Disruption is everywhere. In technology, banking, retail, consumer services just to name a few. And finally, it appears, disruption has arrived at the doors of the Procurement department.
Some are evangelizing the mantra of “disrupt or be disrupted”. That is, chase the next shinning object or be left behind. The usual disruptors include any and all widgets associated with AI, ML, Big Data, NPL, blockchain, eSourcing, Tail Spend Management, Procurement / Sourcing “democratization”, vendor discovery tools, just to name a few.
Well, is it true? Has anyone disrupted Procurement? Have any of the would-be disruptor-advocates shown that it works? That it could work?
The Tool Panacea Myth
Procurement tools are proliferating. They are everywhere. They claim to perform miracles. Just as CRM vendors claimed that adopting their solution would revolutionize sales. But what we found out is that trailing- and average-performing teams continued to trail with and without CRM applications.
As noted by one industry expert, “The best most Procurement departments can say today is that they’re keeping the lights on.” By and large, tools will do little to improve on this situation. Unlike some other segments, Strategic Sourcing is a combination of “science” and “art”. While it may be possible to program the “science” part, the large “art” component will continue to be the “alpha” that distinguishes best-in-class from also-rans.
Big Data myth
Some professionals have opined – quite correctly – the vast majority of Procurement organizations do not have Big Data, and thus, anything to do with Big Data analytics is a distraction.
Frankly, this applies even more to other advanced tools including AI, ML, NLP and others. While these tools hold potential promise, the tools and their application for Strategic Sourcing is in embryonic stage. Many years will pass before these tools become “production-ready” and a business case justification can be developed.
In the meantime, Procurement groups are well-advised to consider alternative uses for the millions of dollars needed required to deploy and manage these advanced tools.
Dearth of talent
Other experts will point out that most Procurement organizations lack the talent and skill-set needed to implement and manage advanced analytics including AI, ML, NPL, etc.. After all, how many PhDs are there in your Procurement group?
But even if these resources were available, most Procurement organizations suffer from “dirty-data”. The age-old truism of “garbage in, garbage out” will be made worse by the fact that machines will find a pattern even when no “true” pattern exists, according to experts quoted in a recent Bloomberg article.
More troubling, a 2018 Deloitte Survey of Global CPOs found that 51% of CPOs are concerned that their current talent is not able to execute on current strategies, much less, implement, operate and maintain complex tools.
Shortcuts leave 60%+ of the savings on the table
Some point to savings generated by eSourcing, Tail Spend Management, etc.. They talk about how they increased savings by 6x or 10x or 100x. The truth is that it is very easy to .01% savings to 1% savings. This 100x increase is obviously irrelevant and immaterial, given the generation of just 1% savings.
The above is the case with virtually all of these shortcuts – be they derived from eSourcing, Tail Spend Management or other similar tactics. Most executives will have a different perspective on the utility and efficacy of these tools once they recognize that 80%+ of the total savings opportunity is being left on the table.
The Path Forward
So, what is a CPO to do?
What about getting back to the basics? What about fulfilling Procurement’s primary mandate? What about delivering Strategic Sourcing benefits to the organization?
Lack of performance explained by many reasons
Data shows that most Fortune 500 organizations have been unable to generate bottom-line impact with Strategic Sourcing, as operating expense closely tracks revenue growth over the past 10 years.
Our own assessment confirms the above finding. Based on hundreds of individual company analysis conducted by Sourcing Advisors Group, more than 95% of the firms have Vendor Spending increasing in-line or faster than Revenue growth over a 3 to 5-year period.
There are many reasons given for Sourcing groups’ inability to improve profitability, including
- the purported need for “velocity”. That is, do it fast even if doing so completely eliminates the reason for the initial action
- lack of talent. A very real issue, but overcoming this concern requires proactive action rather than doing nothing, or worse, overburdening staff with even more sophisticated tools (AI, ML, NPL, etc.)
- it’s too hard. It is hard, but that’s the job we signed up for. As our parents used to say … “If it were easy, everybody would be doing it”
Strategic Sourcing Savings Opportunity Is Very Large
Notwithstanding the challenges, Strategic Sourcing savings opportunity is very large, and the fastest and easiest way for firms to generate value. Value creation from Strategic Sourcing does not require the dreaded reduction-in-force, any significant restructuring activity, and does not significantly tax resources outside of Procurement.
Strategic Sourcing value creation opportunity (though it varies by industry sector and firm) is very large:
- 15%-20% cost reduction across all vendor spending\
- 10%-20%+ EBITDA improvement
- 5% – 10% Operating Margin leverage improvement
In addition to financial benefits, firms will benefit by factors including:
- Employee satisfaction improvement, due to less “busy work” / paperwork and refocused effort on true value-added activity within Procurement and Business Units
- Employee retention improvement, as Procurement staff is re-energized
When done correctly, these targets can often be exceeded, as is proven out by the experience of the Sourcing Advisors Group with many Fortune 2000 firms.
Measure and Incentivize
Finally, it is essential to pursue Strategic Sourcing opportunities with a clear focus on outcomes and full intention to measure results. We are all too familiar with efforts that generated spectacular “paper savings” that failed to translate real bottom-line impact. CPOs should hold their staff and/or consultants to account for real savings generation. CPOs should find creative structures to ensure that all parties have “skin-in-the-game”.