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Dana Gardner:
Hello, and welcome to a special BriefingsDirect podcast coming to you from the
2017 SAP Ariba LIVE conference in Las Vegas.
I’m Dana Gardner, Principal Analyst at Interarbor Solutions,
your host, here the week of March 20 as we explore the latest in collaborative
commerce and learn how innovative companies are leveraging the networked
economy.
Our next digital business insights
discussion explores the successful habits, practices, and culture that define
highly effective procurement organizations. We will now examine unique new
research that identifies and measures how innovative companies have optimized their
practices to overcome the many challenges facing business-to-business (B2B) commerce.
To learn more about the traits
and best practices of the most successful procurement organizations, please
join me now in welcoming Kay Ree Lee, Director
of Business Analytics and Insights at SAP Ariba.
Welcome, Kay Ree.
Gardner: Procurement
is more complex than ever, supply chains stretch around the globe, regulation
is on the rise, and risk is heightened across many fronts. Despite these, innovative
companies have figured out how to overcome their challenges, and you have
uncovered some of their secrets through your Annual Benchmarking Survey. Tell
us about your research and your findings.
Lee: Every year we conduct a large benchmark program benefiting our
customers that combines a traditional survey with data from the procurement
applications, as well as business network.
This past year, more than
200 customers participated, covering more than $400 billion in spend. We analyzed
the quantitative and qualitative responses of the survey and identified the
intersection between those responses for top performers compared to average
performers. This has allowed us to draw correlations between what top performers
did well and the practices that drove those achievements.
Gardner: What’s
changed from the past, what are you seeing as long-term trends?
On trend in the
digital marketplace
Lee: There are three things that are quite different from when we last talked
about this a year ago.
The number one trend that we
see is that digital procurement is gaining momentum quickly. A lot of
organizations are now offering self-service tools to their internal
stakeholders. These self-service tools enable the user to evaluate and compare
item specifications and purchase items in an electronic marketplace, which
allows them to operate 24x7, around-the-clock. They are also utilizing digital
networks to reach and collaborate with others on a larger scale.
We see compliance management as a way for
organizations to deliver savings to the bottom line.
The second trend that we see
is that while risk management is generally acknowledged as important and
critical, for the average company, a large proportion of their spend is not
managed. Our benchmark data indicates that an average company manages 68% of
their spend. This leaves 32% of spend that is unmanaged. If this spend is not
managed, the average company is also probably not managing their risk. So, what
happens when something unexpected occurs to that non-managed spend?
The third trend that we see is
related to compliance management. We see compliance management as a way for
organizations to deliver savings to the bottom line. Capturing savings through sourcing
and negotiation is a good start, but at
the end of the day, eliminating loopholes through a focus on implementation and
compliance management is how organizations deliver and realize negotiated savings.
Gardner:
You have uncovered some essential secrets -- or the secret sauce -- behind procurement
success in a digital economy. Please describe those.
Five elements driving
procurement processes
Lee: From the data, we identified five key takeaways. First, we see that procurement
organizations continue to expand their sphere of influence to greater depth and
quality within their organizations. This is important because it shows that the
procurement organization and the work that procurement professionals are
involved in matters and is appreciated within the organization.
The second takeaway is that –
while cost reduction savings is near and dear to the heart of most procurement professionals
-- leading organizations are focused on capturing value beyond basic cost
reduction. They are focused on capturing value in other areas and tracking that
value better.
The third takeaway is that digital
procurement is firing on all cylinders and is front and center in people's
minds. This was reflected in the transactional data that we extracted.
The fourth takeaway is
related to risk management. This is a key focus area that we see instead of just
news tracking related to your suppliers.
The fifth takeaway is -- compliance
management and closing the purchasing loopholes is what will help procurement
deliver bottom-line savings.
Gardner: What
next are some of the best practices that are driving procurement organizations to
have a strategic impact at their companies, culturally?
Lee: To
have a strategic impact in the business, procurement needs to be proactive in
engaging the business. They should have a mentality of helping the business
solve business problems as opposed to asking stakeholders to follow a prescribed
procurement process. Playing a strategic role is a key practice that drives
impact.
Another practice that drives
strategic impact is the ability to utilize and adopt technology to your
advantage through the use of digital networks.
They should also focus on
broadening the value proposition of procurement. We see leading organizations placing
emphasis on contributing to revenue growth, or increasing their involvement in
product development, or co-innovation that contributes to a more efficient and
effective process.
Another practice that drives
strategic impact is the ability to utilize and adopt technology to your
advantage through the use of digital networks, system controls to direct
compliance, automation through workflow, et cetera.
These are examples of practices
and focus areas that are becoming more important to organizations.
Using technology to
track technology usage
Gardner: In many cases, we see the use of technology having a
virtuous adoption cycle in procurement. So the more technology used, the better
they become at it, and the more technology can be exploited, and so on. Where
are we seeing that? How are leading organizations becoming highly technical to gain
an advantage?
Lee:
Companies that adopt new technology capabilities are able to elevate their
performance and differentiate themselves through their capabilities. This is
also just a start. Procurement organizations are pivoting towards advanced and
futuristic concepts, and leaving behind the single-minded focus on cost
reduction and cost efficiency.
Digital procurement
utilizing electronic marketplaces, virtual catalogs, gaining visibility into
the lifecycle of purchase transactions, predictive risk management, and utilizing
large volumes of data to improve decision-making – these are key capabilities
that benefit the bold and the future-minded. This enables the transformation of
procurement, and forms new roles and requirements for the future procurement
organization.
Gardner: We
are also seeing more analytics become available as we have more data-driven and
digital processes. Is there any indication from your research that procurement
people are adopting data-scientist-ways of thinking? How are they using
analysis more now that the data and analysis are available through the
technology?
If you extract all
of that data, cleanse it, mine it, and make sense out of it, you can then make
informed business decisions and create valuable insights.
Lee: You are
right. The users of procurement data want insights. We are working with a
couple of organizations on co-innovation projects. These organizations actively research, analyze, and use their data
to answer questions such as:
- How does an organization validate that the prices they are paying are competitive in the marketplace?
- After an organization conducts a sourcing event and implements the categories, how do they actually validate that the price paid is what was negotiated?
- How do we categorize spend accurately, particularly if a majority of spend is services spend where the descriptions are non-standard?
- Are we using the right contracts with the right pricing?
As you can imagine, when people enter transactions in a system, not all of it is contract-based or catalog-based. There is still a lot of free-form text. But if you extract all of that data, cleanse it, mine it, and make sense out of it, you can then make informed business decisions and create valuable insights. This goes back to the managing compliance practice we talked about earlier.
They are also looking to
answer questions like, how do we scale supplier risk management to manage all of
our suppliers systematically, as opposed to just managing the top-tier suppliers?
These two organizations are
taking data analysis further in terms of creating advantages that begin to
imbue excellence into modern procurement and across all of their operations.
Gardner: Kay
Ree, now that you have been tracking this Benchmark Survey for a few years, and
looking at this year's results, what would you recommend that people do based
on your findings?
Future focus: Cost-reduction
savings and beyond
Lee: There are several recommendations that we have. One is that procurement
should continue to expand their span of influence across the organization.
There are different ways to do this but it starts with an understanding of the
stakeholder requirements.
The second is about capturing
value beyond cost-reduction savings. From a savings perspective, the
recommendation we have is to continue to track sourcing savings -- because cost-reduction
savings are important. But there are other measures of value to track beyond
cost savings. That includes things like contribution to revenue, involvement in
product development, et cetera.
The third recommendation relates
to adopting digital procurement by embracing technology. For example, SAP Ariba
has recently introduced some innovations. I think the user really has an
advantage in terms of going out there, evaluating what is out there, trying it
out, and then seeing what works for them and their organization.
As organizations expand
their footprint globally, the fourth recommendation focuses on transaction
efficiency. The way procurement can support organizations operating globally is
by offering self-service technology so that they can do more with less. With
self-service technology, no one in procurement needs to be there to help a user
buy. The user goes on the procurement system and creates transactions while
their counterparts in other parts of the world may be offline.
If you can measure risk for your suppliers, why not
make it systematic?
The fifth recommendation is
related to risk management. A lot of organizations when they say, “risk
management,” they are really only tracking news related to their suppliers. But
risk management includes things like predictive analytics, predictive risk
measures beyond your strategic suppliers, looking deeper into supply chains, and
across all your vendors. If you can measure risk for your suppliers, why not
make it systematic? We now have the ability to manage a larger volume of
suppliers, to in fact manage all of them. The ones that bubble to the top, the
ones that are the most risky, those are the ones that you create contingency
plans for. That helps organizations really prepare to respond to disruptions in
their business.
The last recommendation is
around compliance management, which includes internal and external compliance. So, internal adherence to procurement
policies and procedures, and then also external following of governmental
regulations. This helps the organization close all the loopholes and ensure that
sourcing savings get to the bottom line.
Be a leader, not a
laggard
Gardner: When we examine and benchmark companies through this
data, we identify leaders, and perhaps laggards -- and there is a delta between
them. In trying to encourage laggards to transform -- to be more digital, to
take upon themselves these recommendations that you have -- how can we entice
them? What do you get when you are a leader? What defines the business value
that you can deliver when you are taking advantage of these technologies,
following these best practices?
Lee: Leading organizations see higher cost reduction
savings, process efficiency savings and better collaboration internally and
externally. These benefits should speak for themselves and entice both the average
and the laggards to strive for improvements and transformation.
From a numbers perspective, top
performers achieve 9.7% savings as a percent of sourced spend. This translates
to approximately $20M higher savings per $B in spend compared to the average
organization.
We talked about compliance
management earlier. A 5% increase in compliance increases realized savings of
$4.4M per $1B in spend. These are real hard dollar savings that top performers
are able to achieve.
In addition, top performers
are able to attract a talent pool that will help the procurement organization
perform even better. If you look at some of the procurement research, industry analysts
and leaders are predicting that there may be a talent shortage in procurement.
But, as a top performer, if you go out and recruit, it is easier to entice
talent to the organization. People want to do cool things and they want to use new
technology in their roles.
Gardner: Wrapping up, we are seeing some new and compellingtechnologies here at Ariba LIVE 2017 -- more use of artificial intelligence(AI), increased use of bringing predictive tools into a context so that they
can be of value to procurement during the life-cycle of a process.
As we think about the future,
and more of these technologies become available, what is it that companies
should be doing now to put themselves in the best position to take advantage of
all of that?
Curious org
Lee: It's important to be curious about the technology available
in the market and perhaps structure the organization in such a way that there
is a team of people on the procurement team who are continuously evaluating the
different procurement technologies from different vendors out there. Then they
can make decisions on what best fits their organization.
Having people who can look
ahead, evaluate, and then talk about the requirements, then understand the architecture,
and evaluate what's out there and what would make sense for them in the future.
This is a complex role. He or she has to understand the current architecture of
the business, the requirements from the stakeholders, and then evaluate what
technology is available. They must then determine if it will assist the organization
in the future, and if adopting these solutions provides a return on investment
and ongoing payback.
Being curious,
understanding the business really well, and then wearing a technology hat to
understand what's out there are key.
So I think being curious,
understanding the business really well, and then wearing a technology hat to
understand what's out there are key. You can then be helpful to the organization
and envision how adopting these newer technologies will play out!
Gardner: That sounds like very good advice. I’m afraid we’ll
have to leave it there. We’ve been talking about new SAP Ariba research that
identifies and measures how innovative companies overcome the many challenges
facing B2B commerce. And we have learned about some of the latest successful
habits, practices, and culture that define highly effective procurement
organizations.
So please join me in
thanking our guest, Kay Ree Lee, Director of Business Analytics and Insights at
SAP Ariba.
Lee: Thank you, Dana.
Gardner: And a big thank you as well to our audience for
joining this special podcast coming to you from the 2017 SAP Ariba LIVE conference
in Las Vegas. I’m Dana Gardner, Principal Analyst at Interarbor Solutions, your
host throughout this series of SAP Ariba-sponsored BriefingsDirect digital
business insights discussions. Thanks again for listening, and do come back
next time.
Listen to the podcast. Find it on iTunes. Get the mobile app. Download the transcript. Sponsor: SAP Ariba.
Transcript of a
discussion that defines specific successful habits, practices, and
culture that contribute to highly effective procurement organizations. Copyright Interarbor Solutions, LLC,
2005-2017. All rights reserved.
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