Digitally upgrading procurement: How to build a business case for the transformation

Spend Matters welcomes this guest post from Joël Collin-Demers, Consulting Principal at Pure Procurement.

When is it time to replace old appliances?

When they break? When you change your decor? Or is it when you decide to seriously start cooking during a pandemic (a change in “kitchen strategy”)?

The answer is unique to each individual, but one factor rings true in all cases — there must be a benefit involved for the chefs in the house!

When setting out on procurement transformation journey, the dynamic is very much the same.

How do you find the right procurement technology and vendor for your company? Spend Matters’ new 5-step “Procurement Technology Buyer’s Guide” can help — with how-to documents, checklist templates and other tips.

There are a multitude of good reasons to modernize and digitize your company’s procurement function. However, the most important factor to ensure success is that your reasons resonate with the rest of your organization. Otherwise, you may very well find yourself in the company of a majority of organizations who have implemented modern procurement technologies but are not satisfied with the results.

Enter the business case.

A Business Case is More Than Just a Document

A business case is defined as a document and/or model used to justify a proposed project based on its expected benefit for the organization. In the case of procurement digital transformation initiatives, it should contain, at a minimum:

• Procurement transformation strategy & target end state (People, Processes & Technology)
• Implementation roadmap
• Benefits
• Costs (or investment needed)
• Benefit & cost timing

By taking to time to iteratively think through each of these pieces, you will uncover the limits of your knowledge about your organization. For example, you may not have spend data for all your business units to justify your modeling decisions. To the extent that these limits prevent you from putting together a complete model, you will need to define assumptions.

However, if you build your procurement-transformation business case in isolation, a successful project will always remain elusive. There are two main reasons for this:

• You will have too many assumptions, and a critical number of them will turn out to be wrong
• You will not have engaged, convinced and won over the influential stakeholders that will ensure your success

That’s why it’s important to realize the true objective of a business case exercise: to generate stakeholder buy-in and alignment while substituting assumptions for reliable facts and figures. Without these two things, your initiative will fail regardless of the benefits you’ve calculated. Therefore, explicitly plan time to socialize and adjust your business case according to stakeholder feedback.

Defining your Procurement Transformation Strategy & Target End State

Before meeting with stakeholders, you must define a clear and compelling vision. It should demonstrate how a modernized procurement function will help the business meet its objectives. This usually involves defining a target operating model (TOM) using a “blank page” approach. A TOM defines the target end state, after transformation, for your:

• Organizational structure & roles (People). How will the procurement function be organized? Geographically? By business unit? What are the roles within these teams?
• How will work be carried out in the different sub-processes of the procurement value chain (sourcing, contract management, procure-to-pay, accounts payable, etc.)?
• What are the key systems (ERP, S2P, niche software, middleware, etc.) that will support the execution of the processes? How are they interconnected in your future state architecture?

A TOM also details the rationale or strategy behind the key choices made with respect to these three pillars. For example, are you leveraging a “self-serve” strategy for sourcing of indirect commodities below a certain threshold to reduce the number of full-time employees (FTEs) required for sourcing? What are your key process decisions?

This exercise will help establish a north star for the future of the function. It will also help you identify scope elements required to achieve the vision. For example, you may need to adjust your procurement policy if you are planning sweeping changes. However, you may have sub-processes (like contract management) that are already mature and can be left out of your transformation program.

Once you’ve completed your TOM and have answered the “Why” behind your transformation, it’s time to switch your focus to tactical considerations — the “How.”

Implementation Roadmap

After your TOM exercise, you will realize you have quite a bit of work ahead of you. You should elaborate a rollout plan for your TOM that considers your organization’s expectations around project management and business cases to maximize the chances of project approval. Typically, the bigger the scope of a single project, the bigger the benefits associated. However, this is a double-edged sword because the bigger the scope, the bigger the risk of failure. Tackling the implementation with lots of small projects instead of a large program is the way to go if you can help it. Therefore, when possible, approach solution deployments as follows:

• Start as small as possible for each solution deployment (pilot)
• Start with your most enthusiastic and mature business units/commodities
• Start with the structures/processes/applications that require the least number of integrations to other functions/processes/applications
• Try to limit soliciting the same end users simultaneously for different modules/applications (e.g., deploying a source-to-contract solution and a procure-to-pay solution to the same users at the same time)
• Build in time to develop your internal community of transformation experts to leverage the “snowball” effect

These guidelines have a dampening effect on the realization of benefits upfront. You may need to strike a balance between keeping things simple and benefit realization by moving more complex pieces to the left in your timeline to respect desired benefit parameters.

Calculating Transformation Benefits

Once you’ve determined what your TOM and implementation roadmap look like, you can start formally identifying the associated benefits at maturity. Benefit categories will reveal themselves as you define your TOM and roadmap, so start capturing them in parallel. This step is about documenting the formulas and assumptions needed to arrive at hard numbers for all your benefit categories. Here are some examples:

• Efficiency gains (FTE)
  • Automating PO creation and transmission to suppliers
• Cost reduction
  • Sourcing a wider scope of categories
  • Spend compliance
• Office supply cost reduction
  • Eliminate paper / archives
• Early payment discounts on vendor invoices
• Employee experience improvement
• Employee maturity / skill level
• Employee retention
• Risk minimization
• Better contract utilization / execution

Calculating benefits can be tricky. When elements of your formulas aren’t readily apparent, you can rely on benchmark data to guide you. For example, if best-in-class organizations in your industry run their sourcing department with an average of five FTEs, you can subtract that from your current FTE level to find the delta and your potential benefit. Of course, adjust the numbers where the benchmark doesn’t make sense in your context. Additionally, you may have to classify some benefits as “intangible” if you don’t have enough data to prove material impact on the company’s bottom line.

Calculating Transformation Costs

Most costs will align to your implementation roadmap. Start by determining the headcount required for each phase of your plan, role by role. Then, build in the other costs around this baseline staffing plan. Document your assumptions as you move forward. Here are a few cost categories to think about, if applicable:

• Internal headcount
• External headcount (consulting services)
• Office space
• Office supplies & internal change management events
• Communications with suppliers
• Software licenses
• Hardware
• Travel
• Recruiting / severance costs
• Contingency (about 15% of your overall cost)

Timing Costs and Benefits

After having calculated total costs and benefits, you will need to spread them out over time based on your roadmap. For costs, you will naturally have built in the timing for most elements as you will have determined headcount, overhead and software / hardware costs according to your implementation roadmap. However, for benefits, you will need to define additional assumptions about what portion of the benefits are tied to each deployment or rollout of a particular organizational change or application. By capturing timing assumptions, you can model each project’s effect on cashflow.

Conclusion

As you can see, completing a rigorous business case exercise for a procurement transformation is no simple feat. Although this article details the process in a linear fashion, it is often much more organic and iterative. Start by building a first step with a small team. Then, widen your stakeholder audience to get to your second, and hopefully ultimate, version.

It’s important to realize that digital transformations of procurement are first and foremost about changing your organization’s spend culture. Rushing or skipping steps will result in compounded challenges later down the road. Even with a well-defined vision and TOM, start small. Take the time to get everyone on the ship before you sail out to sea. The last thing you want is having to turn back to pick up forgotten passengers.

Check out Spend Matters’ new 5-step “Procurement Technology Buyer’s Guide,” which can help get your stakeholders onboard.