The next
BriefingsDirect innovation discussion focuses on how
technology, data analysis, and digital networks are transforming
procurement and the
source-to-pay process as we know it. We’ll also discuss what it takes to do procurement well in this new era of
business networks.
Far beyond just automating tasks and transactions,
procurement today is a strategic function that demands an integrated, end-to-end
approach built on deep insights and intelligence to drive informed
source-to-pay decisions and actions that enable businesses to adopt a
true business ecosystem-wide digital strategy.
And according to the findings of a benchmarking survey conducted by
SAP Ariba,
there are seven essential traits of modern procurement organizations
that are driving this innovation and business transformation.
To learn
more about the survey results on procurement best practices, please join me in welcoming
Kay Ree Lee, Director of Value Realization at SAP. The discussion is moderated by
BriefingsDirect's Dana Gardner, Principal Analyst at
Interarbor Solutions.
Here are some excerpts:
Gardner: Procurement seems more complex than ever.
Supply chains
now stretch around the globe, regulation is on the rise, and risk is
heightened on many fronts in terms of supply chain integrity.
Innovative
companies, however, have figured out how to overcome these challenges,
and so, at the value realization group you have uncovered some of these
best practices through your annual benchmarking survey. Tell us about
this survey and what you found.
Lee: We have an annual benchmarking program that covers purchasing operations,
payables, sourcing, contract management, and
working capital.
What's unique about it, Dana, is that it combines a traditional survey
with data from our procurement applications and business network.
This
past year, we looked at more than 200 customers who participated,
covering more than $350 billion in spend. We analyzed their quantitative
and qualitative responses and identified the intersection between those
responses for top performers compared to average performers. Then, we
drew correlations between which top performers did well and the
practices that drove those achievements.
Gardner:
By making that intersection, it’s an example of the power of business
networks, because you're able to gather intelligence from your
business network
environment or ecosystem and then apply a survey back into that. It
seems to me that there is a whole greater than the sum of the parts
between what the Ariba Network can do and what market intelligence is
demanding.
Universe of insights
Lee: That’s right. The data from the applications in the
Ariba Network
contain a universe of insights, intelligence, and transactional data
that we've amassed over the last 20-plus years. By looking at the data,
we've found that there are specific patterns and trends that can help a
lot of companies improve their procurement performance -- either by
processing transactions with fewer errors or processing them faster.
They can source more effectively by collaborating with more suppliers,
having suppliers bid on more events, and working collaboratively with
suppliers.
Gardner: And across these 200
companies, you mentioned $350 billion of spend. Do you have any sense of
what kind of companies these are, or do they cross a variety of
different types of companies in different places doing different
vertical industry activities?
Lee: They're
actually cross-industry. We have a lot of companies in the services
industry and in the manufacturing industry as well.
Gardner:
This sounds like a unique, powerful dataset, indicative of what's going
on not just in one or two places, but across industries. Before we dig
into the detail, let’s look at the big picture, a 100,000-foot view.
What would you say are some the major high-level takeaways that define
best-in-class procurement and organizations that can produce it these
days based on your data?
Lee: There are four key takeaways that define what best-in-class procurement organizations do.
The
first one is that a lot of these best-in-class organizations, when they
look at source-to-pay or procure-to-pay, manage it as an
end-to-end process.
They don't just look at a set of discrete tasks; they look at it as a
big, broad picture. More often than not, they have an assigned process
expert or a process owner that's accountable for the entire end-to-end
process. That's key takeaway number one.
A lot of these best-in-class organizations also have an integrated platform from which they manage all of their spend.
Key
takeaway number two is that a lot of these best-in-class organizations
also have an integrated platform from which they manage all of their
spend. And through this platform, procurement organizations provide
their internal stakeholders with flexibility, based on what they're
trying to purchase.
For example, if a company needs to
keep track of items that are critical to manufacturing and they need to
have inventory visibility and tracking. That's one requirement.
Another
requirement is if they have to purchase manufacturing or machine parts
that are not stocked, that can be purchased through supply catalogs with
pre-negotiated part description and item pricing.
Gardner:
Are you saying that this same platform can be used in these companies
across all the different types of procurement and source-to-pay
activities -- internal services, even indirect, perhaps across different
parts of a large company? That could be manufacturing or
transportation? Is it the common platform common for all types of
purchasing?
Common platform
Lee: That's right. One common platform for different permutations of what you're trying to buy. This is important.
The
third key takeaway was that best-in-class organizations leverage
technology to fuel greater collaboration. They don't just automate
tasks. One example of this is by providing self-service options.
Perhaps
a lot of companies think that self-service options are dangerous,
because you're letting the person who is requesting items select on
their own, and they could make mistakes. But the way to think about a
self-service option is that it's providing an alternative for
stakeholders to buy and to have a guided buying experience that is both
simple and compliant and that's available 24/7.
You
don't need someone there supervising them. They can go on the platform
and they can pick the items, because they know the items best -- and
they can do this around the clock. That's another way of offering
flexibility and fueling greater collaboration and ultimately, adoption.
Networks
have become very prevalent these days, but best-in-class companies
connect to networks to assess intelligence, not just transact.
Gardner:
We have technologies like mobile these days that allow that
democratization of involvement. That sounds like a powerful approach.
Lee: It is. And it ties to the fourth key takeaway, which is that best-in-class organizations
connect to networks.
Networks have become very prevalent these days, but best-in-class
companies connect to networks to assess intelligence, not just transact.
They go out to the network, they collaborate, and they get
intelligence. A network really offers scale that organizations would
otherwise have to achieve by developing multiple point-to-point
connections for transacting across thousands of different suppliers.
You
now go on a network and you have access to thousands of suppliers.
Years ago, you would have had to develop point-to-point connectivity,
which costs money, takes a long time, and you have to test all those
connections, etc.
Gardner: I'm old enough to remember
Metcalfe's Law,
which roughly says that the more participants in a network, the more
valuable that network becomes, and I think that's probably the case
here. Is there any indication from your data and research that the size
and breadth and depth of the business network value works in this same
fashion?
Lee: Absolutely. Those three words are key. The size -- you want a lot of suppliers transacting on there. And then the
breadth
-- you want your network to contain global suppliers, so some suppliers
that can transact in remote parts of the world, even Nigeria or Angola.
Then, the
depth
of the network -- the types of suppliers that transact on there. You
want to have suppliers that can transact across a plethora of different
spend categories -- suppliers that offer services, suppliers that offer
parts, and suppliers that offer more mundane items.
But you hit the nail on the head with the size and breadth of the network.
Pretty straightforward
Gardner:
So for industry analysts like myself, these seem pretty
straightforward. I see where procurement and business networks are
going, I can certainly agree that these are major and important points.
But
I wonder, because we're in such a dynamic world and because companies
-- at least in many of the procurement organizations -- are still
catching up in technology, how are these findings different than if you
had done the survey four or five years ago? What's been a big shift in
terms of how this journey is progressing for these large and important
companies?
Lee: I don't think that there's a big
shift. Over the last two to five years, perhaps priorities have
changed. So, there are some patterns that we see in the data for sure.
For example, within sourcing, while sourcing savings continue to go up,
go down, sourcing continues to be very important to a lot of
organizations to deliver cost savings.
The data tells
us organizations need to be agile and they need to continue to do more
with less. Networks have become very prevalent these days, but
best-in-class companies connect to networks to assess intelligence, not
just transact.
They have fewer people operating certain processes, and that means that it costs organizations less to operate those processes.
One
of the key takeaways from this is that the cost structure of
procurement organizations have come down. They have fewer people
operating certain processes, and that means that it costs organizations
less to operate those processes, because now they're leveraging
technology even more. Then, they're able to also deliver higher savings,
because they're including more and different suppliers as they go to
market for certain spend categories.
That's where we're seeing difference. It's not really a shift, but there are some patterns in the data.
Gardner:
It seems to me, too, though, that because we're adding through that
technology more data and insight, we can elevate procurement more
prominently into the category of
spend management.
That allows companies to really make decisions at a large environment
level across the entire industries, maybe across the entire company
based on these insights, based on best practices, and they can save a
lot more money.
But then, it seems to me that that
elevates procurement to a strategic level, not just a way to save money
or to reduce costs, but to actually enable processes and agility, as you
pointed out, that haven't been done before.
Before we
go the traits themselves, is there a sense that your findings illustrate
this movement of procurement to a more strategic role?
Front and center
Lee:
Absolutely. That's another one of the key traits that we have found
from the study. Top performing organizations do not view procurement as a
back-office function. Procurement is front and center. It plays a
strategic role within the organization to manage the organization’s
spend.
When you talk about managing spend, you could
talk about it at the surface level. But we have a lot of organizations
that manage spend to a depth that includes performing strategic supplier
relationship management, supplier risk management, and deep spend
analysis. The ability to manage at this depth distinguishes top
performers from average performers.
Gardner: As
we know, Kay Ree, many people most trust their cohorts, people in other
companies doing the same function they are, for business acumen. So this
information is great, because we're learning from the people that are
doing it in the field and doing it well. What are some of the other
traits that you uncovered in your research?
Top performers play a strategic role within the organization. They manage more spend and they manage that spend at a deep level.
Lee:
Let me go back to the first trait. The first one that we saw that drove
top performing organizations was that top performers play a strategic
role within the organization. They manage more spend and they manage
that spend at a deep level.
One of the stats that I
will share is that top performers see a 36 percent higher spend under
management, compared to the average organization. And they do this by
playing a strategic role in the organization. They're not just
processing transactions. They have a seat at the leadership table.
They're a part of the business in making decisions. They're part of the
planning, budgeting, and financial process.
They also
ensure that they're working collaboratively with their stakeholders to
ensure that procurement is viewed as a trusted business adviser, not an
administrator or a gatekeeper. That’s really the first trait that we saw
that distinguishes top performers.
The second one is that top performers have an
integrated platform for all procurement spend, and they conduct regular stakeholder spend reviews -- resulting in higher sourcing savings.
And
this is key. They conduct quarterly – or even more frequent -- meetings
with the businesses to review their spend. These reviews serve
different purposes. They provide a forum for discussing various sourcing
opportunities.
Imagine going to the business unit to
talk to them about their spend from the previous year. "Here is who you
have spent money with. What is your plan for the upcoming year? What
spend categories can we help you source? What's your priority for the
upcoming year? Are there any capital projects that we can help out
with?"
Sourcing opportunities
It's
understanding the business and requirements from stakeholders that
helps procurement to identify additional sourcing opportunities. Then,
collaborating with the businesses and making sure that procurement is
being responsive and agile to the stakeholder requirements. Procurement,
has to be proactive in collaborating with stakeholders and ensuring
that they’re being responsive and agile to their requirements. That's
the second finding that we saw from the survey.
The third one is that top performers manage
procure-to-pay as an end-to-end process with a single point of accountability, and this really drives higher
purchase order (PO)
and invoicing efficiency. This one is quite straightforward. Our
quantitative and qualitative research tells us that having a single
point of accountability drives a higher transactional efficiency.
Gardner:
I can speak to that personally. In too many instances, I work with
companies where one hand doesn’t know what the other is doing, and there
is finger pointing. Any kind of exception management becomes bogged
down, because there isn’t that point of accountability. I think that’s
super important.
Lee: We see that as well. Top
performers operationalize savings after they have sourced spend
categories and captured negotiated savings. The question then becomes
how do they operationalize negotiated savings so that it becomes actual
savings? The way top performers approach it is that they manage
compliance for those sourced categories by creating fit-for-purpose
strategies for purchase. So, they drive more spend toward contract and
electronic catalogs through a guided buying experience.
You
do that by having available to your stakeholders contracts and catalogs
that would guide them to the negotiated pricing, so that they don't
have to enter pricing, which would then dilute your savings. Top
performers also look at working capital, and they look at it closely,
with the ability to analyze historical payment trends and then optimize
payment instruments resulting in higher discounts.
Top performers leverage technology and provide self-service to enable around-the-clock business.
Sometimes, working capital is not as important to procurement because it's left to the
accounts payable (AP)
function, but top performers or top performing procurement
organizations look at it holistically; as another lever that they manage
within the sourcing and procure-to-pay process.
So,
it's another negotiation point when they are sourcing, to take advantage
of opportunities to standardize payment terms, take discounts when they
need to, and also look at historical data and really have a strategy,
and variations of the strategy, for how we're going to pay strategic
suppliers. What’s the payment term for standard suppliers, when do we
pay on terms versus discounts, and then when do we pay on a
P-Card? They look at working capital holistically as part of their entire procurement process.
Gardner:
It really shows where being agile and intelligent can have major
benefits in terms of your ability to time and enforce delivery of goods
and services -- and also get the best price in the market. That’s very
cool.
Lee: And having all of that information
and having the ability to transact efficiently is key. Let’s say you
have all the information, but you can't transact efficiently. You're
slow to make invoice payments, as an example. Then, while you have a
strategy and approach, you can’t even make a change there (related to
working capital). So, it's important to be able to do both, so that you
have the options and the flexibility to be able to operationalize that
strategy.
Top performers leverage technology and
provide self-service to enable around-the-clock business. This really
helps organizations drive down cycle time for PO processing.
Within
the oil and gas sector, for example, it's critical for organizations to
get the items out to the field, because if they don't, they may
jeopardize operations on a large scale. Offering the ability to perform
self-service and to enable that 24x7 gives organizations flexibility and
offers the users the ability to maneuver themselves around the system
quite easily. Systems nowadays are quite user-friendly. Let the users do
their work, trust them in doing their work, so that they can purchase
the items they need to, when they want to.
User experience
Gardner:
Kay Ree, this really points out the importance of the user experience,
and not just your end-user customers, but your internal employee users
and how younger folks, millennials in particular, expect that
self-service capability.
Lee: That’s right.
Purchasing shouldn't be any different. We should follow the lead of
other industries and other mobile apps and allow users to do
self-service. If you want to buy something, you go out there, you pick
the item, the pricing is out there, it’s negotiated pricing, so you pick
the item, and then let’s go.
Gardner: That’s enabling a lot of productivity. That’s great. Okay, last one.
Lee:
The last one is that top performers leverage technology to automate PO
and invoice processing to increase administrative efficiency. What we
see is best-in-class organizations leverage technology with various
features and functionalities within the technology itself to increase
administrative efficiency.
An example of this could be
the ability to collaborate with suppliers on the requisitioning
process. Perhaps you're doing three bids and a buy, and during that
process it's not picking up the phone anymore. You list out your
requirements for what you're trying to buy and you send it out
automatically to three suppliers, and then they provide responses back,
you pick your responses and then the system converts the requirements to
a PO.
Top
performers are able to achieve about 7.8 percent in savings per year
as a percent of source spend. That’s a key monetary benefit that most
organizations look to.
So that flexibility by leveraging technology is key.
Gardner: Of course, we expect to get even more technology involved with business processes. We hear things about the
Internet of Things (IoT),
more data, more measurement, more scientific data analysis being
applied to what may have been more gut instinct types of business
decision making, now it’s more empirical. So I think we should expect to
see even more technology being brought to bear on many of these
processes in the next several years. So that’s kind of important to see
elevated to a top trait.
All right, what I really like
about this, Kay Ree, is this information is not just from an academic or
maybe a theory or prediction, but this is what organizations are
actually doing. Do we have any way of demonstrating what you get in
return? If these are best practices as the marketplace defines them,
what is the marketplace seeing when they adopt these principles? What do
they get for this innovation? Brass tacks, money, productivity and
benefits -- what are the real paybacks?
Lee:
I'll share stats for top performers. Top performers are able to achieve
about 7.8 percent in savings per year as a percent of source spend.
That’s a key monetary benefit that most organizations look to. It’s 7.8
percent in savings.
Gardner: And 7.8 percent to
someone who's not familiar with what we're talking about might not seem
large, but this is a huge amount of money for many companies.
Lee: That's right. Per billion dollars, that’s $78 million.
Efficient processing
They
also manage more than 80 percent of their spend and they manage this
spend to a greater depth by having the right tools to do it --
processing transactions efficiently, managing contracts, and managing
compliance. And they have data that lets them run deeper spend analysis.
That’s a key business benefit for organizations that are looking to
transact over the network, looking to leverage more technology.
Top
performers also transact and collaborate electronically with suppliers
to achieve a 99 percent-plus electronic PO rate. Best-in-class
organizations don't even attach a PDF to an email anymore. They create a
requisition, it gets approved, it becomes a PO, and it is automatically
sent to a supplier. No one is involved in it. So the entire process
becomes touch-less.
Gardner: These traits
promote that automation that then leads to better data, which allows for
better process. And so on. It really is a virtuous cycle that you can
get into when you do this.
Lee: That’s right. One leads to another.
They
create a requisition, it gets approved, it becomes a PO, and it is
automatically sent to a supplier. No one is involved in it. So the
entire process becomes touch-less.
Gardner: Are there other ways that we're seeing paybacks?
Lee:
The proof of the pudding is in the eating. I'll share a couple of
examples from my experience looking at data for specific companies. One
organization utilizes the availability of collaboration and sourcing
tools to source transportation lanes, to obtain better-negotiated rates,
and drive higher sourcing savings.
A lot of
organizations use collaboration and sourcing tools, but the reason why
this is interesting is because when you think about transportation,
there are different ways to source transportation, but doing it to an
eSourcing tool and having the ability to generate a high percentage in
savings through collaboration and sourcing tools, that was an eye-opener
for me. That’s an example of an organization really using technology to
its benefit of going out and sourcing an uncommon spend category.
For
another example, I have a customer that was really struggling to get
control of their operational costs related to transaction processing,
while trying to manage and drive a high degree of compliance. What they
were struggling with is that their cost structure was high. They wanted
to keep the cost structure lower, but still drive a high degree of
compliance.
When we looked at their benchmark data, it
helped open the eyes of the customer to understand how to drive
improvements by directing transactions to catalogs and contracts where
applicable, driving suppliers to create invoice-based contracts in the
Ariba Network
and then they were enabling more suppliers to invoice electronically.
This then helped increase administrative efficiency and reduced invoice
errors, which were resulting in a lot of rework for the AP team.
So,
these two examples, in addition to the quantitative benefits, show the
tremendous opportunity organizations have to adopt and leverage some of
these technologies.
Virtuous cycle
Gardner:
So, we're seeing more technology become available, more data and
analytics become available with the business networks are being built
out in terms of size, breadth and depth, and we've identified that the
paybacks can lead to a virtuous cycle of improvement.
Where
do you see things going now that you've had a chance to really dig into
this data and see these best practices in actual daily occurrence? What
would you see happening in the future? How can we extrapolate from what
we've learned in the market to what we should expect to see in the
market?
Lee: We're still only just scratching
the surface with insights. We have a roadmap of advanced insights that
we're planning for our customers that will allow us to further leverage
the insights and intelligence embedded in our network to help our
customers increase efficiency in operations and effectiveness of
sourcing.
We
have a roadmap of advanced insights that we're planning for our
customers that will allow us to further leverage the insights and
intelligence embedded in our network.
Gardner:
It sounds very exciting, and I think we can also consider bringing
artificial intelligence and machine learning capabilities into this as
we use cloud computing. And so the information and insights are then
shared through a sophisticated infrastructure and services delivery
approach. Who knows where we might start seeing the ability to analyze
these processes and add all sorts of new value-added benefits and
transactional efficiency? It's going to be really exciting in the next
several years.
Listen to the podcast. Find it on iTunes. Get the mobile app. Read a full transcript or download a copy. Sponsor: SAP Ariba.
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