The State of Procurement (Part 3): Solutions and Procurement Technology

Jim Wetekamp is the former CEO of BravoSolution. In Part 1 of this series, he addressed the state of people in procurement, starting with the CPO, and in Part 2, he examined the state of the technology selection process.

“How is the technology space in procurement evolving?”

A few months ago, I delivered a presentation and related article entitled, “What Procurement Needs.”  This overview focused on the key demands that procurement is seeking to fill to best serve their organizations and drive sustained value. Those needs for strategic, intelligent, integrated and holistic solutions are what are largely shaping the evolution of the procurement landscape today.

There are three major trends enveloping the procurement technology landscape: 1) An increasing investment in customer success, 2) an obviously large consolidation of providers and 3) the beginning of a pivot toward a new generation of innovation.

An Increasing Investment in Customer Success

As a backdrop, consider the following overall positions of typical customers of current procurement technology providers:

• Overall their current solution meets or exceeds expectations.
• A majority would recommend their current provider to their network.
• Most place solid customer success and support slightly ahead of leading technology in importance.
• Most have a high concentration of weighting on technology, professional services, training/adoption and support.
• In recent times the relative weight of technology and staunch support has been growing in proportion compared to services and training.

So, successful, right? Yes and no.

“Customer Success” is a very “eye of the beholder”-oriented term. To a customer it means “advocating” for. Who on the vendor side is partnering with me to drive sustained value through the solution? To a vendor it means customer lifetime value. Who on the vendor side is partnering with the customer to drive renewal, expansion to new modules — usually through a focus on adoption and recognition of achieved ROI?

Either way, the increase in focus on this two-way street is driven by the fact that use of the system does not equal success in all cases. Customer success is the answer to this. It’s the answer, if per my previous post on the state of the process, it helps the customer move past “digitalization drives value, I’m using the system so now I’m digitalized,” to “we’ve digitalized and now we save $20.00 per transaction and have reduced transaction volumes by 25%.”

Large Consolidation of Providers

Believe it or not, the first trend listed (customer success) and the third trend listed (innovation) are the two sides of the vice that are driving such rampant consolidation in the procurement technology market.

Customer success is driving procurement technology M&A by:

• Providing end-to-end automation. Beyond just a desire to add customers or geographical presence, M&A in the procurement space is being driven by a growing customer desire for a single provider to cover the spectrum of capabilities end to end in a seamless and integrated business process. It’s worth noting this could be done through more of a platform-as-a-service and integrated ecosystem approach, but considerations such as seamless security, risks related to the proliferation of sensitive data, and shifting vendor relationships and priorities have limited this model.
• Delivering a globally available service. As more and more organizations shift to more complex use cases of procurement technology they are looking for providers with a more global reach and capability to implement and support their organization in every place at every time. Again, it could be noted that this could be reached through a partner network of enabled experts in concert with the solution, but even then, customers look for a local presence from the technology provider in some capacity.

Innovation is shaping procurement technology M&A by driving companies into:

• Growing a SaaS business. Most of the procurement technology providers were born SaaS or have completed a migration to SaaS, which drives an attractive annuity of future cash generation in an overall category of cloud solutions that are growing faster than the overall software market. Couple that fact with high renewal rates and the synergy associated with back office and support across software product lines, and that makes the procurement technology space very attractive for M&A activity.
• Winning the innovation arms race. M&A is a straightforward and rapid way to 1) fill technology gaps, 2) enter new areas of tangential demand or 3) add scale and efficiency in the context of a larger organization that allows you to divert more resources both in aggregate and percentage towards R&D. It’s this last point that will be interesting to watch as the procurement technology landscape evolves. Some clear leaders are emerging in the market. Will their overall capacity for product investment and innovation create too large of a barrier for entry for other challengers to break in?

Many would highlight to a customer all of the potential ways they can lose in an M&A event, and of course there are considerations a customer should take in that consideration. But overall M&A in the procurement technology space is increasing vendors’ capability to serve and releasing more funds for prospective and strategic technology innovation.

A New Generation of Innovation

Innovation is alive in the procurement space; however, this generally reflects the nature of the buyer. By this I mean that if you placed innovation on a continuum of uncertainty of outcome, procurement technology innovation has hedged more toward certain outcomes — much like the general orientation of the most successful CPOs that place a premium on assurance of predictable results. Ask yourself these questions as a test:

• Do you view procurement technology innovation as more incremental or radical?
• Do you see more new product extensions than you do new business models?
• Do you see customers driving the investment paths or vendor visions?
• Do you see current vendors more focused on their existing base of business or unknown markets?
• Do you see development as more process oriented or discovery oriented?

If the answer was more often the former than the latter, then you have your answer. On the one hand, it’s great news if you are a customer: you are in the driver seat of innovation. With so much focus in the market on consolidation, the power of the customer to lead the process is tremendous. And, please don’t read this as an admonition. Having come from an extremely customer-attuned organization, we very much ascribed to this model, and at the same time occupied a highly regarded visionary position in the market. There is nothing wrong with this strategy, but it does leave something on the table in the form of disruptive innovation.

Procurement technology innovation has been extremely positive in several areas of innovation:

• There continues to be an elevated level of incremental continuous improvements to existing product/process areas such as spend analysis, procure-to-pay and sourcing both in the technology and services areas.
• Customers have been vocal about receiving outcome-oriented improvements that focus on what jobs procurement professionals have been doing and discovering how to do them in a new way and with greater leverage.

Where procurement technology innovation still has room to grow is around enabling fundamentally new business models inside of or across organizations, significantly altering existing paradigms or overall disrupting the marketplace. The closest areas to this type of change may be in tail spend areas where the internet has driven a new kind of availability of selection and savings for categories like travel and other indirect/maintenance purchases.

Why is that? It could be that way because most procurement leaders think that their key levers for value creation are limited to spend consolidation and reducing TCO and not in more dynamic areas such as changing the competitive landscape or altering the company value chain.

Because of this and other factors, it’s plausible that the biggest procurement technology disruption may come from completely outside of the space of traditional/existing procurement technology providers.

But don’t count them out yet. While consolidation of the space has resulted in several viable providers in the areas of source-to-pay, the reality is that there exists a tremendous amount of white space still across the spectrum of procure-to-pay, spend analysis, contract management, sourcing and supplier management. And procurement is in the majority looking heavily for providers in these areas that are keen on leveraging three main aspects of innovation to drive the next wave of value:

• Enhanced predictive and prescriptive analytics
• Adaptive and cognitive-computing driven applications
• And extended/integrated ecosystems of value providers and systems

It’s the push on these areas of investment that will move the procurement technology space to the next generation of innovation. A first wave delivered the first internet-based collaboration and process transparency. The second wave really drove these solutions into connected business processes that extended the value through new activities with new stakeholders across more of the procurement process.

The next wave? The next wave has the true opportunity for intelligent automation — moving past a book keeping of sorts or the mere avoidance of paper/document exchanges and into a real network of flexible, interconnected and discerning solutions that sorts the wheat from the chaff in terms of procurement being in the position to maximize its resources on those areas that need more essential investment such as leadership, trust building, negotiation, agility, team building, communication and debate.

All of the pieces are there for this next wave, and the providers are in a great position to deliver.

And the best news of all: the customer’s voice will be heard loud and clear in what has become a more dynamic sector than ever before.