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| Procurement Management and Profitability |
All companies spend money and effort on developing new products and increasing sales. After all, companies are in business to serve customers and make a profit. Most of the advertisements that you see on LinkedIn are aimed at helping salespeople find and win new clients and customers.
Sales and revenue always seem to get all the attention because that is what builds profitability, and rightly so. But what about the cost side of the equation? In a paper by the Harvard Business Review (HBR), High Performance Procurement and Sourcing, they point out ….any cost savings realized through sourcing improvement drop directly to the bottom line, which in turn can have a substantial impact on profitability.
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1 -If this is the case, why does Procurement lag other non-customer facing business activities in digital transformation? According to an HBR analytics survey, Procurement ranked 10th among a list of 13 critical business activities. Executives understand the impact that procurement has on the bottom line, but even some of the largest organizations still execute sourcing using spreadsheets and manual processes.
2-The HBR survey results tend to support my own experiences being embedded in several IT organizations in a procurement role. Many of the largest organizations have so many silos that it is very difficult for leadership to recognize multiple instances of similar work streams. Companies need a "satellite" view to build efficiencies and cost savings into the procurement and sourcing functions.
Let's talk about how companies can escape this cycle of inefficiency and approach digital transformation in the procurement function.
Innovate
Before we can move towards digital transformation we must innovate to fix current inefficiencies. If you apply technology to broken systems, you will simply have high tech broken systems. So, let's fix the input first. Category planning starts with data analytics. We need to obtain a couple years' worth of procurement data from all corners of the organization. It wouldn't hurt to have expense data to review what kind of "shadow spend" is being procured on department credit cards and then expensed.
Typically, procurement data is not all that good, so we have to categorize, and re-categorize until some useful insights come into view. I have never seen categorized procurement data that didn't reveal substantial savings opportunities! So, we then detail the opportunities and develop project plans to capture the savings. Make sure the savings are removed from the target budget and add to a savings fund, or apply to unfunded projects. According to the authors of the HBR survey, after you capture the savings, tie the completed projects to successful strategic business outcomes.
Collaborate
Of course, we have to work in concert with our internal constituents. The category manager must meet with business owners to understand the budget and projects that are planned for the coming year. For example, if IT objectives are based on requirements from the business units it serves, It is very important for procurement to be in alignment with IT leadership. And, as mentioned in the previous section, it helps to build future collaboration by joining efforts and highlighting successful strategic business outcomes.
I can't talk about collaboration without mentioning our supplier partners. It is incredibly important to maintain strong relationships with suppliers and partners. You never know when you will need them to bend over backwards to help you through an emergency. Suppliers need to offer great products and services, but they also need to be profitable and strong. You need strong partners to get through challenging times should they come your way.
Automate
Innovate and create an accurate, categorized baseline. Capture savings and repair inefficiencies. Build strong partnerships internally and externally. Now you are ready to automate. To keep things on the straight and narrow, you should tightly manage the process. Build a contract management process and calendar important contractual events.
There are many tools like ScoutRFP to help with supplier management, contract management, and ongoing strategic sourcing. Trying to stitch together legacy systems and spreadsheets will get you back on the path of losing control of the procurement function across the enterprise. Cloud based solutions like Scout provide easy to use collaboration across your entire internal constituency, as well as suppliers.
Procure to Pay is the next piece of automation to implement. The HBR authors stated that many organizations already have the P2P process reasonably automated. That may be true in the largest of companies, but in my experience, I have seen many clients who have a disruption at the point of invoice. I still see a lot of invoices being emailed, so there is not a lot of integration.
Am I wrong on this point? I would like to hear from readers if they are seeing the same thing. True P2P starts at sourcing, to requisition to PO to Invoice to Pay - all electronic and integrated. I see the path broken at the point of invoice. Let me know what you are seeing!
Profitability requires strong effort on the revenue and cost side of the equation. Data analytics, ongoing Business Intelligence, collaboration and automation are the keys to driving value in procurement and sourcing.
1. Harvard Business School Publishing, 2017. High Performance Sourcing and Procurement, Driving Value Through Collaboration.
2. ibid
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The Author: David Krigger
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Chief Procurement Officer | Managing Director Data Analytics
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