Unconventional Wisdom: Procurement technology — a fragmented niche market, but a work in progress
We wrote recently that we would be starting a new series of posts on ‘unconventional wisdom’ imparted by our chief research analyst Pierre Mitchell (whose qualification to do so will be known by regular readers). Whatever takes our eye during our conversations with the market, the industry and the procurement people within it, will be a topic for scrutiny — we are looking for the more challenging and unusual questions that are often left unsaid, unexpressed, or unaddressed.
Today we are inspecting a comment made during a candid conversation I had with CPO of Bayer, Thomas Udesen, also co-founder of the Sustainable Procurement Pledge alongside Bertrand Conquéret, about the transfer of what he pledges into what he does practically in the day-to-day. As part of the wider conversation I asked him about the role technology can play in the sustainability agenda.
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“I am totally convinced,” he said, “that the procurement tech providers are mission-critical in providing the necessary transparency needed to achieve sustainability goals.” But he also told me that, from the CPO’s eye view:
“The challenge for the practitioner is that the tech landscape is still complex and fragmented, by that I mean that the ability of the various providers to provide one comprehensive solution is very low, which might hinder adoption because having 10 different providers focused on one aspect makes it more difficult for the CPO who has all 10 to look after at once. Having said that, the notion of a one-stop shop is not realistic either, and the best-of-breed landscape is also fragmented. So it’s a challenge for the market. In an ideal world, for requisitioners like my company that want oversight of anti-corruption, cybersecurity, sustainability, risk management and so on, there would be one interface for the whole ecosystem of players. Right now, in my opinion, provider choice is very big and specialization too narrow.”
This is a fair comment and concept, and one which merits further investigation.
I asked Pierre about his observations of market fragmentation, how it’s set to evolve and why many solution providers are finding it difficult to respond —here’s what he had to say:
A variety of angles are at play
Let’s start by looking at some general trends. ESG is one of the areas that is finally turning into a serious discussion point this year — but from different standpoints.
Regulatory pressure on industry is changing and growing, like the supply chain laws being developed in both the EU and Germany. For example, in the EU the European Commission is looking at a legislative proposal on due diligence requirements to protect human rights and the environment in the supply chain. Germany has taken another step towards its preparation of legislation that will hold companies operating in the country to account for ensuring that social and environmental minimum standards are upheld in their supply chains and by production partners abroad.
Then if we look at the broader focus on sustainability, and actually start to reflect on the true and explicit costs of the supply chain and the impact on the planet — which is starting to happen through sustainable accountability standards for reporting (with the work of the Sustainability Accounting Standards Board and the European Financial Reporting Advisory Group to improve the quality of reporting internationally) – we see from a sustainability ranking point of view (Dow Jones and other indices) that it is becoming a firm valuation criteria for investors.
It’s becoming ever more important that these standards creep into products and the supply chains that build or distribute them. This will become even more important as we start to get visibility into the multiple tiers of our supply chains (which many solution providers are working hard to achieve).
Anything that touches the path of the commodities that come out of the ground, the hydrocarbons and resins that go into plastics that go into the products, in fact anything consumer-facing as we work backwards from CPG (where there is most waste), is another driver of the sustainability agenda. Consumer demands have changed and are becoming more powerful.
Apple is a great example of a firm finally forced by consumers to review their code of conduct and take this seriously driven by workforce conditions. This, modern slavery, diversity and inclusion, emissions and other areas of focus, like Scope 3 regulations, are all entry ramps into the real cost to the supply chain — and it’s imperative to understand them if we want to have fair competition.
The level of transparency that is growing up around sustainability reporting is not only being regulated but is getting deeper and deeper. For big firms like Apple they are pinpointing all the mines they’ve stopped doing business with, where they are located, etc. This level of transparency is difficult to have reflected within the tech solutions because it requires multi-tier supply chain mapping. Interestingly, the tools are increasingly becoming a vehicle for supply market intelligence, and not just on the supply chain risk side. For example, even Palantir is getting into the game.
Value over cost
When you work backwards from the consumer to procurement, procurement is trying to help sales/marketing, product, and ‘digital’ teams focus on value over cost, and this is another driver. It wants to deliver value on the revenue side and on the brand side (driven by consumer demand for sustainable products and supply chains and by how senior management is evaluated).
Once you are compliant and resilient and ethical, then you are ‘ticking all the boxes’ – all the things the C-suite is concerned about. It’s good for the consumer, the planet and revenue. And as we model all these supply chains we start to see cost saving and opportunities as well, by working with suppliers on innovation (like in sustainable packaging). And it’s also good from a talent engagement standpoint. The CPO of Walgreens Boots Alliance told us recently that a positive side effect from the pandemic was higher employee engagement given that they were more directly finding meaning in their activities on the supply chain, the business, and the consumer/patient communities that they serve.
Risk and compliance
Another accelerant of the ESG agenda is assurance of supply, which if done properly means looking at all the risks in the supply chain, from geo-physical to man-made, from natural disaster to regulatory.
Texas’ freezing storms caused chip and resin shortages and plastics supply chain disruption — Toyota plants shut down for lack of materials. Supply chain mapping tells us it’s a highly interconnected supply chain and the push to multi-tier visibility from a risk standpoint helps connect the dots between risks and affected performance/outcome. Oh, and, yes, also being in compliance with regulator A, country B, or customer C. While these should inherently be connected, they are often not. Compliance is often a case of box-ticking rather than addressing prioritized risks that threaten current value or even future opportunities (i.e., you and suppliers were so busy filling out the forms that you missed the customer opportunity).
But compliance is what we created in the first place because we had the right thinking in mind, to protect the environment and the worker. By connecting risk and compliance we can achieve multiple objectives and get a really balanced view that we can bake into our evaluation criteria of how we select the suppliers that are supposed to be extensions of our own organizations.
But, collecting supplier information like self-assessments and certifications is a tedious exercise for everyone and it can be vastly improved so that “guided” supplier information workflows are only asking the questions truly needed for that spend/supplier category. But, we get lost in the proverbial forest, and aren’t freeing this information of documents to gain actual insights. This is why leading firms are pursuing broader/deeper supply chain modeling to build digital twins of their value flows so that the information flows can be used for better intelligence, prediction, and decision making beyond supply chain risk.
This is where we are starting to see partnerships and communities and networks and ecosystems evolving. EcoVadis, for example, is focusing on the content side around definitions and ratings, giving us the apple-to-apple comparisons we want that we can plug into an evaluation criteria that any souring provider will be able to include. That’s a loose coupling between the tech applications and the community insight, and some providers will try to do both. But the world is moving towards ecosystems, and technically it’s often just an API away (e.g,. getting a financial risk score of a private supplier via Rapid Ratings).
We see a lot of work in progress in terms of all of the content that you need to evaluate a supplier both on ESG and on what you want to do from a risk standpoint. The multi-tier comparisons and mapping all the way back to the commodity give us connection points between the nodes that are creating the negative impacts, like ocean freight or mining and manufacturing sites. Those nodes are the key places where you want to focus your data collection to make sure that they are on track to deliver your goods, but are also doing the right things. We are seeing more connections between things like contracts and emerging tech like blockchain that are starting to connect the tiers of supply chain. Getting that visibility means you can start to do real supplier measurement on much more holistic and balanced scorecards.
That ability to bring all this together creates a competitive differentiator, not just for procurement but for the providers. But there’s a giant land grab of who is going to build all of this out, and we need to build ecosystems so these things can really interconnect and we can embed ESG into the supply chain and into risk management. Some industry consortia are pursuing this, but much more work is needed.
What’s holding the solution providers back?
We have regulatory, consumer-driven, risk and value-generation criteria all playing into the sustainability agenda that solution providers (beyond just cloud technology application providers) are trying to cater for. So it’s fair to say there are many tail winds from both a compliance, and risk and compliance standpoint (which are starting to lean towards each other more – especially coming out of a pandemic).
This is a long-term plan, because it’s a broader solution space to solve. It’s not something that is just down to the supplier, it’s the whole supply chain. And it’s not just about risk, or compliance, or cost or form-fit-function or value or brand, it’s about all of them pulling together to connect the dots from consumer all the way through to where we pull the goods out of the ground and the labor we use to do it.
Insights from the 2021 Deloitte CPO report (that we helped co-author and that we summarized here) backed up by CPOs confirm that supply chains are fundamental to the way that we can change the world. The good news for Thomas, and other CPOs, is that solution providers are generally on the right track from a technology standpoint. The bad news is that it’s a work in progress, and will take some time. But, practitioners are in the driver’s seat if they can articulate a clearer design problem for the providers to solve. With agile development approaches, the solution providers are better at churning out better apps more quickly, but they can also become order takers of sorts. So, it’s important to specify the North Star that guides the proverbial “long-term quick fix.” And while ESG concerns and end-to-end n-tier supply chain modeling and management are strategic, there are some practical shorter-term approaches as well. For example, we’ll talk about supplier management in a follow up discussion and why the time for “SRM” might finally be upon us.
SXM SRMAfter EcoVadis’ Sustain 2019: Company Update, Solution Overview and Technology Enhancements (Part 1)03/14/2019
SXM SRMAfter EcoVadis’ Sustain 2019: Company Update, Solution Overview and Technology Enhancements (Part 1)03/14/2019