It's time for procurement to innovate and evolve, rethinking processes to incorporate digital transformation, customer experience, and culture change as core business imperatives.
Last week, I spent time at Ariba Live, the user conference of SAP Ariba, which supplies procurement technology solutions to the enterprise. As I spoke with SAP Ariba customers and listened to presentations, the need for innovation in procurement emerged as a core theme.
Transforming procurement can achieve three important business results:
- Transparency and efficiency: Raising the visibility of indirect spend (goods and services that company's do not directly incorporate into their products) can save significant cost. By rethinking buying processes, companies can simplify redundant purchasing arrangements and relationships to save big money.
- Simplicity: Historically, procurement has been labor-intensive, slow, and painful for both internal employees and external vendors. Think about traditional corporate procurement: an employee wants to buy something, so Purchasing does a vendor search, and then serves as an intermediary between buyer and seller. As one SAP Ariba customer in the oil industry told me, getting rid of this complicated hub-and-spoke approach to purchasing is a high priority.
- Relationships: Rethinking the complexity of enterprise procurement processes can streamline the relationship between buyers and sellers, to help both sides gain mutual benefit.
Procurement innovation should lead beyond cost-savings and efficiency. However, this goal can be elusive. The following table from research by The Hackett Group summarizes the problem:
As the chart shows, the goal of reducing purchase costs is within reach of most procurement organizations. However, broader objectives, such as supporting the organization's digital transformation and becoming more agile, are harder to attain.
As with any digital transformation -- which is another way of saying "business transformation" -- rethinking business models, culture, and mindset takes time.
Transformation at Coca-Cola FEMSA
At Ariba Live, I had an in-depth conversation with Jorge Torres Perez, chief procurement officer at Coca-Cola FEMSA, which has revenue of $24 billion and an annual spend of $13 billion. It is the largest Coca-Cola bottler in the world.
Jorge explains his procurement transformation project:
"It was an enormous change because we went from a very labor-intensive system where the procurement person was chasing down every possible permutation of buying. Now it's self-service. This type of change involves technology, process, and even cultural, shifts."
I asked him to explain the benefits to Coca-Cola FEMSA:
"We reorganized so now [procurement staff] have time to focus on strategic negotiations and chase new vendors they could not before. So, it is great for them. Along those lines, we also established budget control on line items where we want to focus the most. So, our management is also very pleased.
In the past, when managers approved something, they didn't know exactly how much of their budget was consumed. Now, before making approvals, they know exactly how much of their budget is going to be spent."
Jorge described the impact of this transformation on suppliers:
"In many cases, suppliers didn't know exactly how much volume they were going to get, how much of the piece of the pie they were getting. Now we have a strategic approach so buyers can see how much they are going to be spending. We can establish long-term negotiations and a better approach with suppliers. Suppliers can take a long-term perspective based on planned cumulative volume and give us better pricing."
Accenture procurement and customer experience
To explore the connection between customer experience and procurement, I talked with Eli Lambert, who is a managing director for procurement technology inside Accenture's IT organization.
I asked Eli to describe his procurement transformation project:
"Our CIO organization partnered with procurement take the mandate of simplifying and transforming the buying experience for our entire Accenture 450,000-person organization. We have about $6 billion of addressable spend and run of greater than 80% of that through SAP Ariba."
Eli explains the concept of guided buying, which was central to the project:
"You need policies to guide you through the purchasing decision. However, folks may go outside the standard, cost-effective measures and end up with purchases on time and expense reports where they shouldn't be. So, we put a "guided experience wrapper" for our folks online, very similar to the consumer experience so that they understand.
Guided buying is powered by content. In an organization like Accenture, you can curate your content, create catalogs for brand-defined or mission-critical purchases; the suppliers and negotiated rates you need. But you want to couple that with everything else that our Accenture enterprise needs to operate and run.
We need it to offer a great experience and be easy, just as in your consumer life. You need to consumerize the experience and make it fast. And it must accelerate our business by guiding buyers to the right products, which have been vetted, to keep them safe and secure."
Key lessons for procurement
Of course, transformation and innovation in procurement mean efficiency and cost savings. That's obvious. However, using automated methods to gain lower prices from vendors is not the answer to driving maximum value from procurement.
Innovation in procurement means aligning internal employees and external vendors around corporate business goals. By using data and analytics, procurement organizations can achieve three goals:
- Help internal managers communicate more effectively with external partners
- Increase customer satisfaction
- Enable the business to operate faster and with less friction and hassle for both internal buyers and external suppliers
In a report on procurement innovation in the pharmaceutical industry, McKinsey says:
"Top performers realize that purchasing can catalyze innovation once it relies on professional category management and has established its role within the organization. In fact, purchasing associates will see a number of innovations while screening supplier markets in search of less-expensive items, from new packaging solutions up to best-of-breed dosage devices or test kits.
The main challenge in leveraging suppliers as a source of innovation is setting the right incentives and context for purchasing associates. They need deep knowledge about marketed drugs and their effects -- and how to push an innovation through all approval stages."
Although these comments are specific to pharma, the general lesson holds true: it's time for procurement to support innovation in the organization more broadly.
As the Coca-Cola and Accenture examples show, customer experience in transformation is a goal that reigns supreme. When describing SAP's internal procurement transformation, the company raises customer satisfaction as its ultimate measure of success:
"Improving customer satisfaction and the shopping experience for our almost 100,000 employees is ultimately the key measure of our success. Employees are accustomed to simple online shopping experiences in their personal lives, and we want to give them a similar experience in their corporate environment. We focus on user-friendly processes coupled with options that allow employees to decide how to best meet their business needs. We deliver a no-touch or low-touch engagement model wherever possible through automation and believe that total value goes beyond negotiated savings to include the overall user experience."
In summary, a golden age of procurement is upon us. While cost savings are table stakes, customer experience and culture change are the real goals of digital transformation in procurement today.
Disclosure: SAP paid most of my travel expenses and is a CxOTalk partner.