Why Procurement Must Prepare Today to Use Cognitive Software in 2050: Insights from LevaData’s 2018 Cognitive Sourcing Summit

Just as it’s unlikely that most people will be regularly using self-driving cars any time before 30 years from now, procurement is probably not going to be widely using AI-based “cognitive” software within the next five or even 10 years. But that doesn’t mean organizations should sit around waiting for the technology to come to them.

The talent, technology and operational strategies procurement leaders choose today will determine whether or not they are capable of using artificial intelligence-based software in the future. In fact, failing to prepare for the use of cognitive technology today could mean procurement is unable to use those tools even when they have become widely adopted, putting the business far behind its digitally mature competitors.

This was the key insight put forward by LevaData, an emerging provider of AI-enabled e-sourcing software, at its 2018 Cognitive Sourcing Summit on Sept. 13. At the day-long event in Santa Clara, California, presenters and panelists offered their take on why procurement needs to tackle digital transformation today, what a fully “cognitive” sourcing process looks like and how organizations can take the first steps to getting there.

“AI-driven business models create a winner-take-all market, not a digital divide,” said R “Ray” Wang, Founder and Chairman of Constellation Research, in his opening keynote. “You need to start investing today to train your systems, your people, and get to those outcomes.”

The Digital Transformation Imperative

At the inaugural Cognitive Sourcing Summit, in 2017, LevaData focused its presentations on defining what cognitive sourcing is and how its software could enable that approach. And while attendees told the vendor that they loved the vision and the technology as explained, they still needed help bringing back all of these ideas into their organizations, as well as advice for how they could jumpstart these digital approaches.

Accordingly, LevaData focused this year’s event on forming the business case around and providing a roadmap for cognitive sourcing maturity.

When it comes to getting buy-in for digital transformation, the argument comes down to growth. Several statistics in Wang’s opening keynote laid bare the imperative to become a digital leader:

• Of the Fortune 500 firms since 2000, 52% on the list are now gone, most felled by digital disruption
• In 1965, the average tenure of companies on the S&P 500 was 33 years. By 1990, it was 20 years, and it’s forecast to shrink to 14 years by 2026 as innovative entrants continue to disrupt established industries
• Digital leaders claim 69.8% of overall market share for their industry and 77.1% of the profits

There’s no question that digital disruption is threatening most major businesses, while also preventing upstarts from making headway in markets where first-movers have entrenched themselves as the face of their industry (see: Uber).

But when it comes to growth in particular, most companies have not yet grasped the potential of digitally transforming their supply chains.

A November 2017 McKinsey study found that the average supply chain has a digitization level of 43%, the lowest of the five business areas the consultancy analyzed. What’s more, only 2% of executives surveyed said the supply chain is the focus of their digital strategies.

Yet the same research found compelling evidence that these priorities were misplaced. Companies that aggressively digitize their supply chains can expect annual revenue growth of 2.3% and annual growth of earnings before interest and taxes to rise by 3.2% — the largest increase from digitizing any business area, according to the study.

Getting Buy-In for Digital Transformation

Connecting this gap between potential and actual gains is where procurement and supply chain organizations struggle. Often, the issue begins as a board-level problem.

In order to get the investments needed to kick off a digital effort, management has to have a sufficient interest in paying for it. Before, supply chain had not been the major area of focus for boards, as digital investments in sales, marketing and finance appeared to have both more immediate payoff and less risk, considering the comparative fragility of the supply chain.

Due to the factors cited above, however, boards are beginning to feel a sense of urgency about digitizing their operations. Investments in other functions have led to better customer-facing experiences (e.g., e-commerce efforts) and sped up the ordering process, yet supply chains, lagging in digital maturity, don’t have the processes and technology needed to keep up.

Compounding this are changing attitudes among boards about what exactly digital means for supply chains. Most procurement professionals would be hard pressed to say they didn’t use any form of digital technology, yet the tools they’re most familiar with today merely enable organizations to streamline routine activities, expand the capabilities of existing systems such as ERP and enhance baseline analytics practices.

This is because boards have commonly framed digital initiatives within the supply chain as automation exercises, said Douglas Kent, managing partner at CHAINovation, an operations and supply chain advisory firm, during a panel discussion. To align supply chains with more digitally mature functions and make their businesses more competitive, Kent said boards are now looking at digital as a transformation initiative, the goal of which is to enable enterprise-wide decision-making.

Kent’s fellow panelists — Ray Wang and Donald Farmer, principal of strategy at TreeHive — agreed, affirming that the acceleration of decision-making is a key way to help companies foster growth.

Farmer said this in particular relies on procurement’s ability to form a strong partnership with the IT function. IT typically acts as a “gatekeeper” within the business, allowing “access” to data only as needed. Instead, Farmer encouraged attendees to push IT into the role of “shopkeepers” that provision data out to stakeholders, who can then use that data to make better decisions — like, for example, smarter and faster decisions about how to re-source a category in light of a trade war escalation.

Ultimately, the ability to democratize and automate decision-making processes forms “the heart of cognitive sourcing,” Wang concluded. 

From Pitch to Roadmap

While the first portion of LevaData’s event focused on giving attendees a “shot in the arm” to take on digital transformation, both internally and with management, the vendor acknowledged that getting buy-in is on the only first step in a longer journey. Realizing a successful digital transformation also depends on procurement’s ability to create a vision for future supply chain maturity and execute on that plan.

Knowing many of its customers and prospects needed initial help in this effort, LevaData created its Cognitive Sourcing Maturity Model Assessment, a process and performance auditing tool that analyzes organizational structures, sourcing strategies, RFQ processes and negotiations to assess an organization’s maturity level in light of today’s more advanced sourcing technology.

To learn more about where LevaData’s maturity model envisions procurement and sourcing organizations completing their digital transformation journeys, stay tuned for our continued coverage of the 2018 Cognitive Sourcing Summit, where we’ll explore the maturity model and how one LevaData customer has used the framework to structure its own effort to eventually enable true cognitive sourcing.