What if Procurement Managed Itself like a Supply Market? And Which Market?

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Procurement, like any service business, should generate value. Based on widely known benchmarks, this translates on average to a 4X–5X “procurement ROI,” where the “R” is demonstrable economic value annually created by procurement divided by the annual investment in procurement, usually the annual procurement budget.

Here’s an example. If total addressable spend is $500 million and the procurement budget is the general industry average of 1% of spend, the business is investing about $5 million in procurement. Most of this investment goes to labor, with only about 10% of this is allocated for technology. And of the $500,000 spent annually on technology, probably less than a third is discretionary spend for procurement, while the rest of the money is spent on ERP licenses/maintenance, custom systems, integration and IT support.

That leaves about $150,000 for supporting a lot of requirements in spend analytics, e-sourcing, contract management, supplier management and P2P, to name a few. And unless you think your IT department can serve up a cloud-based procurement application suite better than the 500-plus vendors in a $5 billion procurement market, you’re going to be sourcing your procurement tech.

So, how would you categorize this spend on the Kraljic matrix? Well, in terms of the complexity x-axis, it’s certainly complex. We track a few hundred providers (and offer complimentary SolutionMaps in 6 key categories), but the market could easily be 1,000 if you include category-specific and industry-specific players. In terms of the y-axis of business impact of the category (the generally accepted interpretation of the y-axis), it may seem low given the low spend, but with a 5X ROI and the potential to help a procurement organization become a top quartile performer at 12X, then the impact is enourmous. In the example above, an incremental 1X (e.g., to 5X from 4X) would mean $5 million improvement per year. Suddenly, spending on procurement tech (or any enabler of improved procurement ROI) starts looking like spend in the strategic quadrant.

Of course, treating procurement like a single category doesn’t make sense, because procurement is a portfolio of services (i.e., processes that deliver measured value to stakeholders) and supporting assets and resources (i.e., people, technology and information). For example, an organization can use a BPO can to buy transactional process services, higher-value knowledge-based services and digitized services, often using the terribly named “robotic process automation.” In a similar way, procurement professional services providers need to have different types of services depending on thier business and their internal stakeholders.

The trick then becomes how to cost effectively stand up increasingly external and digitized assets/resources (without creating undue complexity) to meet those stakeholder needs. And luckily, there are increased choices of “freemium” and low-cost services out there, and many are getting rolled into the delivery models of traditional spend categories themselves (e.g., using Amazon Business for tail spend or UBER for Business for corporate travel). With this said, obviously you’re simply not going to find a single vendor to do absolutely everything, so don’t get roped into “winner take all” by an IT department looking to justify the investment or commitment to the incumbetn ERP vendor.

The bottom line is that since supply markets are getting disrupted and going digital (which of course offers great leverage and innovation to traditional categories) procurement must similarly disrupt its own traditional approach of supplying services to its “customers.” By adopting this “outside-in” approach and tapping the collective intelligence of supply markets, it is practicing what it is preaching — or should be preaching. At Spend Matters, we’re trying to do our little part by rethinking how procurement vendor research should be done (i.e., pushing for deep, personalized, mix-and-matched, “crowdsourced vs. analyst” views) with SolutionMap.

It’s also worth noting that the tricky thing about “value” and business impact is that some of it is subjective in the eyes of the customer. If procurement can be viewed as a market category (or at least a portfolio of services with associated markets), then it typically has some work to do in moving its stakeholder perception of its from out of the Krajlic matrix quadrant of “tactical” to the “strategic” quadrant by way of the “leverage” quadrant via high impact economic value and also by way of the “critical” quadrant as procurement’s set of services goes way beyond doing deals and automating POs.

If procurement can tame the complexity of the hundreds of providers in the market to help it optimally transform itself from tactical to strategic, then it’ll accelerate that journey. And if you need help sifting through the complexity, we’re here to help — just give me a shout.

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