State of Procurement Digital Transformation: Lessons Learned by Early Adopters
Every business function’s digital transformation requires a strategy that aligns with enterprise goals. At the same time, procurement organizations must holistically assess their own digital capabilities and aspirations, measure the gaps between the two, and use that analysis as the basis for preparing a digital transformation roadmap. Hackett Group research has found that enhancing customer experience and improving analytics competencies are the highest-priority areas for digital investment. Robotic process automation, starting from a relatively low current capability level, promises to be a major contributor to procurement’s operational efficiency within a relatively short period; moreover, 43% of procurement organizations are undertaking initiatives to improve supplier integration in their digital ecosystem.
Approaching the Implementation of Procurement’s Digital Capabilities
The Hackett Group’s Digital Transformation Framework defines five critical capabilities for business services (procurement, finance, HR and IT), each broken down into capabilities specific to each function.
This framework was used as the basis for a digital capability assessment, gap analysis and investment priority analysis, which were part of the digital transformation study referenced earlier. Respondents were asked to self-assess their current capability level and to rank capabilities by priority of improvement.
Digital Customer Engagement
Engaging procurement’s customers in the digital era means providing 24-hour access to applications via users’ preferred channels, plus real-time information and status on performance, requests and transactions. Fifty-eight percent of procurement organizations believe they already have the ability to design customer-facing systems and user interfaces for usability and customer experience optimization, offering personalization, mobility support and universal access. Nonetheless, 69% have a major improvement initiative planned or in progress, underscoring that improving customer experiences is still one of the biggest challenges and an important focus of procurement digital transformation strategy. This finding also reflects a demand for personalization of experiences from business users. Providing consistent, customized and simple access to procurement technology is essential.
Beyond transactional purchasing technology, procurement must also support stronger engagement with budget owners and stakeholders through the category management process. Digital applications offer better visibility to market insights and the supply base.
“Digital ways of working” means the provision and use of core automation as well as analytics, collaboration, intelligence, knowledge and productivity tools. Taking the example of analytics: Forty-eight percent of the study respondents indicate their current decision-support analytics capability is adequate or even strong, but 63% have an improvement initiative planned or underway, reflecting a recognition of the high priority procurement is giving to becoming more data- and insight-driven. A new generation of integrated analytics and insights tools offers unprecedented capabilities in strategic sourcing, contract management and supplier management. Embedded artificial intelligence can help procurement make sense of market, production and even process utilization data, allowing types of recommendations and insights not possible before. It also speeds up and relieves workers of the more routine aspects of conducting risk assessments and analyzing contracts and company financials.
Digital Service Optimization
Cloud and agile methods enable rapid deployment and API-based integration of new technology platforms. Other capabilities can reduce or eliminate the constraints of legacy systems or investment restrictions. For example, 58% of respondents are looking for suitable opportunities to automate high-volume, repetitive, rule-based systems, using robotic process automation. Hackett Group research has found that RPA can improve the execution efficiency of such tasks by as much as 30% by eliminating the need for rekeying data in separate systems, improving data quality, and turning the workers formerly responsible for conducting these activities into managers of the robots while handling more judgment-based, creative work that is unsuited to RPA. Another 36% of respondents have some capability in this area today, largely in the form of pilot projects in their early stages.
In a digital ecosystem, procurement organizations connect with suppliers, users and other parties, from the supplier’s provision of raw materials to the manufacturer, all the way through to the finished product’s delivery to the end user. Adding to the richness of the ecosystem are an increasing number of sensors and assets able to communicate status and other data through the internet of things. Thirty-six percent of study respondents are able to integrate suppliers into their corporate systems today, permitting sharing of inventory levels, forecast demand and usage data, and expected delivery times; another 43% report an improvement initiative planned or in progress in this area. The interconnectedness of this extended value network facilitates collaboration on innovation, for example through increased visibility and incorporation of user feedback into the design of new products and services.
Allocation of Resources and Technology Investment Toward Digital Transformation in Procurement
As with other business services, procurement is largely responsible for paying for new technology and skills through operating-cost take-outs. These are being achieved by streamlining processes and rationalizing technology infrastructure and application platforms. Thus, developing digital capabilities in each area of the digital transformation framework outlined in the previous pages means developing new skills internally, supplemented by strategic outside hires, and allocating sufficient technology resources and budgets toward digital initiatives.
We asked procurement practitioners about the percentage of technology cost in the total procurement operating budget (12%) and the component of digital transformation in this technology budget (16%). While presently a modest 16%, the number is expected to increase rapidly to 73%. Well-established technologies (i.e., cloud, master data management, mobile) and, increasingly, emerging ones (i.e., AI, RPA, blockchain) will likely become an extension of existing investments in traditional sourcing and procurement technology platforms. The number of procurement resources involved in digital transformation (expressed as a percentage of total FTEs involved in transformation) displays a similar pattern.
Conclusion and Recommendations
While 63% of procurement respondents to our digital transformation study have a function-specific digital transformation strategy today, deficiencies in alignment with enterprise efforts, resources and competencies need remediation as soon as possible. The following are insights from early digital adopters:
- Understand the vision and purpose for a digitally enabled procurement function: Many early adopters have a mandate from executives who are committed to extracting the potential benefits from digital technologies. They make it acceptable for teams to experiment and innovate; further, they create a culture in which failure is not career-ending. Companies emphasizing savings as the primary benefit of digital initiatives may instinctively focus initiatives on more productive sourcing, but the opportunity can be much broader than that. For example, capability augmentation by blending technology with human capabilities should also be considered. Procurement should take action to meet the current requirements of its stakeholders but also position itself to stay one step ahead of those requirements as they evolve.
- Recognize market maturity: Buyers are challenging existing BPO service providers to deliver required changes and benefits from digital capabilities. This presents challenges, as providers need to replace existing revenue and profits in order to change at the pace clients require. In terms of digitally enabled technology platforms on the market, innovations are coming fastest from new procurement technology startups, not the traditional top-tier providers. Consulting firms continue to offer opportunity assessment and roadmaps as they compete to build expertise and knowledge.
- Understand process architecture: Developing a fit-for-purpose future-state design blueprint requires a clear understanding and documentation of current procurement processes. Implementing a new digital service delivery model that leverages emerging technologies requires harmonizing existing processes with services as configured in these technology platforms. Customer journey mapping and lean methodologies may also be applied to solve existing problems and challenges. Both require understanding the current-state process architecture.
- Invest in digital skills and talent: Whether by outsourcing, acquiring expert contingent talent externally or developing it internally, knowledge based on experience is essential. Many leaders have built their own store of in-house institutional knowledge, which allows them to become educated buyers and ready the organization to handle future changes. Investigate current technical and analytical talent levels internally – is there an opportunity to recruit talent from elsewhere in the company? Is the expertise of non-traditional resources, such as data engineers, applicable? The relationship between talent and culture has never been stronger. These relationships are self-reinforcing: A dynamic, change-oriented culture attracts change-oriented, agile talent. One large financial services company held a week of in-person and virtual events to enlighten new teams about the potential of digital technologies and skills.
- Co-innovate with other departments/functions and third parties: Learn what other departments (such as IT) or partners have piloted or tried as part of their digital endeavors. Speed is important in any transformation project but, when digital technology is involved, circumventing the IT organization for the sake of speed is a recipe for failure, Learn what IT’s digital strategy is. Does it have skills and funding for analytics projects or experience in RPA or AI? Ask existing technology and business process outsourcing providers about opportunities to pilot new developments. Discern any linkages among teams from finance, treasury, and supply chain that are working on their own digital transformation. Co-development may illuminate avenues for creating value by investing in similar technologies or using outside services.
by Erik Dorr and Nic Walden of The Hackett Group
Available for download with permission.