The Future is Here: Harnessing Technology to Transform Procurement
As digital technology continues to influence procurement, how can business leaders use this to free up resources and drive innovation?
Marcell Vollmer, Chief Digital Offer at SAP, shares his insights on the current opportunities digital transformation can offer, and his vision for the future of procurement.
How can organisations effectively use digital technology to support their procurement transformation?
“Procurement’s number one challenge is to achieve savings. Based on my experience as a CPO, only hard savings are really meaningful; soft savings tend not to be a priority within the KPIs of a CFO. To achieve these hard savings, you need to have strategic sourcing solutions available.
Gaining all the insights you can about your suppliers is imperative, from sustainability criteria through to social responsibility. The right digital technology will allow you to aggregate all the relevant information to drive the process from supplier selection, on-boarding classification, performance review, and evaluation.
We have recently seen the effects of hurricane Harvey, in which even oil production had to be stopped. In the event of a catastrophic event such as this, you will need a risk management system in place. Risk management requires technology to gain full control of, and monitor, all possible risk. Of course, nobody can predict risk, but you can obtain information quickly, to prepare and drive the mitigation by anticipating possible events; natural disasters, political uncertainty, but also economic shifts or changes in the financial stability of your supplier.
There is also the challenge of managing overall spend. To gain spend visibility, you need to develop a comprehensive overview of all available information. This requires spend visibility systems to make this happen, giving you access to all insights on PO and non-PO spend.
Next, consider the supplier life cycle. We need to be driving eSourcing events, ideally paperless. The right technology can help you to not only prepare this, but benefit from spend insights and supplier data, which when applied to an eSourcing event or eAuction can help you get the best price. Once you’ve won a supplier from an eAuction, you need to have a contact management system in place, which is the next piece of technology, helping you to aggregate and use the existing information you have. It should seamlessly integrate to ensure you have data consistency, providing accurate information across all your tools.
The next steps are to send out a purchase order, receive an invoice, and make payments. Technologies such as the Ariba network can help you to connect the buying side with the supplier side. Sending a purchase order today does not require any paper or physical processes: you simply send a purchase order, the supplier converts the purchase order into an invoice, sends it back to you, and as soon as the good are received in the system the supplier gets paid.
This is all basic process; the right technology will help you free up resource to focus on value-adding activities: the strategic sourcing, driving strategies by generating value. There are three elements that need to be considered: driving supplier innovation, focusing on risk management, and ensuring you have a sustainable supply chain. This is only achievable when you have the right foundational technology in your procurement department to leverage purchasing power and bring down the transactional cost.”
Procurement as a function is not always given a large amount of investment. How can a business leader free up the financial resources needed to fund digital transformation?
“We need to focus on hard savings and the future of value generation: what can you deliver to change the face of procurement, as seen by other departments?
Let’s look first at leveraging the purchasing power, which of course has the highest impact on achieving hard savings. Why is it that procurement is not getting additional headcount and resources? It should be easy to put forward a business case that says, ‘If I had more people I could achieve more hard savings and contribute to the profit of the company.’ But the budget is often tied up with business responsibilities and complex power plays.
In many industries, for example the automotive industry, procurement plays a strong role. It is very much involved in the R&D process; developing new technologies with suppliers. But in many industries the perception of procurement is based on historical foundations, being seen as a transactional, administrative department.
Looking ahead, we need to focus on how to make the transition from transactional to innovative, and the potential impact of this. When Tim Cook was the Chief Supply Chain Officer for Apple, he invented, together with his suppliers, Gorilla Glass. This is the glass on our smartphones which is not easily scratched; the reason we can use it so easily and it looks like new when you polish it is supplier innovation. When you focus on this kind of innovation you may find yourself with better access to resources. You will no longer be seen as an administrative function, but as a driver for the company’s strategic priorities.
This is a value proposition which will encourage procurement to not only focus on headcounts and cost savings, but also the strategic side. There is huge potential to free up resource, and business networks will help. Sending out a purchase order, receiving an invoice, processing the payment: in an ideal world, these processes do not need resources. By delivering headcount savings, you can potentially invest in digital transformation to become a strategic partner, focusing on value-adding activities. By doing so you are investing in the future of not only the procurement function, but of the company.”
How will the use of digital technology impact savings across the different spend categories?
“It is difficult to comment broadly on indirect and direct spend, as different industries have very different category management in place. Based on my discussions over the years with CPOs, CFOs and Procurement Executives, you need to focus on the spend category where you can realise the highest possible impact. At SAP, being a software company we only have indirect spend; when I was CPO, the fastest growing area, and therefore the biggest spend category, was IT. Investing in a cloud was our number one strategic priority.
Ask yourself how you want to run your business in the future. As an example, you might consider moving from a pure category management approach to a supplier-centric approach.
In industries such as automotive, you may wish to partner with suppliers to develop the next generation of engines for your cars, building self-driving capabilities into your vehicles. Or if you are developing electric cars you may partner with companies producing the batteries. By focusing on one spend category, and delivering quick projects, you can develop a methodology which you can then apply to other categories.
If your procurement function focuses purely on the processing side, the operational activities, then you are at risk. Due to the automation that digital transformation and new business models will bring, there will not be a great deal of space for traditional procurement in the future. I believe procurement as a function will become smaller. Operational, tactical tasks might no longer exist in the future because of the advancement in machine learning. AI and big data will fundamentally change the way you work in procurement. The procurement of the future will be powered by data, but driven by people.
As the function gets smaller, procurement may be decentralised. Nobody wants to lose their job therefore you need to focus on how your team can drive the transformation, and prepare for the future. Change the value proposition of what you represent as a department; where can you create real value? My theory is that in time the Chief Procurement Officer title might no longer exist, being replaced with a more strategic, value-focused approach, such as Chief Value Officer.
Hopefully new skills will join the procurement function such as data analysts and data scientists. Bring people on-board who are experts in machine learning, who know how to drive robotic process automation. I was recently speaking at a procurement conference in San Francisco; when I asked, ‘Who has a data scientist or data architect?’, half of the room raised their hands. I then asked who already had them last year, and significantly less people kept their hands in the air. This digital revolution is moving fast, with new roles joining the procurement function. The presence of these new roles will be a key indicator of the success and future of your function.”
There’s no question that digital procurement will change dramatically in the next five to ten years. How do you expect it to evolve, and what specific developments would you like to see realised?
“A dramatic change will be seeing paper completely disappearing and automation going to the next level: being supported by machine learning, AI, cognitive computing and big data. Big data is not only descriptive data, it is prescriptive guidance; what to do with the data, and how to guide the buyer.
I see a fundamental change in how people in procurement will change their roles and adapt to the new technology; understanding the processes that will be done by machines. There are written studies by companies such as McKinsey, predicting that 51% of job activities could be performed by machines in the next few years. It’s important to clarify that they are referring to job activities, not the actual jobs or people. The roles will therefore evolve, and that is something we already see in procurement. Technology will fundamentally transform the procurement function, and we are only at the beginning of seeing the true impact. Take for example Blockchain; we can only estimate its true potential based on existing user cases, and anticipate how this will impact transactions in the future.
Marketplaces will be key in the future, and how you engage with suppliers and business partners in the market will change. The Ariba network is the largest network, connecting three million companies, transacting 1.2 trillion USD. Ali Baba has the highest IPO in the world, and is only focused on B2C. Out of the 80 trillion on global GDP, B2C accounts for around 15 trillion. The remaining 65 trillion is B2B. You can imagine then the potential here for connecting the buyers with suppliers.
I would like to see technology helping us, and supporting how we can transform and prepare businesses for the future. Back in 2004 I was setting up shared services for SAP. It’s not a great task, looking at two screens in a shared services centre. I’d like to see this having a high degree of automation, but also see the introduction of new technologies such as AI. We can really benefit from these technologies, allowing us to focus on the more value-adding activities, and also the more enriching activities that we like to do. Procurement should be driving innovations to really help the business to become more successful, and not just be captured in daily business with administrative, operative tasks. As mentioned with Blockchain, we are only at the beginning; in the future, we will see marketplaces connecting companies and transforming business transactions.
To drive change, you will also need to focus on talent management. How will you develop your team in the future? How can people find a role in the new set-up; perhaps it won’t be within procurement, therefore how can they find another role within the company?
We need to be realistic about the potential of our talent management; not everybody can become a data architect. The job of the leader of a company or division is to support change, but also to look at the remaining tasks, and how we can structure the future function by leveraging the technology. People need to work with the technology and enjoy using it, in a similar way to using a smartphone. Smartphones have fundamentally changed the way we live and work, and most people both like and benefit from them. It is not unusual in times of change for people to be concerned about losing their jobs; it is our job as leaders to focus on how we can take those people to the next level.
The future workforce will, by its nature, influence the future of procurement, therefore we need to ensure we understand them. Millennials don’t know a world without smartphones; they are comfortable with them and are keen to gain access to the latest technology. They also don’t fear that a task is only for a certain period of time. If you ask a millennial what they want to do professionally, you may not hear: ‘I want to start in procurement, become a buyer, and work my way up to CPO.’ Career progression does not need to be linear. Millennials want to work with something of purpose, to understand what exactly they are doing to help the company. They might wish to work in a particular role for eight or nine months, perhaps a year. But after that they may want to try something new, to learn new skills and find the next excitement in their career.
Procurement has a great opportunity to be a talent pool, but that doesn’t necessarily mean keeping people for 10 or 15 years. You can start in one position, gain experience, then you may remain, or you may move into another function. This works both ways; an IT manager might become a category manager or a category buyer in procurement after a functional career. You need to support your team and their career, understanding that they may not stay with you for a long time, possibly developing fast and joining another function in the next 18 months. But this is why procurement for me is the most beautiful function; you gain a fantastic overview of a company, you understand and learn the business model, and you can then pick and choose the next step for your career.”
Marcell Vollmer is Chief Digital Officer at SAP Ariba, the world’s largest marketplace, developing digitalisation strategies to help the world’s leading companies digitalise their business, and eliminate procurement and supply chain complexity.