Empowering Their People-How Companies Should Manage Procurement Professionals in Digital Times

Empowering Their People-How Companies Should Manage Procurement Professionals in Digital Times

Empowering Their People-How Companies Should Manage Procurement Professionals in Digital Times
Empowering Their People-How Companies Should Manage Procurement Professionals in Digital Times 

 

Procurement is changing faster than ever. Big data and AI support decision-making jointly with strategic buyers, opening vast new possibilities of value creation, such as more powerful negotiation setups, quality monitoring, or the enhanced selection and incentivization of innovative suppliers. Robotics can take over large shares of manual tasks and operative buyers need to learn to work with these machine-based colleagues.
CPOs who understand and manage these opportunities well will help their companies outperform competitors. Insights from leading practitioners show that making the new technologies work is certainly not only a question of selecting the right tools and applications. It is the people that drive digital transformation efforts. But how should procurement’s people management be organized in digital times? What are conventional best practices that can be leveraged? What are required capabilities for best-in-class companies? And, most importantly, how should such best practices be adapted to manage the significant change ahead when the digital revolution hits procurement?

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Point of Departure: A Fresh Look at Conventional Best Practice  

Best-in-class people management encompasses two dimensions: employees’ ability to perform, in terms of their skill set, and their willingness to perform with regard to their motivation. The skill/will matrix is derived from the model of situational leadership that has been developed by Paul Hersey and Ken Blanchard. 
 
It guides leading CPOs in their people management and sorts their employees into four clusters: procurement superstars as a leading group to be empowered; up-and-comers should receive strong trainings based on their high willingness to perform. Experts with lower willingness but high skill are to be motivated either with financial incentives, recognition, or ideally their intrinsic attitude. Last, there are candidates with neither skill nor will, who are to be phased out (see exhibit 1).
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In their approach to best-in-class people management, it is crucial that CPOs distinguish between strategic and operational procurement. Strategic procurement outlines the landscape for the next two to three years and ensures that value is generated in areas such as savings, quality, speed, innovation, and risk. Operational procurement, on the other hand, focuses on implementing the strategic decisions made and includes tracking purchasing orders, ensuring on-time in-full delivery, and renegotiating with suppliers within defined award strategies.

Ability to Perform  
In best-in-class companies, requirements for strategic buyers contain a wide variety of tasks, some of them analytical and some interpersonal in nature, while others primarily require rigidity, such as in data management (see exhibit 2). The variety of tasks is so wide that only few buyers excel in all dimensions. In addition, strategic tasks are characterized by their nonredundant setup. Each day, a different skill mix is required, making it hard to plan or even robotize.
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As strategic thinkers, procurement employees must define the future state of a category; for example, by setting up roadmaps, while at the same time considering the available supply base. As negotiators, they conduct negotiations with both external (e.g., suppliers) and internal stakeholders (e.g., engineering), select the right negotiation approach, and prepare fact-based commercial discussions by holistically gathering information. 
 
As diplomats, they act as the core interface toward business partners and consistently challenge existing specifications. As analysts, they conduct the needed calculations such as linear performance pricing (LPP) or simple outlier analysis. As researchers and data miners, they screen supply markets or internal data to identify and evaluate suppliers or to clean spend data prior to large tenders, for example. Finally, as implementation coaches, they ensure their savings are implemented in the organization. For this skill, procurement employees must pay close attention to details to follow through with the required activities with a group of stakeholders, such as in engineering or plants.
Requirements of operational procurement employees in contrast are relatively standardized. They entail, above all, a structured and detailed way of working, deep knowledge of the procure-to-pay (P2P) process and workflow in the organization, and a holistic understanding of systems to ensure an efficient handling of data entries and management. As such, operational procurement employees must act as process experts in terms of being knowledgeable about systems management; as perfectionists by ensuring for example, that prices are updated regularly; and as communicators in order to link with suppliers and track purchasing orders.

Willingness to Perform  
While it’s true that an employee’s motivation is typically hard to measure, there are four dimensions that have shown to be strong contributors to it: development, rewards and recognition, company strategy and culture, and work-life balance.  Essentially, each of these dimensions focuses on creating an engaged and committed workforce. Companies developing their procurement employees might achieve this by giving them more responsibility and by letting them join projects beyond their defined roles. In the Nordics, leading companies have joined forces to offer young supply chain professionals to tour different departments as part of their professional development.

Companies also nurture motivation by ensuring that the right reward and recognition mechanisms are in place. For example, an FMCG company awards the “value project of the month” to recognize teams who achieved breakthrough savings, secured access to critical innovations, or ensured flawless continuity or quality of supply. Promoting a meritocracy culture—a system where ability and achievement are the basis for advancement—with a clear methodology for measuring employee engagement levels is another lever: a Nordic foods giant launched a campaign that encompassed a series of inspirational events that helps new joiners absorb the unique working culture and inspire new confidence in the procurement function based on its more powerful mandate. Beyond that, reduced work hours (e.g., via sabbaticals) and adjusted work organizations (e.g., flextime) help in sustaining a healthy work-life balance.
Successful companies have been those that nurture the skills of their procurement employees and keep their motivation high. However, while these approaches have worked well in the past, they are likely to fall short when considering the immense requirements of the digital revolution ahead. As such, it is not only the way that the procurement of goods and services has shifted – from traditional towards more digitalized goods and services. The upcoming change also requires a more diverse skill set of procurement employees, and it definitely requires that teams are motivated beyond precedent levels—not only to go through the digital change but to shape it for their respective departments. And, most importantly, this change is coming faster than initially anticipated. 
 
Agile processes have become key for leading procurement employees, and best-in-class companies have moved away from giving explicit instructions based on predefined tasks and developing internal solutions, now instead focusing on following guiding principles, achieving perfection through trial and error, and developing collaborative solutions jointly with customers and partners. Agile ways of working, such as working in small teams, with high flexibility, and in sprints, have therefore become as critical as hiring the right talents or deciding which skills to insource or outsource. In short, answers must be found to the following three key questions:
  1. Which of the current procurement tasks will be taken over by digital solutions and will no longer require employees to be trained in a particular skill set?     
  2. How can CPOs ensure the skills needed for new digital solutions are sufficiently built up in their functions?     
  3. How can buyers be motivated to drive the change needed and truly transform their activity profile?
Which of the current procurement tasks will be taken over by digital solutions and will no longer require employees to be trained in a particular skill set?
 
If we look at the wide and nonredundant task set of strategic buyers, it would be difficult to replace it with purely robotic solutions. This is especially true for strategy creation or dealing with business partners (diplomat). However, other activities can at least be significantly supported by digital, making the lives of strategic buyers easier and limiting the skill set required. An example is the negotiator skill. 
 
The core task here has been to pick the right negotiation design. Now AI can support in decision-making using negotiation coaches. These coaches significantly increase the share of auctions versus face-to-face negotiations, and robots set up the auctions automatically. Another example is the analyst skill. Big data systems can be processed using advanced analytics, such as LPPs with automated regression reports shared on all parts of a category on a monthly basis with the respective buyers. The biggest digital impact will be on the researcher and data miner role. Here, data crawlers automatically fill repositories, such as by scanning contracts or collecting feedback from suppliers autonomously. 

Based on these developments, the skill set needed from strategic buyers is changing substantially, necessitating a different people profile (see exhibit 3).
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The situation looks different for operational procurement. Here, a large share of tasks easily can be taken on by robotics. Current skills, such as the ability to structure data inputs and follow-ups, will be needed much less. A large share of operational buyers will be freed up for more strategic tasks or offering potential HR budget savings.

How can CPOs ensure skills needed for new digital solutions are sufficiently built up in their functions? 

When thinking about adapting new digital capabilities in procurement, CPOs should structure their employees into three groups with a varying degree of digital adoption needed (see exhibit 4). The smallest group, the digital creators, includes those employees who are at the core of digital value creation. They account for roughly 10% of the procurement department, and their core competences include the creation and control of complex data models and the development of advanced algorithms. In most instances, these people have to be recruited, since their skill set is new to procurement functions. 
Typical roles are master data specialists, AI modelers, or robotic engineers. Master data specialists, who are in charge of large data repositories, feed them with data (e.g., via data crawlers) and make sure that buyers also enter the right data points. They form the backbone of all analytics and AI. AI modelers write codes to feed advanced analytics or AI in order to support decision-making. 
 
They have built AI negotiation coaches or risk management assessments trying to detect suppliers that might get into financial distress soon. Robotic engineers design and maintain the bots that are primarily used in operational procurement. We also count digital change agents in the core group of digital creators, although their work is not focused on data, codes, or robotics. They ensure the digital change is accepted and embraced within the function.

The second cluster, the digital core group, needs to have a thorough understanding of how digital systems work. They must constantly interpret their output and, even more importantly, understand when digital solutions should be applied and what input parameters be used. For example, a buyer for tail spend in a chemicals company first needs to realize that an AI-based solution could enable him to better predict the item portfolio in which a quality failure is likely to occur. 
Also, the buyer must provide the AI programmer with the relevant input parameters and then calibrate the systems to deliver the desired output. The digital core group consists of those employees who bring digital to life, expand technology to new fields, and ensure it is used to tackle day-to-day challenges. These individuals make up for another 20–30% of the department.

The third group, the digital users, includes those employees who usually have no fundamental understanding of the digital system. In the future, however, they will need to know how to use and interact with it. Digital users primarily sit in operational procurement and may interact with robotics in PR-PO approval, for example. Companies will need to develop the skills of digital users to interact with machines, such as via feedback loops in supplier selections or open questions in PR approvals the machines cannot assess themselves.
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How can buyers be motivated to drive the change needed and truly transform their activity profile?

The digitalization of procurement goes hand in hand with an acceleration of pressure, uncertainty, and increasing requirements for value generation. Strategic purchasers will be steered through AI and other technologies in their decisions. Activities in operational procurement will largely be made redundant and the remaining operational purchasers will have to welcome robots as their new colleagues. 
At the same time, new specialized roles will be introduced such as the aforementioned master data scientists or robotic engineers. While the conventional pillars of motivation will still play a large role, the change to come is too big to rely on them alone. Another paradigm has come to the fore in such turbulent times: leadership.

Thinking of procurement at the front lines of corporate value generation, it is natural to look at another organization facing similar challenges (although in a different environment) to draw inspiration from. Jocko Willink and Leif Babin, former Navy SEALs, have coined the leadership paradigm “extreme ownership”[1]. In critical missions—and this applies to digital transformation projects in procurement as well—four major principles emerge that determine success or failure: accountability, discipline, enthusiasm, and communication. With laser focus in the leadership approach on these four principles, Navy SEALs lead their teams through uncertainty and form a group ready to take on any change needed.

Accountability is probably the most important principle of extreme ownership. Accepting total responsibility, owning up to problems that inhibit performance, and developing solutions to those problems is needed to create value in digital times. Despite the uncertainty in digital times, employees need to feel fully accountable for the results they deliver. Discipline ensures that leaders keep sight of the strategic mission and help their team members be flexible and adaptable to changes, such as the need to rely on AI for upcoming choices. A team can only deliver exceptional performance when working together effectively. Enthusiasm ensures that procurement leaders strive for continuous improvement and instill a similar attitude in their team members. 
True leadership is about making people execute difficult tasks, having them handle uncertainty, and determine the right priorities. Digital bears great opportunities, so we need to spin a positive story around it. Finally, communication ensures that team members understand what to do and, more importantly, why they should do it. Extreme owners are true believers in their mission and always identify ways to jointly achieve that mission. They ensure that each member is part of the team and not an excuse for it. 

How it has been done: Procurement transformation at a global bank  When a leading German bank embarked on its journey to define and implement a digital transformation for its procurement department, the function’s reputation in the company was rather poor. Despite the significant spend volume of €5 billion—mainly in IT—and the awareness of difficult times ahead, procurement was not considered a strategically relevant function. The CPO however, who had been recently appointed to the position and who had successfully streamlined the sales unit before, recognized the enormous potential in the department. 
 
Mainly driven by the large opportunities of the digital landscape and the leverage he saw in his young team, he defined the vision of becoming the leading procurement function in the services industry. He made digital transformation the cornerstone of his agenda and communicated this clearly to both his people and other departments. But rather than simply outlining the project deliverables, he decided to take his people on a journey. Milestones were set up like a mountain climbing expedition, and each milestone was to reveal its own unique challenges. His charisma and the way he brought the digital roadmap to life created a level of enthusiasm the team had never experienced before. Each member started developing a strong sense of gratification and a continuous improvement mind-set.
Another cornerstone was the savings target the CPO had initially defined: €500 million. And, going even one step further, the CPO made himself fully accountable for reaching it. He clearly communicated to the leadership team that there was only one person to blame in case of failure and that was the CPO himself. This attitude, together with the intention of becoming a benchmark for other departments and even the services industry as a whole, made every team member work harder than ever before. The procurement department was no longer made of one leader and many followers, it was made of many leaders working together with one representing them all.

After fifteen months, the digital roadmap was successfully implemented and the savings target was even exceeded. The discipline that the CPO demonstrated throughout the transformation project was remarkable: from day one when the project was kicked off until the last day when all milestones had been implemented, he always remained focused on the strategic mission. He also consistently enforced high performance standards—until they eventually became the new standard. Agile prioritization and rigorous decision-making facilitated this process.

People are the core pillar in any digital change. CPOs must have a good understanding how each role in their department will be affected by the digital revolution. Equally important, they need to thoroughly understand what new roles and capabilities will be needed that are not embedded in the department so far. The most important focus, however, will be the change management aspect of how to lead the function’s employees into the new digital era in a positive yet challenging manner. 
The Navy SEALs’ approach to leadership yields many insights here. CPOs are well advised to adopt the principles of extreme ownership—probably the most extreme form of change management—and follow the understanding of what it takes to be successful particularly in digital times. They must be a leader and follower, straightforward but self-reflecting, diligent but without losing perspective, and determined but always considerate. These capabilities will be crucial to claiming victory on their own unique battlefields.

[1] Willink, Jocko, und Leif Babin. 2015. Extreme Ownership: How U.S. Navy SEALs Lead and Win. St. Martin's Press.
 
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The Author: Daniel Weise
 
                                          Daniel Weise

About:
I am a procurement enthusiast and have the privilege to lead BCGs procurement business line globally. Supporting my clients globally and across industries, I focus on value delivery - beyond cost and including resilient supply chains and sustainability, operating model redesign and digitization programs. I have also supported many of my clients in PMI and restructuring settings. Recently, I have published my first book summarizing my experiences in digitizing procurement functions: "Jumpstart to Digital Procurement". In BCG, I am also part of our global Operations Practice Area leadership team.
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