World-Class Procurement: Redefining Performance in a Digital Era · 2019-06-06 · Reproduction of this document or any portion thereof without prior writteonsent is prohibited.n

Kurt Albertson, Principal

World-Class Procurement:Redefining Performance in a Digital EraChristopher Sawchuk, Principal

2© 2019 The Hackett Group, Inc. All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited.

Today’s volatile environment adds to need for change

Change Drivers Strategic Adjustment Digital Imperative

Macro risk factors– Political polarization and gridlock– Trade war– Corporate, consumer and public debt– Slowdown of growth in China– Brexit

Changing marketplace– Customer as king– Digital disruption– Intensified competition– Insight imperative

Shift focus from global to domestic markets

Shift focus from growth to margin

Balance cost control with strategic investment

Three years ago we said the time is now

Complacency now puts the future at risk

Need to act now

Digital opportunity

Accelerate digital transformation

52%33%

15%34%

55%

10%

Revenuegrowth

Marginimprovement

Cash flowimprovement

2018 2019


Procurement organizations are facing parallel imperatives

Let’s talk about:Where we are today

Where we need to goHow we get there

Procurementvalue must evolve

Procurement must digitally transform its processes

1 2

Many organizationsstruggle with both

Where we are today…


2.50

4.14

4.73

2.94

3.89 4.06 4.38 4.57 4.55 4.70 5.04

8.00

11.35

12.71 12.53

10.72

9.019.44

9.5010.38

10.6710.99

While procurement continues to deliver incremental value improvement, the definition of value continues to evolve

Source: The Hackett Group, 2019

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019ROI = Cost Reduction and Avoidance Savings/Procurement Cost

2011: Cost avoidance was 19% of total savings

World Class

Non-World Class

Enable Success in

Any Economy

Excel in a Volatile

Recovery

AccelerateGlobal Growth

Optimize Global

Performance

Integrate the Enterprise

for Sustainable Success

Accelerate Growth from Innovation

Creating a World-Class Internal

Customer Experience

Creating Agility in a Digital Age

Digital Excelleration

Unlocking the Value of Digital

Redefining Performance

in a Digital Era

2019: Cost Avoidance is 24% of total savings


While “reducing and avoiding purchase costs” continues to top the list of procurement’s priorities, we see some alignment with other stakeholder objectives

Source: The Hackett Group, Key Issues Study, 2018, 2019

2018 2019

46%

58%

54%

43%

57%

41%

25%

29%

35%

20%

Improve procurement’s business agility

Elevate the role of procurement to a trusted

advisor

Reduce and avoidpurchase costs

Improve OPEX savings

Enhance operational process efficiency

40%

50%

50%

63%

53%

55%

45%

38%

25%

28%

Increase stakeholder satisfaction

Reduce and avoidpurchase costs

Elevate the role of procurement as a trusted

advisor

Improve procurement’s business ability

Enhance operational process efficiency

87%

83%

83%

95%

95%

88%

Critically importantHighly important

88%

81%

78%

77%


Yet, procurement’s scorecard appears to be even more focused today than in the past on cost savings

Source: Procurement Value Measurement Studies, The Hackett Group, 2011, 2017

Percentage of firms measuring value element on primary procurement scorecard

Value proposition of procurement services

Right goods /services at the right time & place

Right goods and services AND at the right price

Shift from lowest price to TCO

Reduce demand activity, complexity and variability

Increase business value derived from spend

Supply Assurance

Price

Total Cost of Ownership

DemandManagement

Value Mgmt

Valu

e

+

43%

77%

50%

27%

40%

2010 2017

32%

30%

28%

22%

94%


Unless there is a significant market shift or major competitive event, cost savings generally become more difficult to achieve

Source: The Hackett Group, 2019 Procurement Functional Benchmark

As spend influence increases, savings as a percent of influenced spend decreases

8.3%

5.6% 5.2%4.7%

<50% 51% to 70% 71% to 85% >85%

Savings as a percent of influenced spend

Percent of spend influenced by procurement


The need to evolve procurement’s value proposition and scorecard is certainly not a new concept

2007

2010

2011

2018

The question today: “Do we feel more strongly that there is a forcing event to better motivate the needed change?”

We believe that answer is “Yes.” The environment around us is changing and the business needs us more than ever to enable their success. We need to transform and how we deliver and measure value does as well. We are not replacing, but augmenting.


Despite a broad emphasis on digital transformation today, there are wide gaps in organizations’ ability to deliver on their digital transformation objectives

Source: 2019 Key Issues Study, The Hackett Group

Strategic maturityEnterprises with digital transformation strategy in place or being executed

Current 2-3 years

IT capability gapEnterprises with IT organization that have competencies and resources in place toexecute the strategy

Current 2-3 years

Execution gapEnterprises with competencies and resources in place to execute the strategy

Current 2-3 years

2018

2018

2018

Enterprise digital transformation strategic maturity, execution and IT capability gap

66% 89%54%

49% 80%

48% 82%

36%

40%

Q2.5: Please indicate your level of agreement with each of the following statements pertaining to digital transformation of your company.


In addition to new ways of doing things and a faster rate of change, digital transformation will require a true focus on the customer – big “C” and little “c”

New ways of doing things

Move beyond just automating existing processes Define completely new ways of doing things Enable with new technologies (e.g., cloud, big data, RPA, social media)

Velocity of change Embrace a “fail fast” philosophy Execute pilots in targeted areas and scale up rapidly Shift focus from discrete projects to continuous transformation

A customer-centric approach

Move beyond internally focused transformation Design from the “outside in”, starting with customer needs Design new ways to engage the customer (internal and external)

Where we need to go…


Lack of investment– Spend management not the priority– Lack of executive buy-in– Economy is good, M&A growth over organic growth

Organizational change– Redefining roles to shift time away from routine tasks has proven difficult– Talent shortage means we’re building skills internally

Tech adoption– Market is complex, moves fast, and can be hard to navigate– Gravitational pull is toward ERP, which doesn’t always meet our needs– Many systems have been “half implemented” – leaving parallel manual and

automated processes

Why haven’t things changed already?

For most organizations it takes a massive inflexion point to overcome inertia,often driven by external forces or a significant internal disruption.

“Day-to-day work interferes with our ability to move the needle on the strategic.”

- CPO

“Minor-seeming gaps in our recently selected technology are holding up our automation roadmap.”

- CPO


Past Present (and future)

For many years, our focus has been more limited to the efficiency of our organizations and it’s effectiveness, though primarily on spend cost reduction. Today, we are seeing an expansion of our view of effectiveness as well as a new found focus on experience

Strategic focus: Past vs. present

EfficiencyEffectiveness

Efficiency

Effectiveness

Experience


Change management and upskilling– Fast-fail methodology– Prepare for the digital age– Talent focus to attract and retain

the best– Long-term and ongoing learning

Fast and flexible adoption of new technologies– Platforms with open-access API– Best-of-breed solutions where

needed– Looking outward at the network

instead of inward at process automation

– Focus on things adjacent to savings like maverick spend reduction via a modern e-procurement UI, guided buying

Take an external view– Start with the customer– Budget owner priorities should

drive category activities, not savings targets (savings will come along the way)

– Supplier value matters too

1. Reset the culture 2. Digitize 3. Define value

What will it take to change?

Supply Management

Scorecard

Customer Objective:

Quality Services

Customer Objective: Innovative

TechnologiesCustomer Objective: Reliable Supply

How we get there…


As you segment your stakeholders, define value on their terms

C-suite

Suppliers

ProcurementTeam

Requisitioners

ExternalCustomers

BudgetOwners

Protect profits

Awarded business

I feel valued

Get me what I need

Products/ Services I need

On time

Level

1Price savings

Sustainable price

I have the right tools

Allow me to get what I need

Best price for what I need

Best price

Level

2Cost savings

Joint cost reduction

I feel empowered

Help me buy smarter

Best value for what I need

Best value

Level

3Decrease risk

Joint business improvement

I have a clear upward trajectory

Anticipate what I need

Meeting unanticipated

needs

????

Level

4Increase

competitiveadvantage

Joint strategic development

I am making a difference in the

world

I don’t need to do anything

Engaging beyond my

needs

????

Level

5

“Higher value” can mean something different to each stakeholder….


Most of us are stuck down at the green level. These are our goals, not our stakeholders’ for the most part

Stakeholders from different categories (and within a category) will have different value priorities. This is where we need to start!

Value Mgmt

Total Costof Ownership

PriceRight goods and services

AND at the right price

Shift from lowest price to TCO

Increase business value derived from spend

BudgetOwners

StakeholderCategory 1





Multiple, Complex

Goals

Innovative technology

Speed to market Best quality Differentiating

features

Quality of service representative

Fill rate Cycle time

Automated ordering

Best total cost Fast delivery

time

Quality of service

Variety of service options

Single supplier for all services

Lowest cost Fastest delivery Highest quality

Savings Total cost of ownership Cost avoidance Cost reduction


It starts with making stakeholder satisfaction foundational in your culture Understand stakeholder needs through effective communication Interact with various stakeholders and ask engaging questions:

– What matters most to you?– How can we enable you?– How can we enable your department?

Ensure goals are aligned Discuss goals and agree on definitive ways to measure achievements at the category level Agree on a process to roll category goals up to the functional level

Segmentation is more than identifying and addressing different groups, it’s determining what matters to whom


Spend cost reduction

Operational improvement (e.g., supply assurance)

Cost of function optimization

Transactional cycle time reduction

Cost beyond price reduction (e.g., total cost of ownership)

Supply risk reduction

Demand optimization

Working capital improvement

Supply base diversification

Corporate brand awareness

Stakeholder experience improvement (customer and supplier)

Strategic cycle time reduction

M&A enablement (due diligence/integration)

M&A enablement (discovery)

Supplier enabled innovation

Internal business process enablement (e.g., sales productivity to procurement)

Non-procurement employee satisfaction

Corporate social responsibility (beyond supply base diversity)

Overall, more transparency to customer metrics and use of market intelligence

Traditional Modern Emerging

Phases of value evolution


59% of organizations measure supplier performance.

About one-third see improvement.

36% of organizations measure operation-based metrics

like number of assessments completed and cycle time.

64% of organizations don’t measure outputs, like a

composite risk score or margin/revenue at risk.

Supply risk management programs are having the greatest impact on supplier performance, but most organizations don’t measure risk reduction value beyond supplier performance

Modern metric example: Supply risk

Source: The Hackett Group, Supplier Management and Risk Study, 2018


80% of organizations measure the traditional volume-

based metric, spend with diverse suppliers.

26% of organizations measure the impact supplier

diversity programs have on local communities.

28% of organizations measure internal customer

satisfaction with diverse suppliers.

Companies are beginning to measure value in terms of supplier development, community impact, internal customer satisfaction and savings, not just external compliance

Modern metric example: Supply base diversification

Source: The Hackett Group, Supplier Diversity Study, 2019


84% of organizations drive standard payment terms

across suppliers

$27 million Cash flow benefit of a 10-day improvement per $1 billion of

addressable spend

44% of organizations track cashflow benefits on their

scorecard

DPO optimization benefits include improved cash flow as well as cost reductionModern metric example: Working capital

Source: The Hackett Group, P2P Performance Study, 2017, Procurement Value Measurement Studies, The Hackett Group,, 2017


96% of organizations measure savings related to target

cost as a proxy for innovation.

44% of organizations measure number of projects supported, a practice metric.

15% of organizations measure top-line revenue

enabled by suppliers.

While supplier driven innovation is not new, very few companies measure truly innovative output Emerging metric example: Supplier-enabled innovation

Source: The Hackett Group, Supplier Innovation Study, 2018


Top-line growth– Supplier partnering– Product development– Acquisition targeting

Increased productivity– Employee retention– Benefits

Broad-based CSR– Sustainability– Community development

Other emerging methods of value creation


Examples of digital transformation and technology use cases

CUSTOMER-CENTRIC

Design thinking Digital customer engagement

Customer journey mapping

Segmentation Individualization Omni-channel

DIGITAL OPERATIONS

Social technologies

Internet of things

Artificial Intelligence

Cloud RPA Block-chain

Mobility

DIGITAL INSIGHT

Analytics Data integration

Big data Predictive modeling

Data visualization

Mobility allows for faster approval points and an easier shopping experience in the field

RPA reduces manual process steps, including across automated systems to reduce costs and improve cycle time

Cognitive tools like artificial intelligence and machine learning along with big data will help category managers identify valueopportunities and managers identify and mitigate risks through the supply base

Data tools will provide better insights into value delivery by procurement and data visualization tools will enhance the process of savings reconciliation

Predictive modeling will allow a more aggressive approach to extracting value from the financial supply chain


The nature of procurement work will change in the digital era

211 29%

314 44%

196 27%

91 , 28%

135 , 42%

98 , 30%

Structured Work

Interactive WorkNon-scripted interaction with people: People management /

motivation Negotiation Persuasion Interpersonal knowledge

transfer Public presenting Collaborative facilitation

Application of prescribed rules, methods or scripts: Data capture, validation, entry Administrative tasks Document search, retrieval, filing Standard inquiry response Rule based work planning and scheduling Basic trouble shooting Standard report generation

Knowledge WorkAcquisition or application of knowledge, including creation, conceptualization and decisioning: Creative design Data interpretation / analysis Business decision-making Knowledge acquisition / learning Research / information collection Complex trouble shooting

** Total number of FTEs required to execute the baseline workload after digital transformation

* Total number of FTEs employed in corporate finance, HR, procurement and IT organizations in companies with over $1BN in revenue in the USA, Canada and Europe by the end of 2018

Baseline* = 721(FTEs x 1,000)

Digital** = 324(FTEs x 1,000)

-50%-57%

-57%


41.1 27.8

19.0

-13.3

-8.8

World Class Smart Automation Digital World Class

Procurement smart automation will offer a significant opportunity to increase productivity and free up resources for strategic initiatives

Procurement FTEs per billion spend

Peer digital transformation World class digital transformation

59.9 45.2

26.7

-14.7

-18.5

Peer Smart Automation TechnologyOptimization

- 25%

Digital acceleration

- 68%

Digital World classadvantage

World class advantage

- 31%- 55% - 54%

Smart automation will free up FTEs doing transactional work, and also enhance the productivity and reach of interactive and knowledge workers…. How will you use these gains?


Macro risk factors and a changing marketplace are forcing organizations to make strategic adjustments

Despite their intentions, most organization have not moved beyond savings as a primary value measure

Investment, role transformation, and technology adoption has been slower than hoped

Optimize what you have– Talent is a factor – focus on upskilling and change management– Shift focus the customer – customer, customer, and…suppliers!

Augment what you have– Risk mitigation– Supply base diversification– Working capital improvement– Stakeholder experience

Create new value streams and build capabilities– Supplier innovation, product collaboration, M&A– Sustainability, community involvement, brand awareness

Final thoughts

Remember, the goal is to enable the business!


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World-Class Procurement: Redefining Performance in a Digital Era · 2019-06-06 · Reproduction of this document or any portion thereof without prior writteonsent is prohibited.n