What digital transformation is and means for Procurement

Procurement professionals understand the need for a digital transformation, but they do not necessarily understand what a digital transformation involves. This leads to partial success at best and failure at worst.

Procurement clearly feels the need for embracing the digital. In the 2023 Deloitte Global CPO Survey, which was co-produced with help from Spend Matters Chief Research Officer Pierre Mitchell, 72% of respondents considered digital transformation as a top priority for the year, making it joint second after “Driving operational efficiency.” 42% saw investments into such a transformation as a top strategy for delivering value — making it second again. In the time since that survey’s publication, the ever-increasing attention given to generative AI has only made the need for the widespread implementation of digital technologies even more felt.

And yet, the survey’s authors also note that many CPOs do not know how to begin the transformation process and others failed in the transformation or did not reap the promised rewards. Of course, the digital transformation of procurement faces many hurdles, hence our “Procurement digital transformation survival guide for practitioners,” which touches on every step of the process and the possible pitfalls waiting in each. These challenges cannot be tackled effectively if you do not know what it is you have set out to do, though.

Why transform?

Although many CPOs may say Procurement must undergo a digital transformation, some may question the rationale for doing so. Traditionally, Procurement has pottered along behind the scenes to fulfill a purely operational role, not a strategic, transformative one. The answer is twofold: first, the implementation of technology can indeed increase Procurement’s value to the organization; second, the reality is that the effectiveness and efficiency boasted by technology-enabled Procurement teams is increasingly becoming the norm.

In September, The Hackett Group published research that showed the use of generative AI can reduce process costs for Procurement by 47% while increasing staff productivity by 54%. Putting aside the questions of generative AI — which we have covered at length — the reasons for the costs and the productivity gained apply to technological solutions in general. Post-pandemic costs, inflation and climate-related disruptions have escalated in recent years, and automating certain rote processes has enabled teams to work more quickly.

More concretely, Xavier Olivera, Spend Matters Lead Analyst for Downstream Procurement, once explained that since entering the ‘permacrisis’ environment of the post-pandemic world, the balance of power in purchasing has shifted: “Traditionally, the buyer held the purchasing power. They could squeeze a supplier’s profits. This has changed, however. On many occasions, the power is actually held by the supplier due to the risks of ensuring the stream of supply, changing the relationship’s dynamics.” The best way to derive savings, the most traditional of traditional Procurement tasks, is no longer through haggling alone. Instead, it is orchestrating operational activity through the creation of an ecosystem of applications. In other words, Procurement needs to undergo a proactive digital transformation that forces it to evolve from its role of generating savings to reimagining its function and processes through the medium of technology.

But it’s about more than the tech

The benefits of digital transformation sound nice, but the reality often falls short of the promise. In the worst cases, an organization invests a load of money into a new tool that hampers current practices without producing any noticeable gains in productivity or cost reduction. There are many reasons why this might happen. Sometimes, the problem occurs before the tech search even begins.

A big issue, Spend Matters Lead Analyst for Upstream Procurement Bertrand Maltaverne says, is that many use three different words more or less interchangeably: digitization, digitalization and digital transformation. He defines the three as follows:

• Digitization is the conversion from analog to digital, e.g., translating written information into data.
• Digitalization is the process of using digital technology and the impact it has on business operations (e.g., digitalization of a process).
• Digital transformation is a digital-first approach encompassing all aspects of business, regardless of whether it concerns a digital business or not.

Note that a major differentiating factor between these three definitions is the central importance placed on tech. It begins as the central point when considering the tool itself to become an enabler for an organization’s function. This distinction is echoed in a similar definition given by The Hackett Group in 2018: “[I]mproving customer experiences, operational efficiency and agility by fundamentally changing the way business services are delivered, using digital technologies as the enabler of holistic transformation.” Digital transformation is about the wider transformation that digital tools enable, not the transformation of analog tools into digital ones.

The distinction matters because this conflation of digitization with digital transformation lies at the heart of many failed attempts to bring about digital transformation. “The most common mistake that organizations make is to look at technology as the solution to all their problems and to think of it as an end in itself when it is just a means to an end,” Bertrand explains. “The second most common one is using the new tool as nothing more than a way to automate old practices. Thoughtless automation leads to missing out on the real value and transformative impact some of these latest technologies promise. When implemented strategically and intelligently, new technologies enable organizations to do what was previously impossible.” The need for such thought behind the implementation of technology lies at the heart of why Spend Matters exists. The market is filled with many marvelous tools, but you need to carefully choose the right one to unlock its transformative potential.

Despite its wording, the ‘digital’ in digital transformation should come as the last part for the change brought to an organization. The order required to bring about digital transformation is people, then processes, then the tech. “People come first because they run the processes and they use the technology,” Bertrand states. “Processes come second because they serve as the scaffolding for the tasks people complete with the tech. Technology is an enabler, not a solution.”

Read more in our series: How to work through change and A practitioner interview on their transformation challenges.