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Seven secrets to highly effective procurement

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.

Lee

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.

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At Interarbor Solutions, we create the analysis and in-depth podcasts on enterprise software and cloud trends that help fuel the social media revolution. As a veteran IT analyst, Dana Gardner moderates discussions and interviews get to the meat of the hottest technology topics. We define and forecast the business productivity effects of enterprise infrastructure, SOA and cloud advances. Our social media vehicles become conversational platforms, powerfully distributed via the BriefingsDirect Network of online media partners like ZDNet and IT-Director.com. As founder and principal analyst at Interarbor Solutions, Dana Gardner created BriefingsDirect to give online readers and listeners in-depth and direct access to the brightest thought leaders on IT. Our twice-monthly BriefingsDirect Analyst Insights Edition podcasts examine the latest IT news with a panel of analysts and guests. Our sponsored discussions provide a unique, deep-dive focus on specific industry problems and the latest solutions. This podcast equivalent of an analyst briefing session -- made available as a podcast/transcript/blog to any interested viewer and search engine seeker -- breaks the mold on closed knowledge. These informational podcasts jump-start conversational evangelism, drive traffic to lead generation campaigns, and produce strong SEO returns. Interarbor Solutions provides fresh and creative thinking on IT, SOA, cloud and social media strategies based on the power of thoughtful content, made freely and easily available to proactive seekers of insights and information. As a result, marketers and branding professionals can communicate inexpensively with self-qualifiying readers/listeners in discreet market segments. BriefingsDirect podcasts hosted by Dana Gardner: Full turnkey planning, moderatiing, producing, hosting, and distribution via blogs and IT media partners of essential IT knowledge and understanding.