Procurement Maturity & Business Resilience Part 1: The Role of Savings
Procurement as a discipline seems to function in a state of perpetual motion. Digital transformation, value creation, stakeholder influence, business driver, a better seat at the table. Always striving, always looking at how we do things and finding – or creating – room for procurement process improvement. This striving for growth is what “procurement maturity” is all about. There’s no status in the status quo.
For all the evolution of Procurement and advancement of its practitioners, savings is still at or near the top of the list of KPI’s when measuring effectiveness. “At or near” the top, because it depends on how a particular business is doing, its competitive ranking, or what’s going on with the economy in general. As explored in some detail in our whitepaper, The Procurement Maturity Curve – A Four-Stage Hierarchy of Value, Procurement’s evolution can be compared to Maslow’s hierarchy of needs: When all the basic requirements for existence are being met, individuals (or in this case, Procurement) can then expand their focus of development.
During periods of major business disruption, Procurement’s outlook understandably has to contract a bit to focus on the basics. That’s when savings may jump back up the priority list. But as disruptive events like the global pandemic make abundantly clear, achieving those cost savings is inextricably entwined with Procurement’s agility, creativity, and embrace of procurement technology.
In this two-part blog, we’ll examine the role of procurement technology in adding value across the enterprise. We’ll also touch on how integrating and leveraging data and spend analytics tools can enhance processes, providing procurement professionals with increased transparency and oversight for the sake of compliance, risk management, and collaboration.
(Re)Defining Procurement Savings
When a company is at the point of investing in a Procurement function, it’s often because they’ve become large enough to recognize the need to rein in spiraling purchasing costs. With savings as the driver (in the beginning, at least), Procurement’s job is then to make sure the operation has what it needs when and where it is needed to run operationally in the most cost-effective manner.
If the goods and services needed are in the right place at the right time, then one measure of Procurement performance is apparent. The prices paid for those goods and services, and the contract terms that are put in place, are where Procurement’s performance can be evaluated more subjectively.
As mentioned above, Procurement’s relationship to savings changes according to wider influences, which can supplant or just add to a list of many critical objectives. Consider the abrupt shift in top CPO pressures (pivot, anyone?) caused by the pandemic, as illustrated in Ardent Partners’ report CPO Rising 2020: Continuity, Resilience, Recovery:
- Before Covid-19: Drive a Digital Transformation, Improve Processes, Increase Agility
- After Covid-19: Prioritize Cash Management, Increase Savings, Improve Supply Chain Visibility
While a singular focus on savings may seem passé in today’s complex and value-oriented business environment, business resilience demands a firm commitment by Procurement to cost containment, strict spend management, and savings generation to enable the corporate bottom line to recover and rebuild.
This does not mean, however, that our efforts are confined to a rudimentary leveraged volume approach. Skilled Procurement teams can apply existing skills and P2P technology software tools in new ways and to new categories of spend — with results that can be measured not only in terms of savings, but in their contribution to improving cash flow and maintaining cash management for the health of the business.
How Procurement Can Deliver More and Spend Less
A re-emphasis on savings doesn’t lock Procurement into a race to the bottom, where quality or functionality have to be compromised to cut costs. As Procurement matures up the curve, better managing enterprise spend in the process, increasingly strategic approaches can be applied to achieving efficiency. These can include switching to more innovative or more collaborative supply partners, introducing alternative materials, automating procure-to-pay and invoicing processes, or adopting more appropriate commercial models.
In short, Procurement needs to find ways to get more for less (the aforementioned creativity and agility). Chief among these is collaborating to get more out of supply partnerships; negotiating to get more rather than negotiating to pay less. This “shared success” approach can also be a significant advantage during disruption, because those solid, mutually beneficial supplier relationships may mean the difference between business continuity and bankruptcy.
The best place to start in a “negotiate more” procurement model is by having a thorough understanding what Procurement purchases today and what it costs — in other words, building a contextualized awareness of current costs.
To accomplish this, Procurement needs the ability to dig deep into the details of actual spend and supplier profiles to find value. Then we can leverage process automation to influence the mix of goods and services demanded in support of evolving business objectives. This can’t be done without technology.
Procurement / P2P Technology: Performance Enhancement
Leveraging technology and data isn’t what determines the level of Procurement Maturity for a given organization, but it does accelerate Procurement along the value continuum, providing teams with the ability to expand contributions well beyond the bottom line.
“It’s become clear that there is no leadership without technology leadership”.
— Accenture, Technology Vision 2021
The statement above applies just as equally to Procurement as it does to organizational leadership in general. Technology took a front seat in enabling businesses, municipalities, communities, and entire industries to forge ahead during the pandemic. Without technology and process automation, purchasing, invoicing, AP, and AR would virtually be at a standstill, or at best a very slow crawl, slashing cash flow just when companies need it most.
Every aspect of procurement technology — from spend analysis through supplier management solutions — creates a unique opportunity to leverage data on behalf of improved outcomes and increased value. Procurement organizations need to put the right set of P2P technology tools in place, especially if there is to be a successful expansion of how Procurement manages spend. Leading organizations rely on technology solution platforms where advanced integrated functionality goes beyond procure-to-pay (requisitioning, catalog management, invoicing) to include areas like embedded analytics, supplier data, contract management, payments, and others that empower procurement to grow beyond basic approaches to generating savings.
Enterprise procurement solutions have been around awhile, and are maturing along with the expectations placed on them. Simply outperforming manual alternatives is no longer a draw; solutions have to be as intuitively usable as any consumer applications in order to make it faster, easier, and more efficient for Procurement to get its job done in the best way possible (and put a lid on maverick spend).
But even that is a low bar. The best procure-to-pay software technology out there is leveraging AI and machine learning, not to supplant people, but make them more effective while freeing them up to add strategic value. According to the Hackett Group report Four Dimensions for Measuring Digital Progress in Purchase-to-Pay, 67% of organizations cite “Deploy / enhance easy-to-use technology platforms” as the number one step in improving P2P customer service.
Big Data, or Big Deal? Depends What You Do With It
Procurement savings is a measure of efficiency; Any means of increasing that efficiency logically comes under procurement’s purview. Data analysis – especially spend data – is one of the most productive ways to make that happen.
Ardent Partners’ Procurement Metrics That Matter In 2020 CPO Rising 2020: Continuity, Resilience, Recovery report asked CPOs what they need most to take Procurement to the next level. Topping that list is better data visibility that can be gained from enhanced analytic capabilities.
Deep analysis of how, where, when, and with who Procurement is spending delivers a range of insights that enable teams to better rationalize demand, leverage volume, and make sure pricing models match supplier cost models as closely as possible. A more expansive approach to savings generation requires knowing more about each category of spend, the associated suppliers, and how both affect the ability of the enterprise to operate. Having this insight during business disruption provides Procurement with the ability to pivot more quickly and accurately when kinks in the supply chain occur.
Data analytics often leads to the elimination of spend waste by revealing areas where an organization does not realize sufficient value in return for the cost outlay. Procurement’s analytical capabilities open the door to purely internal savings through the adjustment of wasteful processes before applying the same lens to supply partners who are in a position to make further recommendations.
Bottom-Line For Procurement Savings?
Savings will likely be the most common measure of Procurement’s contributions to organizational effectiveness. After all, Procurement is a function with a bottom-line focus. But it’s important to not see that as a limiting factor, but a springboard.
As Procurement’s scope and capabilities expand significantly thanks (in part) to emerging technology and we apply new approaches, we must still be able to capture and express our contributions in terms of efficiency improvement.
The challenges of both daily work requirements and business disruption periods cement Procurement’s need for a solid technology foundation — one that allows us to access and analyze data, streamline purchase-to-pay and invoicing transactions, and mitigate risks wherever possible across the enterprise.
That risk is exactly what we’ll explore in Part Two of this series. We’ll dig deeper into the increasingly important role that Procurement plays in making companies more responsive, proactive, and resilient.