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Despite an optimistic business outlook in 2018, procurement leaders are still wary about a range of risks with the potential to reduce margins, from access to critical talent to managing cyber-risk. Procurement leaders indicate they are focused on deepening collaboration with suppliers to meet growth expectations and manage risk. They expect that 30% of procurement processes will be touched by digital transformation activity in 2018, foreshadowing a year of both benefits and disruption. Fully 95% believe digital transformation will fundamentally change the way procurement services are delivered within two to three years. Early positive signs from the implementation of digital technology (such as robotic process automation and advanced analytics) are sparking interest in new areas where procurement can contribute strategic business value.

Enterprise Initiatives in 2018 Focus on Growth and Operating-Cost Reduction

The theme of information and analytics as a driver of growth and innovation is reflected in the major enterprise initiatives planned in 2018. Customer-focus improvement is the top-ranked initiative, followed by product/service expansion. These are two essential areas for generating top-line revenue growth. Improving the customer experience and supporting innovation both require better, more easily accessed data.

Enterprise cost reduction is also a priority in 2018. Historically, cost-cutting programs have been carried out in functional silos, without much cross-functional coordination. In the era of digital transformation, better alignment and collaboration between groups like finance and procurement is necessary but often requires significant cultural change.

Procurement organizations need to evolve to meet the demands of a rapidly changing business environment, but must live with reductions in operating budgets averaging 0.3% in 2018. Their goals for the coming year reflect their resource-constrained and risky environment. Among these are improving their agility, elevating their role to that of a trusted advisor, enhancing their cost-avoidance capabilities, and supporting enterprise digital transformation. While respondents rate support for these and other business objectives as important, they also acknowledge that their ability to address them effectively is relatively low. It is a great concern that one of the areas that procurement is least prepared to address is supporting enterprise digital transformation objectives.

Procurement Must Improve Four Key Capabilities

Concerns about procurement’s ability to address critical development areas go beyond capabilities required to help the enterprise meet its goals. Our analysis found critical development areas that affect the function itself and also highlighted gaps between what procurement believes is important and what it can actually deliver in these areas:

  • Align procurement skills and talent with changing business needs
  • Measure and managing procurement performance and business value
  • Obtain more value from existing suppliers through relationship management
  • Obtain more value from existing categories through category management

As procurement organizations mature, they start looking beyond traditional areas of tactical supply assurance and price. In parallel, procurement spends more time on strategic business enablement, an area that requires more coordination and collaboration with internal stakeholders and suppliers based on criteria outside of negotiated cost alone. Increasingly, service delivery requires advanced business skills such as negotiation, relationship management, problem-solving and strategic thinking. Moving into these areas, procurement serves as more than a buyer/negotiator; it becomes a consultant and change agent.

Procurement Performance And Business Value

The State of Digital Transformation

To meet ongoing expectations for supporting enterprise operation cost reduction and functional development areas, procurement needs to accelerate its digital transformation through investment in technology and related skills.

There is growing awareness of the potential impact of digital transformation on procurement. In 2018, 95% of respondents state that it will fundamentally change the way services are delivered over the next three to five years, compared to 84% in 2017. The percentage of organizations with a formal strategy for digital transformation more than doubled year over year, from 32% to 66%. Furthermore, in the same period, the number of organizations indicating they have the resources in place to handle the transformation also rose sharply, from 25% to 46%.

It is too early to tell what the optimal ratio of resources to automation will be with digital transformation. Adoption of emerging technologies such as artificial intelligence, the internet of things (IoT), robotic process automation (RPA) and blockchain will eliminate many jobs, but will also create new ones.

Strategic Implications

We anticipate that 2018 will be a year of robust economic growth, albeit tempered by the effects of continued technological disruption. Enhancing the means of collecting, enriching and analyzing information will be critical for understanding trends and identifying opportunities. But in parallel with finding more and better ways to use data, companies must take the steps necessary to protect it.

In 2018, procurement must develop its strategic capabilities (such as category management and supporting supplier innovation ) via digital transformation, while continuing to deliver excellence in the basics (compliance, operational process efficiency and savings identification). Despite an inevitable array of disruptions (technological, regulatory, etc.) nothing should keep procurement from working to meet the needs and wants of internal stakeholders and suppliers through investment in talent management and technologies that will improve data collection, performance measurement, risk mitigation and collaboration.

By Constantine Limberakis and Christopher S. Sawchuk of The Hackett Group
Published in Procurement Executive Insight Issue
Available for download with permission.

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