Digitalisation can deliver a step-change in procurement performance and value, but the approach and organisational culture are critical to harvesting the benefits. Peter Wetherill talks to CPOs in Germany, the UK and US about the opportunities and challenges of investing in new technology.
It’s often said in procurement that ‘what gets measured gets managed’. Without the tools to properly determine what your organisation spends, where and with whom, it’s a tough ask for CPOs to deliver against annual savings targets or mitigate supplier risks. Tougher still is to know with certainty that the facts you present are accurate and complete. Without total oversight, procurement’s results will be perpetually questioned and potentially dismissed.
Digitalisation is nothing new. For centuries, people have sought ways to automate repeatable tasks, allowing them to focus on value-add activities. Procurement has at times been guilty of lagging behind the curve in capitalising on emerging technologies. But as we reach a key threshold where advanced solutions are increasingly available to the masses, the strategic role of procurement is intensifying – as is the demand for making the function more effective.
The pace of change is profound; what is leading edge today could be obsolete tomorrow. So, how should CPOs account for this and when is the right time to go digital? The answer lies in introducing a culture and ways of working that foster innovation and have the flexibility to evolve. Former US President Dwight D. Eisenhower said: “Plans are worthless, but planning is essential.” Digitalising procurement in an agile way is the solution and will position procurement as a leader in the digital agenda.
Focusing on the future role of people in procurement is the place to start. What value can your team bring to the business? What knowledge and talent do you need to retain? Beyond that, everything else has the potential to be digitalised.
Shahriar Tabrizi, Group Chief Procurement Officer, Sivantos Group, Germany
“The digitalisation of procurement is cost-intensive. It starts with investment in ERP (enterprise resource planning) systems and other specialised tools, which means it first requires the support of senior management. It is procurement’s job to save money, not spend it, so a company’s digital strategy must come from the top.”
Tabrizi is fortunate. Sivantos has invested in technology and procurement has had complete transparency over the company’s multi-hundred million external spend (direct and indirect) for the past seven years. “I’m aware of every cent that’s spent and have some very smart analytic tools that can generate comprehensive, monthly reports broken down by commodities, suppliers, spend and forecast for 28 separate affiliates.”
This level of third-party spend analysis is all too rare and requires ongoing maintenance to ensure the data is clean and accurate. “It’s a long-term commitment, you can’t just give it up after two years. You must continue to be excellent on data quality and maintenance otherwise you’ll never be able to make historical comparisons. I question our actions every year and consider if we can do anything better.”
The business recently provided a data dump to suppliers with big data and analytics capabilities to discover what, if any, additional information they could provide. “I expect they can break down the data further into forecasting, price or quantity levels but I don’t think they can give us much more… we’re waiting to find out.”
But big data tools should not be considered, he says, until you’ve got the basics right. “You first need transparency – if you don’t have that all you’re doing is adding big data to a problem you’ve not solved and creating more problems.”
Too few companies are as enlightened as Sivantos. Tabrizi cites examples where procurement has no mandate and is therefore just an executor or service provider. “In that situation you never get control – you will always run behind the car. I see that a lot. Most firms want to have full transparency but only see direct spend because indirect is hard to manage. Everyone talks about these things at conferences, but most lack data transparency, commodity management, project procurement and procurement engineering... without that, most of the time you have no clue what’s going on.”
Sivantos uses electronic invoicing, automated purchase-to-pay and a detailed sales and operation process to manage demand planning. The level of information these systems provide, together with good structures, processes and personnel, has helped the procurement department achieve double-digit savings for the past seven years.
For some, investment in technology might result in a loss of procurement staff, while for Tabrizi it enables the strategic members of his team to evolve into data analysts.
“In my view, digitalisation is a must-have for every organisation – it makes data transparent and easily available. Digital tools result in analytics that should drive actions. The most important thing in procurement is structured commodity management.
If you manage that well, then blockchain, AI (artificial intelligence) and big data can be supportive tools, but they’re not replacing, they’re enriching.
“Procurement is still a people function. You need people who interact as business partners and achieve buy-in. That leads to consistent and long-term savings. We don’t want Monopoly money savings, we want EBITDA impact and you get this by people working together.”
Andrew Newnham, Director of Business Efficiency and Group Procurement, ITV, UK
When it comes to digital tools, the procurement team at broadcasting company ITV decides on a case-by-case basis the best way to add value, while ensuring its approach reflects that of the business.
“We might develop the functionality of an in-house tool or have something custom-built,” says Newnham. “That’s how ITV works, so that’s how we work. A big pharmaceutical business may want an all-encompassing system but we’re an agile, medium-sized media company. We want to deliver immediate change, so we buy bespoke or modify and enhance existing tools to add value.”
The company has very little leakage on its purchase-to-pay system, which supplies spend data and enables the team to see where it can best add value. One of Newnham’s key objectives this year is to unlock value from all the small, creative production companies ITV has acquired in the US, UK and Europe over the past three years. “The challenge will be to find a way to get spend data and ensure good spend management, while not stifling creativity with cumbersome back-office administration.”
ITV also has contracts management, electronic request-for-proposal tools – recently modified to help comply with UK law on modern slavery and bribery – and uses Google as a collaboration tool for its intranet and to share documents, data and category management plans.
“We want good, easy-to-use ‘consumerised’ tools that have an intuitive interface – that’s how you get compliance. It’s more important to have things people can understand quickly instead of a monolithic, unwieldy system that requires a lot of integration. You don’t get value from functions you don’t use, so the business case turns to dust. Make it easy and people come to you for a solution and then you can add value.”
Procurement has four technology category managers and is integrated with the technology team. That credibility gives it a degree of independence, as was evidenced with the recent purchase of a new software licensing tool.
Now it is in the early stages of putting two new systems – one AI, the other robotics – through a ‘proof of concept’ phase to assess value and competitive advantage. “AI and robotics kind of get bunched together, but they are very different. We’re looking at how we can change the way the business does things using both.”
It is trialling AI to sift through old drama recordings and add metadata to log their content. So instead of people watching old shows then labelling them to say they contain, for example, swearing, nudity or violence (to ensure they meet watershed rules and sell programmes into appropriate markets), the company is piloting an AI tool that can work faster than real-time. Elsewhere it is trying a robotics process to link separate legacy sales and scheduling systems.
Newnham also plans to automate some of the legal department’s repetitive contract work for on-screen talent.
“Broadcasting, operations, legal and marketing are now all keen for us to look at robotics solutions for them. They want them tomorrow, which is a pretty good way for procurement to be, but we need to prioritise costs. We need a business case for every implementation to see where it can bring the biggest benefit.”
Tomas Wiemer, Former Global Digital Transformation and Process Excellence Leader, Nokia, US
The Nokia team is equally evangelical about the digital opportunity, noting a difference between the digitalisation of procurement processes, automation and simplification.
“If you just do the latter, not much changes,” says Wiemer. “Proper digitalisation brings new opportunities, new ways of working, improved user experience and interconnectivity. Changes mean the skillset of buyers will alter by up to 50% in the next three to five years.”
Social media, for example, means buyers can interact with more suppliers through sourcing programmes, websites and closed social media forums. This will open up request for proposals to many more in an efficient, connected way.
“In ten years’ time, I predict you will not know the difference between a customer and supplier. The long shot is you create environments in which you do business and those environments interact, where you bring suppliers and customers together. It will be a nightmare for lawyers.”
However, he believes currently most companies are in ‘wait-and-see mode’. While many have invested in customer-facing technology, back-end systems are more likely to hail from the late 1990s and early 2000s.
Smaller companies have a better chance to modernise faster, he believes, whereas larger corporations have many systems and tools that are not connected.
“When a new CPO starts, they have to do something different and the digital agenda often follows. If they’re joining a customer-oriented business, the business is probably already thinking about the back-end and suppliers, but many traditional companies haven’t spent much time or money on it. You can work with what you have and add some new dimensions, or you can wait and thrash out everything at once – but that makes it a huge change and management challenge, which could be quite overwhelming.”
When it comes to the business case, companies still struggle with demonstrating a clear return on investment, but technology evolves at speed, so the longer you wait the more costly and disruptive it becomes, he says.
“The main risk is that the more companies struggle with profit, the more they will remain traditional and not invest much in technology. CPOs unfamiliar with the digitalisation agenda should read up on it, attend conferences and start to work on small scopes and user cases. The digital transformation will come.”