as adding more value, becoming this trusted advisor.
Albertson:
Let me tie it into the conversation that we've been having. We just
talked about a lot of data and analytics and putting that in the hand of
procurement folks, so that they can then go and have conversations and
be really advisers in terms of helping enable business strategies as
opposed to just looking at historical spend cost analysis, for example.
That helps procurement category managers raise their game and really be
perceived as adding more value, becoming this trusted adviser.
Hackett
Group works with hundreds of Global 1000 organizations, and probably still
one of the most common discussions we have, and even in on-site training
support that we do, is around strategic category management. It's
switching the game from strategic sourcing, which we view as an end-step
process that results in awarding a competitive bid process, with
aggregation of spend and awarding a contract, to a more formal category
management framework.
That provides a whole set of broader value levers that you can pull to drive value, including
supplier relationship management (SRM),
which includes working with suppliers to innovate, impacting a much
broader set of value objectives that our stakeholders have, including
spend cost reduction, but not only including spend cost-reduction.
We
see such a level of interesting category management today. In our Key
Issues Study in 2016, when we look at the capability building that
organizations are rolling out, we've been seeing this shift from
strategic sourcing to category management.
Strategic
sourcing as a capability was always number one. It still is, but now
number two is this category management framework. Think of those two as
bookends, with category management being a much more mature framework
than just strategic sourcing.
Category management
Some
80 percent of companies said category management is a key capability
that they need to use to drive procurement’s objectives, and that’s
because they're impacting a broader set of value objectives.
Now,
the value levers they're pulling are around innovation and SRM. In
fact, if you look at our 2016 Key Issues Study again, tapping supplier
innovation is actually a little bit further on down the list, somewhere
around 10.
When we look at all the things that are
there, it’s actually ninth on the list, with 55 percent of procurement
executives saying it’s a critical and major importance for us.
The
interesting thing, though, is that if you go back to 2015 and compare
where that is versus 2016, in 2016, that moves nearly into the top three
with respect to the significantly more focus on a key capability. SRM
has been a hot topic for our clients for a long time, but this tells us
that it’s getting more and more important.
We're seeing
a lot of organizations still with very informal SRM, supply innovation
frameworks, in place. It’s done within the organization, but it’s done
haphazardly by individuals within the business and by key stakeholders. A
lot of times, that activity isn't necessarily aligned with where it can
drive the most value.
We have to rethink how we look at our supply base and really understand
where those suppliers are that can truly move the needle on supplier
innovation.
When we work with a company, it's
quite common for them to say, "These are our top five suppliers that we
want to innovate with." And you ask, "If innovation is your objective,
either to drive cost reduction or to help improve the market
effectiveness of your products or services and drive greater revenue,
whatever the reason you are doing that, are these suppliers going to get
you there?"
Probably 7 out of 10 times, people come
back to us and say that they picked these suppliers because they were
the largest spend impact suppliers. But when you start talking about
supplier innovation, they freely admit that there's no way that supplier
is going to engage with them in any kind of innovation.
We
have to rethink how we look at our supply base and really understand
where those suppliers are that can truly move the needle on supplier
innovation and engage them through a category-management framework that
pulls the value lever of SRM and then track the benefits associated with
that.
And as I said, looking at our 2016 Key Issues
Study, supplier innovation was the fastest growing in terms of its focus
objective that we saw when we asked the procurement executives.
Gardner:
Marcell, back to you. It sounds as if the idea of picking a supplier is
not just a cost equation, but that there is a qualitative part to that.
How would you automate and scale that in a large organization? It
sounds to me like you need a business network of some sort where
organizations can lay out much more freely what it is that they're
providing as a service, and then making those services actually hook up -- a collaboration function.
Is that something you're
seeing at Ariba, as well that the business network, helping procurement
move from a transaction cost equation to a much richer set of
services?
Key role
Vollmer:
Business networks play a key role for us for our business strategy, but
also on how to help companies to simplify their complexity.
When
you reach out to a marketplace, you're looking for things. You're
probably also starting discussions and getting additional information.
You're not necessarily looking for paint in the automotive industry or
the color of a car. Why not get an already painted car as a service at
the end?
This is a very simple example, but now think
about when you go to the next level on how to evolve and have a
technology partnership, where you reach out to suppliers, looking for
new suppliers, by getting more and more information and also asking
others who have probably having already done similar things.
When
you do this on a network, you get probably responses from suppliers you
wouldn't even have thought about having capabilities like that. This is
a process that, in the future, will continue to aid successfully the
transformation to a more value-focused procurement function, and
simplicity is definitely a key.
You need to run simple. You need to focus on your business, and you need to get rid of the complexity.
You
need to run simple. You need to focus on your business, and you need to
get rid of the complexity. You can’t have all the information and do
everything on your own. You need to focus on your core competencies and
help the business in getting whatever they need to be successful, from
the suppliers out in the market to ensure you get the best price for the
desired quality, and ensure on-time deliveries.
The
magic triangle of procurement is not a big secret in the procurement
world. Everybody knows that it's not possible to optimize everything.
Therefore, you need to find the right mix. You also need to be agile to
work with suppliers in a different way by not only focusing just on the
price, which a lot of operational technical procurement functions are
used to. You need what you really want to achieve as a business outcome.
On
a network you can get help from suppliers, from the collaboration side
also, in finding the right ones to drive business value for your
organization.
Gardner: Another major area where
we're expecting significant change in 2016 is around the use of
procurement as a vehicle for risk reduction. So having this visibility
using networks -- elevating the use of data analysis, everything we have
talked about, in addition to cost-efficiencies, in addition to bringing
innovation to play between suppliers and consumers at the industrial
scale -- it seems to me that we're getting insight deeply into supply
chains and able to therefore head off a variety of risks. These risks can be around
security, around the ability to keep supply chains healthy and
functioning, and even unknown factors could arise that would damage even
an entire company's reputation.
Kurt, do you have
some data, some findings that would illustrate or reinforce this idea
that procurement as a function, and CPOs in
particular, can play a much greater role in the ability to detect risk
and prevent bad things from happening to companies?
Supply continuity risk
Albertson:
Again, I'll go back to the 2016 Key Issues Study and talk about
objectives. Reducing supply continuity risk is actually number six on
the list, and it’s a long list, and that’s pretty important.
A
little bit further down, we see things like regulatory noncompliance
risk, which is certainly core. It's certainly more aligned with certain
industries than others. So just from our perspective, we see this as
certainly number six on the list of procurement 2016 objectives, and the
question is what we do about it.
There's another
objective that I talked about earlier, which is to improve agility. It's
actually number four on the list for procurement 2016 objectives.
I
look at risk management and procurement agility going hand in hand. The
way data helps support that is by getting access to better information,
really understanding where those risks are, and then being able to
quickly respond and hopefully mitigate those risks. Ideally, we want to
mitigate risks and we want to be able to tap the suppliers themselves
and the supply network to do it.
In fact, we attacked
this idea of supply risk management in our 2025 procurement study. It’s
really about going beyond just looking at a particular supplier and
looking at all the suppliers that are out there in the network, their
suppliers, their suppliers, and so on.
But then, it's
also tapping all the other partners that are participating in those
networks, and using them to help support your understanding and
proactively identifying where risk might be occurring, so that you can
take action against it.
How do we manage and analyze all this data? How do we make sense of it?
That's where we see a lot of our clients struggling today.
It’s
one of the key cornerstones of our 2025 research. It's about tapping
supplier networks and pulling information from those networks and other
external sources, pulling that information into some type of solution
that can help you manage and analyze that information, and then
presenting that to your internal stakeholders in a manner that helps
them manage risk better.
And certainly, an
organization like SAP Ariba is in a good position to do that. That’s
obviously one of the major barriers with this big-data equation. How do
we manage and analyze all this data? How do we make sense of it? That's
where we see a lot of our clients struggling today.
We
have had some examples of clients that have built out an SRM group
inside their procurement organization as a center-of-excellence
capability purely to pull this information that resides out in the
market, whether it’s supplier market intelligence or information flowing
from networks and other network partners. Marrying that information
with their internal objectives and plans, and then synthesizing that
information, lets them put that information in the hands of category
managers.
Category managers can then sit down with
business leaders and have fact-based opinions about what’s going to
happen in those markets from a risk perspective. We could be talking
about continuity of supply, pricing risks and the impact on
profitability, or what have you. Whatever those risks are, you're able
to use that information. It goes back to elevating the roles of trusted
advisor. The more information and insight you can put into their hands
the better.
The indirect side
Obviously,
when we look at some of the supply networks, there's a lot of
information that can be gleaned out there. Think about different buyers
that are working with certain suppliers in getting information to them
on supply risk performance. To be frank, a lot of organizations still
don’t do a great job on the indirect side.
There are
opportunities, and we're seeing it already in some of these markets for
supply networks to start with the supplier performance piece of this,
tap the network community to provide insight to that, and get help from a
risk perspective that can be used to help identify where opportunities
to manage risk better might occur.
But there are a lot
of other sources of information and it’s really up to procurement to
try to figure this out with all the sources of big data. Whether it’s
sensor data, social data, transactional data, operational data, partner
data,
machine-to-machine (M2M)
data, or cloud services based data, there's a lot of information. We
have a model that looks at this kind of these three levels of kind of
this analytics model.
The first level of the model is
just for recording things and generating reports. The second level is
that you're understanding and generating information that then can be
used for analytics. Third, you're actually anticipating. You have
intelligence and you're moving towards more real-time analytics so that
you can be quicker in responding to potential risk.
Procurement organizations need to ensure that they really help the
business as much as possible, and also evolve to the next level for
their own procurement functions.
I mentioned this
idea of agility as being key on the procurement executive’s list.
Agility can be in many things, but one of the things that it means with
respect to risk is that you can’t avoid every risk event. Some risk
events are going to happen. There's nothing you're going to do about
them, but you can proactively make plans for when those risk events do
occur, so that you have a well thought-out plan based on analytics to
execute in order to minimize the impact of that risk.
Time
and time again, when we look at case studies and at the research that’s
out there, those organizations that are much more agile in terms of
responding to these risks where you're not going to be able to avoid
them, minimize the impact of those risks significantly compared to
others.
Gardner: As we look ahead to 2016,
we're certainly seeing a lot on the plate for the procurement
organization. It looks like they're facing a lot more technology issues,
they're facing change of culture, they're thinking about being a
networked organization. Marcell, how do you recommend that procurement
professionals prepare themselves? What would you recommend that they do
in order to meet these challenges in 2016? How can they be ready for
such a vast amount of change?
Vollmer:
Procurement organizations need to ensure that they really help the
business as much as possible, and also evolve to the next level for
their own procurement functions. Number one is that procurement
functions need to see that they have the right organizational setup in
place. That setup needs to fit the overall organizational line of
business spectra, what a company has.
The second
component, which I think is very important, is to have an end-to-end
focus on the process side. Source-to-pay is a clearly defined term, but
it's a little bit different in all the companies. When you really want
to optimize, when you really want to streamline your process, you want
to use business networks and strategic sourcing tools, as well as
running in a highly automated level of transaction to leverage the
automation potential of what you have in a purchase order or invoice
automation, for example.
One defined process
Then,
you need to ensure that you have one defined process and you need to
have side systems covering all the different parts of the process. This
needs to be highly integrated, as well as integrated in your entire IT
landscape.
Finally, you need to also consider change
management. This is a most important component by which you help the
buyers in your organization transform and evolve to the next level into a
more strategic procurement function.
As Kurt said
about the data, if you don’t have some basic data, you're very far away
from driving predictive analytics and prescriptive guidance. Therefore,
you need to ensure that you invest also in your talents and that you
drive to change management side.
These are the three
components that I would see in 2016. This sounds easy, but I've talked
to a lot of CPOs. This journey might take a couple of years, but
procurement doesn't have a lot of time. We need to see now in
procurement that we define the right measures, the right actions, to
ensure that we can help the business and also create value.
As
was already mentioned, this needs to go beyond just creating
procurement savings. I believe that this concept is here to stay in the
future. I think the value is what counts, what you can create.
Listen to the podcast. Find it on iTunes. Get the mobile app. Read a full transcript or download a copy. Sponsor: SAP Ariba.
You may also be interested in:
