If there is a standard question asked in any meeting involving Digital Business, or even on current IT, by a CEO, or a CIO, then this is the one! Fortunately there is a clear answer that has not yet failed to arouse interest, as the financial benefits are immediately clear and easy to track, yet at the same time it is low on internal operational disruption. Finally, it doesn’t cause conflict with Sales, Marketing or new Digital Officers activities!
The answer lies in transforming Procurement through using Digital Business to reduce the cost of each purchase by real time competition; increase the number of items that are subjected to individual bids through reducing the cost of bidding; and to realign Procurement staff experience and knowledge towards finding new lower cost suppliers through using Digital Markets.
Focusing on Procurement seems somewhat counter intuitive as to date the almost inevitable focus of Digital Business has been to look to find new ways to sell more, but by the end of this blog hopefully the reasons will have become clear!
Even if your Enterprise is focused on using Digital Business to transform its competitive abilities then sooner, or later, it will become clear that Procurement will need to be transformed to match. It is difficult to radically transform sales and marketing of products with out an equally radical transformation in the procurement processes to provide a back-to-back alignment of agility and flexibility from your suppliers!
Before introducing the immediate, and very real, cost savings to be made from Procurement, with the practical steps to deliver these results, consider the very real strategic benefit in support of the Sales and Go To Market activities. The transformation of the Enterprise supply side market place placing pressure on Suppliers to find new ways to compete to gain your Enterprise business is an excellent demonstration of the kind of future Digital Business markets that your Sales activities will need to compete within.
Creating a Digital Business market in which your Suppliers must compete in real-time for your business introduces a perfect environment to learn new techniques and methods that can deliver sales success for your own Enterprise’s ability to compete in Digital Business markets.
But what can the transformation of Procurement into a Digital Business actually produce as practical tangible short-term results? Constellation Research has an available case study on how an investment of $13 million turned into savings of $132 million in the first full financial year following the investment. In the second year savings of more than $200 million are forecast, as a return on investment that’s way better than most, perhaps even all current IT projects can manage! In fact that’s worth saying again in bold print to make the point!
See how an investment of $13 million in a Procurement Transformation to a Digital Business made savings in the first full financial year of $132 million in Constellation Research case study
The approach, methodology and focus on cost saving all align to the role that the CIO and IT department has traditionally played in the Enterprise, so its well within the current enterprise approach for IT projects. A point not necessarily true for many Sales and Marketing projects, plus most Procurement Management is more than happy to work in partnership improving their core function. Its fair to say that a Procurement Transformation is the low hanging fruit of Digital Business being most readily accessible, and offering clear financial benefit targets, in contrast to many Sales moves.
Where do the cost savings accrue from in Digital Business Procurement?
- A sharp, and pronounced decrease in the cost of competitive supplier bidding, coupled with substantial automation of the procurement bidding processes, enables an increased amount of the procurement expenditure to be competitively managed. In the case study some $5 billion of expenditure was moved from periodic competitive bidding with one or more year best buy status awards to every purchase being competitively bid.
- The automation of bidding processes by new technology Services and capabilities, (supporting point 1), reduces substantially reduces the time/cost of running a procurement bid. Shifting to online real time auction bidding using reverse auctioning, which forces suppliers to bid against each other, and can be fully integrated with the requirement and order processes.
- A reorganization of work teams, (to enable point 2) by introducing flexible virtual workgroups based to better utilize time and knowledge optimization through collaboration and social tools. Virtual work teams focus on using personal knowledge and flexible time management to better find and realize short-term opportunities.
In most enterprises though reduced expenditure (point1) is the transformation ‘to be’ outcome the path from the current ‘as is’ situation will start from the reorganization of the manner of working (point 3) to unlock the necessary skills and knowledge to make the transformation. In any case introducing good quality collaboration tools to enhance communication and clarification of every day working issues is fast becoming accepted good practice as speed and variety of the daily activities increases and becomes more frequently variable.
Collaboration tools allow unstructured questions to be asked around topic, and answered by those able to provide answers, without either party needing to know the names or roles of each other. Unlike email that constrains the questioner to only being able to address questions to people they know, and therefore misses reaching a large section of the available experience and knowledge accumulated within an Enterprise.
Analyzing the results of Collaboration provides new and usually radically different information, it possible to see the new unrecognized issues being raised, by whom, and with what the frequency of occurrence to better understand and improve existing processes. This newly found knowledge allows the transformation program to immediately add operational improvements.
Analyzing Collaboration threads quickly identifies who is answering which question, and allows a new mapping of people skills and knowledge by topics, thus providing a fundamental insight into who is best able to contribute to which part of the transformation process through redesign of particular identified elements.
Armed with this increased knowledge of the current issues, trends and the capabilities of the people in Procurement it becomes easier to logically break down the transformation tasks to align with available skills. Leaders of virtual work groups can now tap into a deeper pool of expertise without disrupting normal organizational structures or work. The first stage will need to focus on understanding exactly what is current good practice in Digital Business Procurement, or e-commerce online procurement to add an older term.
For those not familiar with the various aspects of ‘digital’ Procurement there is a bewildering section of terms and techniques though almost all are based on some from of Reverse Auction. This is literally the reverse of an ordinary auction in which a single Seller offers goods for sale and a range of Buyers compete through outbidding each other with increasing prices. In a Reverse Auction there is a single Buyer with multiple sellers, usually actively bidding in real time to undercut each other. A Reverse Auction is usually a fully transparent bidding process, through a single sealed bid process is possible, to actively excite interest and competitive pricing pressures from suppliers in order to secure the business.
Implicit in Reverse Auctioning Procurement is the Sellers acceptance of the Buyers commercial terms, thus placing the responsibility, a major part of the cost, and a great deal of the work, associated with normal Procurement process onto the seller! This point alone results in sharp reductions in time and negotiations of terms in normal competitive bidding.
In examining the market for information on ‘digital’ procurement any of the following terms may be used by various Business Process Outsourcing, or BPO, providers, and product vendors, to describe the capabilities they provide; Procurement auction, e-auction, sourcing event, e-sourcing or eRA, eRFP, e-RFO, e-procurement, B2B Auction.
In addition there is a further specialized type of ‘digital’ procurement whereby the Buyer stipulates the maximum price they are prepared to pay. The use of this process is of great value when a manufacturer is costing their fully assembled product and wants to allocate an allowable cost to each bought in component.
There are a large number of Procurement Service Providers offering various levels and volumes of Procurement capabilities, As a Service, avoiding direct investment and aiding direct cost allocation to individual business activities. This is a further advantage in adopting Procurement as a Digital Business transformation as the practices are indeed standardized with the outcomes providing the competitive differentiation. Unlike Sales and Marketing Digital Business where the competitive differentiation is usually a key success factor in Digital Business initiatives and accordingly requires higher investment.
An a quick first stop example to gain a rapid overview on Business Process Outsourcing, SourceOne offer an informative and well laid out web site. There are of course a great many other Procurement BPO providers, as well as many excellent Procurement products. Some Enterprises in some industry sectors will still wish to maintain particularly competitive advantages by operating their own Procurement Services, a reasonable comprehensive list of some of the best-known products can be found here.
If you have read this far then the argument that there is a single initiative that introduces Digital Business into the enterprise with both the capability to target clear savings, and with a transformation program that offers less risk and disruption must be becoming clear.
Most likely you are even now formulating some ideas on how to explore further how Digital Business Procurement might work in your Enterprise. So in conclusion here is a set of suggestions as to a starting point to work out the potential benefits.
- Determine the total annual spend of your enterprise in the last financial year, together with the number of orders, and the number of suppliers. (Previous good Procurement practice has been to reduce the number of suppliers, due to cost of administration of any supplier, with a switch to multi year call off awards so the results may be surprising).
Build a simple model to show these parameters of the current situation in a manner that suits your enterprise point of view and the metrics discovered. This is the current base from which to calculate improvements. Do not forget to search for items normally regarded as out of scope and not included in the ‘annual’ procurement process.
- Carry out a series of analytics that refine the emerging picture of exactly how your enterprise expenditure is made up. Some key factors are usually;
- Split the expenditure between items that directly add value to your products and market versus items that support the administration of your enterprise. Administrative support purchases can be the lowest risk starting point to trial Digital Business Procurement, but the big rewards come from increased competitiveness, or margin improvement, in the product area
- Determine separately firstly the amount of expenditure and the number of orders that are subject to competitive bidding individually, and secondly orders on an annual basis with multiple call offs that are not subject to individual competitive bids. Orders place in multi year bid awards stretching over more than one year should be excluded as non-competitive!
- Use the information from b) to produce a graph for product-based expenditure with number of orders on one axis and value of individual order on the other axis. Overlay this graph with data as to individually competitively bid orders, and annually awarded contract call off orders.
- Look for the anomalies that will comprise of the first round of targets in terms of amounts and sizes of orders, then carry out a detailed analysis of these orders to really understand the details and determine if these are realistic targets.
This is obviously an exercise to carry out with the Procurement department so it must be about jointly established objectives. This is the focus and those responsible should be clear on this even though at an Enterprise level this may form part of a strategic move towards Digital Business. Attempts to integrate this directly with the sales strategy towards increased flexibility in the market place, or simply a further move in strategic cost reduction plans, should not muddle the prime purpose.
Procurement professionals want to find ways to improve purchasing costs by making better use of their knowledge and experience, and are generally frustrated by the lack of time to focus on this due to the amount of time spent on ‘bid administration’. Introducing Digital Business Procurement with dynamic bidding services reduces the ‘administration’ element and allows the to focus on finding new, more competitive sources. In parallel the dynamics of Digital Business Procurement model allow trials of improved purchasing profiles, using different parameters such as changing trading volume to establish how this might impact price as an example, and rapid analysis of results to provide feedback for further improvement.
In fact its difficult to find any reasonable argument not to start to actively investing your Enterprise Procurement profile to establish the potential gains. Most Enterprises will quickly be able to build a case with a worthwhile target to make a trial transformation of Procurement using an external BPO provider worthwhile. Add the low levels of internal disruption with equally low risk factors through using a Services approach and it is truly a single easy to quantify game changing move in the adoption of Digital Business!
