Effective Procurement Organizations Are Integral and Strategic Partners to the Business

Fabian Blank via Unsplash

The promise of digital transformation of the RFP process (and procurement, generally) is not the use of technology for its own sake. It is the opportunity to change the business process, and with it the role of the procurement department, within the organization. It is the chance to move from a narrow focus on cost savings and processes to an orientation around value.

The Hackett Group has an excellent article entitled “World-Class Procurement: Redefining Performance in a Digital Era” published earlier this year that talks about some of their findings.

“The Hackett Group defines digital transformation as ‘improving customer experiences, operational efficiency, agility and business value contribution by fundamentally changing the way services are delivered, using digital technologies as the enabler of holistic transformation.’”

Fundamentally changing the way services are delivered.

Procurement is a service organization within the enterprise. It is subject to the same forces of change as every other part including a shifting fabric of risk, massive technological disruption, rapid development of new business models, intensified competition, changing social mores, demographic trends, and political disruption.

It must change the way it does business to adapt to these volatile conditions.

Key to this transformation, as Hackett notes, is that “Procurement organizations are moving beyond inward-focused KPIs to also measure the experience of their key internal and external customers.”

That is a powerful statement.

When it works, the effect is profound: “… world-class procurement influences 93% of spend versus 64% for more typical organizations (i.e. the peer group) and generate 75% more savings.”

There is a circle of trust here. If you engage procurement in the strategic conversation, then procurement can help the enterprise obtain its strategic goals more effectively. But, first, the organization must trust procurement. Are they reliable? Can they deliver? Do they have the human capital and the right tools to add value? Are they easy to deal with, or is the customer experience painful and bureaucratic?

In world-class organizations, procurement strategy is viewed by 75% as aligned with overall business strategy, compared to just 40% for the peer group, per Hackett. All of this is even more critical when one considers the ongoing tendency to centralize purchasing.

When they get it right, Hackett estimates the Return on Investment for world-class firms is 11.0% compared to just 5.0% for the peer group, with cost avoidance making up 24% of total cost savings. 95% of survey participants see the objective “Elevate the role of procurement as trusted advisor” as either “highly important” or “critically important,” on par with “Reduce and avoid purchase costs.” Of course, when procurement measures its performance, it is still tilted towards buying the “right goods and services AND at the right price” with “Value management,” “Demand management,” and “Total cost of ownership” taking a back seat.

This is all true even as savings as a percentage of spend falls as procurement’s influence increases. When procurement gets involved for the first time, they can obtain large savings of 8.3% on average, but these taper to 4.7% as they have a more persistent influence and the easy one-time gains at the beginning are no longer available.

This means that the raison d’etre for procurement must become more strategic in driving value creation at the enterprise-wide level.

This is compounded by the changes in the workforce as Millennials come onboard. See our earlier comment on the difficulty in finding and keeping good procurement talent.

How do you engage people in procurement in a world of beautiful user experiences, immediate response, and data-driven decision-making?

EdgeworthBox is a platform for transforming the RFP business process to drive cost reduction efficiencies (including cost avoidance), to promote enterprise-wide strategic engagement with purchasing through an easy-to-use interface, and to enable the use of data and social networking to obtain better outcomes. Our platform, borrowing features from financial markets in an interface we deem to be like a “Bloomberg machine for procurement,” enables much easier search for and vetting of suppliers while also facilitating communications with our contemporary messaging platform. We call it Network-Based Sourcing™. Drop us a line. We would love to talk to you more about your individual situation and how we can help you.

Founder & CEO, EdgeworthBox. Investor and entrepreneur. I want to change the RFP business process.

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Chand Sooran

Chand Sooran

Founder & CEO, EdgeworthBox. Investor and entrepreneur. I want to change the RFP business process.

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