Through much of the recent global downturn, procurement groups worked with a tailwind of corporate spend mandates, deflationary pricing, and a supply base hungry for business. They were able to meet their goals by focusing on realizing the savings that those advantages enabled. Transformational procurement initiatives and the development of advanced procurement capabilities were, in most cases, put on hold. Projects related to new systems or improvement in procurement technologies were among the first casualties.
Today, however, procurement groups face a new environment. Inflation has returned and low-hanging fruit has been picked. However, organizations continue to expect Procurement groups to generate improvements in ROI. Procurement groups are reassessing a number of elements of strategy and capability, and technology enablement has re-emerged as a key focus. This is confirmed by The Hackett Group's 2011 Procurement Key Issues study, which showed that applications projects were the second highest ranking capability-building area -- right behind talent up-skilling efforts.
As procurement groups review their technology needs and market offerings, there is good news and bad. While technology offerings have advanced, there are few examples of organizations that have fully achieved the vision of an end-to-end Procurement system capability that supports their goals. Based on our experience, eight key trends and challenges within the market have led to this point:
- Procurement was an afterthought in the initial wave of ERP implementation, and largely remains so
The initial functionality and architecture of ERPs was designed with transactions in mind, and woefully underserved the procurement function. Key processes such as Strategic Sourcing, Supplier Management, Category Management, Spend Analysis -- and even Purchase Order Processing -- were left unsupported or hopelessly fragmented by ERP implementations. ERP vendors are working to address this gap, but few truly transformational success stories have emerged.
- Many organizations (and systems vendors) lack a clear vision of end-to-end Procurement
More than most other functions, procurement remains a work in process. The end-state definitions and capabilities of key processes have yet to attain broad market consensus. Not surprisingly, there is no one vendor that has come forward with a clear view of world-class end-to-end Procurement and a system that is configured out of the box to support that view. Few organizations have been able to translate their procurement vision into an actionable, integrated design that is detailed enough to drive process models, data models, and systems architecture. The loss of focus during the global downturn further slowed the pace of advancement on this topic.
- Reality lags market promises in a number of systems areas
Adoption and effective use of a number of key technology components in sourcing and procurement remains limited. Companies struggle with spend analysis due to poor up-front coding and classification of data, and need for on-going management. Companies struggle with savings planning and tracking due to limited integration with finance and weak modeling of master data for complex spend categories such as services. Compliance management remains a challenge due to the difficulty of capturing category-specific compliance requirements and limited availability of data to support reporting. P2P is often hampered by ERP configuration issues or fragmented ERP environments and weak procurement processes/controls -- processes and training lag technology investments. Support for a simpler "consumerized" interface (so prevalent in the CRM space) is only now starting to gain momentum on the supply side.
- Software as a Service (SaaS) is becoming the predominant deployment model for key procurement tools
Key elements of the procurement technology footprint are shifting to hosted and on-demand models, reducing up-front costs and IT requirements, but creating some limitations on flexibility in data models, user interfaces, and functionality. We see this shift continuing, changing provider business and revenue models, and enabling more rapid adoption of technology. One example is the shift toward native or partner-based external content and intelligence, to help improve the ROI beyond internal automation (see point 6 below).
- Sourcing and procurement system vendors are racing to cover a common application footprint
Many sourcing and procurement systems providers that started out as niche are either consolidating or contracting with other providers to assemble a broad footprint of procurement functionality. "Supplier Information Management" is a perfect example of a micro-market that has sprung up to meet some disparate functionality gaps in supplier master management, supplier self-service portal support, and automation of document-centric (much of it regulatory driven) workflow automation in supplier management. This is creating value for early adopting users, and also some vendor fragmentation, but consolidation and commodization is likely to occur, as it has in the e-sourcing and e-procurement market segments. As functionality gaps close, clients are increasingly focused on the software deployment model, price, ease of use, tool provider stability, service, competency in supporting complex category areas (e.g. services), optimization capabilities, etc.
- Market intelligence service providers create new options for Sourcing and Procurement organizations
Growing availability and maturity of procurement market intelligence service providers (especially low-cost country market intelligence service providers) affords new options for companies considering in-house data classification/cleansing, and provides the opportunity to outsource various elements of analysis. We see more organizations contracting externally with market intelligence providers, allowing category managers and strategic sourcing staff to offload analytical activities and focus on more strategic value added roles. This is an active market for diverse specialists, but we expect to see increasing attention from the larger BPO players, who will need to come to grips with the fact that many (if not most) procurement organizations will be much more willing to outsource market intelligence processes than their entire source-to-settle process for massive swaths of spend.
- Data is increasingly a gating factor in the effectiveness of sourcing and procurement processes
While maturity and adoption of e-sourcing and e-procurement has continued to advance, capabilities such as spend analysis, performance management, compliance management, and savings project tracking have been hampered by poor data quality, availability, and integrity. To address these deficiencies, companies are moving to increase accuracy/integrity of data captured at the front end of the process (via improved processes, user training, and tools), improve procurement data models, and improve integration between finance and procurement systems, data, processes, etc. The many types, sources, uses, and integration points of Procurement data make this a highly challenging problem that few organizations have solved and that no single technology provider has fully tackled.
- Emerging focus on supply risk management tools
For many procurement groups, supply and vendor risk issues were not even on the radar until the recent global downturn. Now, most procurement organizations have taken some part of the responsibility for this area of enterprise risk and have realized that to properly manage it, they need tools and systems to support a new type of "SRM" -- Supply Risk Management. Of all the technology areas, this one is the earliest in its maturity curve, with no established market leaders and many recent start-ups/boutiques. Of course, part of the challenge is the fact that the focus and even definition of supply risk management varies greatly by risk type (price risk mitigation via hedging is very different than checking the boxes on a regulatory-driven supplier certification/audit process), by industry (e.g., manufacturer vs. financial services) and by company. And again, acquisition of relevant Supplier data amplifies the challenges in this space.
While the above assessment paints a rather bleak picture of technology enablement opportunities in Procurement, all hope is not lost. In Parts 2 and 3 of this Blog entry, we will explore the state of specific technology components and define a path forward.
- Len Prokopets and Robert Derocher, Principals, Archstone Consulting