Procurement in 2016—The Supply Chain Goes Digital

Procurement in 2016—The Supply Chain Goes Digital
Transcript of a sponsored discussion on the role of procurement as a strategic business force.
Listen to the podcast. Find it on iTunes. Get the mobile app. Sponsor: SAP Ariba.
Dana Gardner: Hi, this is Dana Gardner, Principal Analyst at Interarbor Solutions, and you’re
listening to BriefingsDirect.
Our business innovation thought leadership discussion today focuses on the
heightened role and impact of procurement as a strategic business force. We'll
explore how intelligent procurement is rapidly transforming from an emphasis on
cost savings to creating new business value and enabling supplier innovations.
As the so-called digital enterprise adapts to a world of increased collaboration, data
access, and business networks, procurement leaders can have a much bigger
impact, both inside and outside of their companies.
To learn more about the future of procurement as a focal point of integrated business services
we’re joined by Kurt Albertson, Principal of Advisory Services at The Hackett Group in Atlanta.
Welcome, Kurt.
Kurt Albertson: Thank you, Dana.
Gardner: We're also joined by Dr. Marcell Vollmer, Chief Operating Officer at SAP Ariba and
former Chief Procurement Officer at SAP. Welcome, Marcell.
Dr. Marcell Vollmer: Thanks, Dana, for having me. Great being here.
Gardner: You must be seeing external forces having an impact on your company and on Ariba's
customers. We're looking at mobile devices being used more and more for business. We have
connected business networks. How are these trends impacting procurement, and why is
procurement going to have a bigger impact as time goes on?
Vollmer: Thanks, Dana. That's a really good question. I see a couple of disruptive trends, which
are very important and are directly impacting procurement.
We see how smartphones and tablets have changed the way we work on a daily
basis, not to forget big data, Internet of Things (IoT), Industry 4.0. So, there are a
lot of technology trends out there that are very important.
On the other side, we also see completely new business models taking off. Uber is
the largest taxi company without owning a single cab. Airbnb is basically the
same, the largest accommodation provider, but not owning a single bed. We see also companies
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Gardner:
Vollmer:

like WhatsApp, Skype, and WeChat. They don't own the infrastructure anymore, like what we
know from the past.
I could mention a couple more, like Alibaba. Everybody knows it was the highest IPO in history,
with a market capitalization of around $200 billion, and they even don’t have an inventory. What
we're seeing are fundamental changes, the technology on one side and then the new business
models.
We now see the impact here for procurement. When business models are changing, procurement
also needs to change. Companies intend to simplify the way they do business today.
Complex processes
We see a lot of complex processes. We have a lot of complex business models. Today it needs
to be "Apple easy" and "Google fast." This is simply what millennials expect in the market.
But also, we see that procurement, as a function itself, is transforming from a service to
function. And this is definitely one trend. We see a different strategic
impact. What is asked of procurement from the lines of
business is more important and is on the agenda for the
procurement function.
Let me add one last topic, the evolution of the CPO role, by saying that seeing the different
trends in the market, seeing also the different requirements indicated by the trends for
procurement, the role of procurement, as well as the CPO role in the 21st Century will definitely
change.
I believe that the Chief Procurement Officer role might evolve and might be a Chief
Collaboration Officer role. Or, in the future, as we see the focus is more and more on the
business value, a Chief Value Officer role might be the next big step.
Gardner: Kurt, we're hearing a lot from Marcell about virtual enterprises. When we say that a
major retailer doesn’t have an inventory, or that a hotel rooms coordinator doesn’t have any beds,
we're really now talking about relationships. We're talking about knowledge rather than physical
goods. Does that map in some way to the role of the Chief Procurement Officer? How has the
virtual enterprise impacted the procurement process?
Albertson: Marcell brought up some great points. Hackett is a quantitative-based organization.
Let me share with you some of the insights from a very recent Key Issues Study that we did for
2016. This is a study we do each year, looking forward across the market. We're usually talking
with the head of procurement about where the focus is, what’s the priority, what’s going to have
the biggest impact on success, and what capabilities they're building out.
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Let me start at a high level. A lot of things that Marcell talked about in terms of elevating
procurement’s role, and more collaboration and driving more value, we saw it quite
strongly in 2015 and we see it quite strongly in 2016.
In 2015, when we did ourKey Issues Study, the number one objective of the
procurement executive was to elevate the role of procurement to what we called a
trusted advisor, and certainly you've heard that term before.
We actually put a very solid definition around it, but achieving the role of a trusted
advisor, in itself, is not the end game. It does allow you to do other things, like
reduce costs, tap suppliers for innovation, and become more agile as an organization, which was
in the top five procurement objectives as well.
Trusted advisor
So when we look at this concept of the trusted advisor role of procurement, just as Marcell said,
it's about a lot of the procurement executives across multiple industries who are asking, "How do
we change the perception of procurement within the eyes of the stakeholders, so that we can do
more higher value type activities?"
For example, if you're focusing on cost, we talk a lot about the quantity of spend influence,
versus the quality of spend influence. In fact, in our forum in October, we had a very good
discussion on that with our client base.
We used to measure success of the procurement organization by cost savings, but one of the key
metrics a lot of our clients would look at is percent of spend influenced by procurement. We have
a formal definition around that, but when you ask people, you'll get a different definition from
them in terms of how they define spend influence.
What we've realized is that world-class organizations are in the 95 percent range and 90 percent
plus on the indirect side. Non world-class procurement organizations are lagging, in the 70
percent range in terms of influence. Where do we go from here? It has to be about the quality of
the spend influence.
And what our data shows very clearly is that world-class organizations are involved during the
requirements and planning stages with their internal stakeholders much more often than non-
world class organizations. The latter are usually involved either once the supplier has been
identified, or for the most part, once requirements are identified and the stakeholder already
knows what they want.
In both cases, you're influencing, but in the world-class case, you're doing a much better job of
quality of influence, and you can open up tremendous amounts of value. It changes the
discussion with your internal stakeholders from, "We're here to go out and competitively bid and
help you get the best price," to "Let’s have a conversation with what you're trying to achieve and,
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Albertson

with the knowledge, relationships, and toolsets that we have around the supply markets and
managing those supply markets, let us help you get more value in terms of what you are trying to
achieve."
We've asked some organizations how we become a trusted advisor, and we've built some
frameworks around that. One of the key things is exactly what you just talked about. In fact, we
did a forward-looking 10-year-out procurement 2025 vision piece of research that we published a
few months ago, and big data and analytics were key components of that.
When we look at big data, like a lot of the things Marcell already talked about, most procurement
groups aren’t very good at doing basic spend analytics, even with all the great solutions and
processes that are out there. Still, when we look out in the market, there are a lot of companies
that don't have line-item level detail or they don't have 90 percent or 95 percent-plus data quality
with respect to spend analytics.
We need to move way beyond that for procurement to really elevate its role within the
organization. We need to be looking at all of the big data that’s out there in the supply networks,
across these supply networks, and across a lot of other sources of information. You have PDAs
and all kinds of information.
We need to be constructively pulling that information together in a way that then allows us to
marry it up with our internal information, do more analysis with that, synthesize that data, and
then turn it over and provide it to our internal stakeholders in a way that's meaningful and
insightful for them, so that they can then see how their businesses are going to be impacted by a
lot of the trends out in the supply markets.
Transformational impact
This year, we asked a question that I thought was interesting. We asked which trends will have
the greatest transformational impact on the way procurement performs its job over the next
decade. I was shocked. Three out of the top ﬁve have to do with technology: predictive analytics
and forecasting tools, cloud computing and mobility, the global economy and millennial
workforce.
Mobility, predictive analytics, forecasting, and cloud computing are in the top ﬁve, along with
global economy and the millennial workforce, two other major topics that were in our forward-
looking procurement 2025 paper.
When we look at the trend that’s going to have the greatest transformational impact, it's
predictive analytics and forecasting tools in terms of how procurement performs its job over the
next 10 years. That’s big.
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Consider the fact that we aren’t very good at doing the basics around spend analytics right now.
We're saying that we need to get a lot better to be able to predict what’s going to happen in the
future in terms of budgets, based on what we expect to happen in supply markets and economies.
We need to put in the hands of our stakeholders toolsets that they can then use to look at their
business objectives and understand what’s happening in the supply market and how that might
impact it in two to three years. That way, when you look at some of the industries out there,
when your revenue gets cut in more than half almost within a year, you have a plan in place that
you can then go execute on to take out cost in a strategic way as opposed to just taking a broad
axe and trying to take out that cost.
Gardner: Interesting. So it's being much smarter, much more analytic, and being proactive,
rather than reactive, to what’s going on inside your company. It’s interesting Kurt, because I talk
to a lot of IT people, and they're doing more with the data and the analysis and they want to
elevate it to more people in the organization, like the Chief Procurement Officer.
It seems to me that Ariba is in a position to bridge these groups between what IT or data
providers can bring out in terms of analysis and what these Chief Procurement Officers are going
to need in order to do their jobs differently.
Marcell, do you see that? Do you see Ariba playing a role as the bridge between technology and
business processes that the CPOs are going to be looking to have more insight from?
Vollmer: Absolutely, Dana. I couldn’t agree more what Kurt said about the importance of the top
priorities today. It's very important also to ask what you want to do with the data. First of all, you
need technology. You need to get access to all the different sources of information that you have
in a company.
We see today how difficult it is. I could echo what Kurt said about the challenges. A lot of
procurement functions aren't even capable of getting the basic data to drive procurement, to do
spend analytics, and then to see that it really links this to supply-chain data. In the future this will
definitely change. .
Good time to purchase
When you think about what you can do with the data by predictive analytics and then say,
"This is a good time to buy, based on the cycle we've seen is this timeframe." This would give
you a good time to make a purchase decision and go to the market.
And what do you need to do that? You need the right tools, spend visibility tools, and access to
the data to drive end-to-end transparency on all the data what you have, for the entire source-to-
pay process.
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Gardner: Another thing that we 'e expecting to see more of in 2016 is collaboration between
procurement inside an organization and suppliers, ﬁnding new ideas for how to do things,
whether it’s marketing or product design.
Kurt, do you have any data that supports this idea that this is not just a transaction, that there is,
in fact, collaboration between partners and that that can have quite an impact on the role and
value that the procurement ofﬁcer and their charges bring back to their companies?
Albertson: Let me tie it into the conversation that we've been having. We just talked about a lot
of data and analytics and putting that in the hand of procurement folks, so that they can then go
and have conversations and be really advisors in terms of helping enable business strategies as
opposed to just looking at historical spend cost analysis, for example. That helps procurement
category managers raise their game and really be perceived as adding more value, becoming this
trusted advisor.
Hackett works with hundreds of Global 1000 organizations, and probably still one of the most
common discussions we have, and even in on-site training support that we do, is around strategic
category management. It's switching the game from strategic sourcing, which we view as an end-
step process that results in awarding a competitive bid process, with aggregation of spend and
awarding a contract, to a more formal category management framework.
That provides a whole set of broader value levers that you can pull to drive value, including
supplier relationship management (SRM), which includes working with suppliers to innovate,
impacting a much broader set of value objectives that our stakeholders have, including spend
cost reduction, but not only including spend cost reduction.
We see such a level of interesting category management today. In our Key Issues Study in 2016,
when we look at the capability building that organizations are rolling out, we've been seeing this
shift from strategic sourcing to category management.
Strategic sourcing as a capability was always number one. It still is, but now number two is this
category management framework. Think of those two as bookends, with category management
being a much more mature framework than just strategic sourcing.
Category management
Some 80 percent of companies said category management is a key capability that they need to
use to drive procurement’s objectives, and that’s because they're impacting a broader set of value
objectives.
Now, the value levers they're pulling are around innovation and SRM. In fact, if you look at our
2016 Key Issues Study again, tapping supplier innovation is actually a little bit further on down
the list, somewhere around 10.
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When we look at all the things that are there, it’s actually ninth on the list, with 55 percent of
procurement executives saying it’s a critical and major importance for us.
The interesting thing, though, is that if you go back to 2015 and compare where that is versus
2016, in 2016, that moves nearly into the top three with respect to the significantly more focus on
a key capability. SRM has been a hot topic for our clients for a long time, but this tells us that it’s
getting more and more important.
We're seeing a lot of organizations still with very informal SRM, supply innovation frameworks,
in place. It’s done within the organization, but it’s done haphazardly by individuals within the
business and by key stakeholders. A lot of times, that activity isn't necessarily aligned with where
it can drive the most value.
When we work with a company, it's quite common for them to say, "These are our top five
suppliers that we want to innovate with. And you ask, "If innovation is your objective, either to
drive cost reduction or to help improve the market effectiveness of your products or services and
drive greater revenue, whatever the reason you are doing that, are these suppliers going to get
you there?"
Probably 7 out of 10 times, people come back to us and say that they picked these suppliers
because they were the largest spend impact suppliers. But when you start talking about supplier
innovation, they freely admit that there's no way that supplier is going to engage with them in
any kind of innovation.
We have to rethink how we look at our supply base and really understand where those suppliers
are that can truly move the needle on supplier innovation and engage them through a category-
management framework that pulls the value lever of SRM and then track the benefits associated
with that.
And as I said, looking at our 2016 Key Issues Study, supplier innovation was the fastest growing
in terms of its focus objective that we saw when we asked the procurement executives.
Gardner: Marcell, back to you. It sounds as if the idea of picking a supplier is not just a cost
equation, but that there is a qualitative part to that. How would you automate and scale that in a
large organization? It sounds to me like you need a business network of some sort where
organizations can lay out much more freely what it is that they're providing as a service, and then
making those services actually hook up, a collaboration function.
Is that something you're seeing at Ariba, as well that the business Network, helping procurement
move from a transactional cost equation to a much richer set of services?
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Key role
Vollmer: Business networks play a key role for us for our business strategy, but also on how to
help companies to simplify their complexity.
When you reach out to a marketplace, you're looking for things. You're probably also starting
discussions and getting additional information. You're not necessarily looking for paint in the
automotive industry or the color of a car. Why not get an already painted car as a service at the
end?
This is a very simple example, but now think about when you go to the next level on how to
evolve and have a technology partnership, where you reach out to suppliers, looking for new
suppliers, by getting more and more information and also asking others who have probably
having already done similar things.
When you do this on a network, you get probably responses from suppliers you wouldn't even
have thought about having capabilities like that. This is a process that, in the future, will continue
to aid successfully the transformation to a more value-focused procurement function, and
simplicity is definitely a key.
You need to run simple. You need to focus on your business, and you need to get rid of the
complexity. You can’t have all the information and do everything on your own. You need to
focus on your core competencies and help the business in getting whatever they need to be
successful, from the suppliers out in the market to ensure you get the best price for the desired
quality, and ensure on-time deliveries.
The magic triangle of procurement is not a big secret in the procurement world. Everybody
knows that it's not possible to optimize everything. Therefore, you need to find the right mix. You
also need to be agile to work with suppliers in a different way by not only focusing just on the
price, which a lot of operational technical procurement functions are used to. You need what you
really want to achieve as a business outcome.
On a network you can get help from suppliers, from the collaboration side also, in finding the
right ones to drive business value for your organization.
Gardner: Another major area where we're expecting significant change in 2016 is around the
use of procurement as a vehicle for risk reduction. So having this visibility using networks,
elevating the use of data analysis, everything we have talked about, in addition to cost
efficiencies, in addition to bringing innovation to play between suppliers and consumers at the
industrial scale, it seems to me that we're getting insight deeply into supply chains and able to
therefore head off a variety of risks, risks around security, around the ability to keep supply
chains healthy and functioning, and unknown factors that could arise that would damage even an
entire company's reputation.
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Kurt, do you have some data, some findings that would illustrate or reinforce this idea that
procurement as a function, and Chief Procurement Officers in particular, can play a much greater
role in the ability to detect risk and prevent bad things from happening to companies?
Supply continuity risk
Albertson: Again, I'll go back to the 2016 Key Issues Study and talk about objectives.
Reducing supply continuity risk is actually number six on the list, and it’s a long list, and that’s
pretty important.
A little bit further down, we see things like regulatory noncompliance risk, which is certainly
core. It's certainly more aligned with certain industries than others. So just from our perspective,
we see this as certainly number six on the list of procurement 2016 objectives, and the question
is what we do about it.
There's another objective that I talked about earlier, which is to improve agility. It's actually
number four on the list for procurement 2016 objectives.
I look at risk management and procurement agility going hand in hand. The way data helps
support that is by getting access to better information, really understanding where those risks are,
and then being able to quickly respond and hopefully mitigate those risks. Ideally, we want to
mitigate risks and we want to be able to tap the suppliers themselves and the supply network to
do it.
In fact, we attacked this idea of supply risk management in our 2025 procurement study. It’s
really about going beyond just looking at a particular supplier and looking at all the suppliers that
are out there in the network, their suppliers, their suppliers, and so on.
But then, it's also tapping all the other partners that are participating in those networks, and using
them to help support your understanding and proactively identifying where risk might be
occurring, so that you can take action against it.
It’s one of the key cornerstones of our 2025 research. It's about tapping supplier networks and
pulling information from those networks and other external sources, pulling that information into
some type of solution that can help you manage and analyze that information, and then
presenting that to your internal stakeholders in a manner that helps them manage risk better.
And certainly, an organization like Ariba is in a good position to do that. That’s obviously one of
the major barriers with this big-data equation. How do we manage and analyze all this data?
How do we make sense of it? That's where we see a lot of our clients struggling today.
We have had some examples of clients that have built out an SRM group inside their
procurement organization as a center-of-excellence capability purely to pull this information that
resides out in the market, whether it’s supplier market intelligence or information flowing from
Page 9

networks and other network partners. Marrying that information with their internal objectives
and plans, and then synthesizing that information, lets them put that information in the hands of
category managers.
Category managers can then sit down with business leaders and have fact-based opinions about
what’s going to happen in those markets from a risk perspective. We could be talking about
continuity of supply, pricing risks and the impact on profitability, or what have you. Whatever
those risks are, you're able to use that information. It goes back to elevating the roles of trusted
advisor. The more information and insight you can put into their hands the better.
The indirect side
Obviously, when we look at some of the supply networks, there's a lot of information that can
be gleaned out there. Think about different buyers that are working with certain suppliers in
getting information to them on supply risk performance. To be frank, a lot of organizations still
don’t do a great job on the indirect side.
There are opportunities, and we're seeing it already in some of these markets for supply networks
to start with the supplier performance piece of this, tap the network community to provide insight
to that, and get help from a risk perspective that can be used to help identify where opportunities
to manage risk better might occur.
But there are a lot of other sources of information and it’s really up to procurement to try to
figure this out with all the sources of big data. Whether it’s sensor data, social data, transactional
data, operational data, partner data, machine-to-machine (M2M) data, or cloud services based
data, there's a lot of information. We have a model that looks at this kind of these three levels of
kind of this analytics model.
The first level of the model is just for recording things and generating reports. The second level
is that you're understanding and generating information that then can be used for analytics. Third,
you're actually anticipating. You have intelligence and you're moving towards more real-time
analytics so that you can be quicker in responding to potential risk.
I mentioned this idea of agility as being key on the procurement executive’s list. Agility can be in
many things, but one of the things that it means with respect to risk is that you can’t avoid every
risk event. Some risk events are going to happen. There's nothing you're going to do about them,
but you can proactively make plans for when those risk events do occur, so that you have a well
thought-out plan based on analytics to execute in order to minimize the impact of that risk.
Time and time again, when we look at case studies and at the research that’s out there, those
organizations that are much more agile in terms of responding to these risks where you're not
going to be able to avoid them, minimize the impact of those risks significantly compared to
others.
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Gardner: As we look ahead to 2016, we're certainly seeing a lot on the plate for the procurement
organization. It looks like they're facing a lot more technology issues, they're facing change of
culture, they're thinking about being a networked organization. Marcell, how do you recommend
that procurement professionals prepare themselves? What would you recommend that they do in
order to meet these challenges in 2016? How can they be ready for such a vast amount of
change?
Vollmer: Procurement organizations need to ensure that they really help the business as much as
possible, and also evolve to the next level for their own procurement functions. Number one is
that procurement functions need to see that they have the right organizational setup in place. That
setup needs to fit the overall organizational line of business spectra, what a company has.
The second component, which I think is very important, is to have an end-to-end focus on the
process side. Source-to-pay is a clearly defined term, but it's a little bit different in all the
companies. When you really want to optimize, when you really want to streamline your process,
you want to use business networks and strategic sourcing tools, as well as running in a highly
automated level of transaction to leverage the automation potential of what you have in a
purchase order or invoice automation, for example.
One defined process
Then, you need to ensure that you have one defined process and you need to have side systems
covering all the different parts of the process. This needs to be highly integrated, as well as
integrated in your entire IT landscape.
Finally, you need to also consider change management. This is a most important component by
which you help the buyers in your organization transform and evolve to the next level into a
more strategic procurement function.
As Kurt said about the data, if you don’t have some basic data, you're very far away from driving
predictive analytics and prescriptive guidance. Therefore, you need to ensure that you invest also
in your talents and that you drive to change management side.
These are the three components that I would see in 2016. This sounds easy, but I've talked to a
lot of CPOs. This journey might take a couple of years, but procurement doesn't have a lot of
time. We need to see now in procurement that we define the right measures, the right actions, to
ensure that we can help the business and also create value.
As was already mentioned, this needs to go beyond just creating procurement savings. I believe
that this concept is here to stay in the future. I think the value is what counts, what you can
create.
Gardner: I'm afraid we'll have to leave it there. You've been listening to a sponsored
BriefingsDirect podcast discussion on the heightened role and impact of procurement as a
Page 11

strategic business force. And we learned how procurement leaders can make a much bigger
difference in the organization as procurement itself transforms to become a focal point of
integrated business services.
So please join me in thanking our guests, Kurt Albertson, Principal of Advisory Services at The
Hackett Group. Thank you so much, Kurt.
Albertson: Thank you, Dana. I enjoyed it.
Gardner: And a big thank you to Dr. Marcell Vollmer, Chief Operating Ofﬁcer at SAP Ariba,
and the former Chief Procurement Ofﬁcer at SAP. Thank you so much, Marcell.
Vollmer: Many thanks Dana; many thanks Kurt. It was a great conversation, I appreciate it.
Thank you.
Gardner: And also a big thank you to our audience for joining this SAP-sponsored business
innovation thought leadership discussion. I’m Dana Gardner, Principal Analyst at Interarbor
Solutions, your host and moderator. Thanks again for listening, and do come back next time.
Listen to the podcast. Find it on iTunes. Get the mobile app. Sponsor: SAP Ariba.
Transcript of a sponsored discussion on the role of procurement as a strategic business force.
Copyright Interarbor Solutions, LLC, 2005-2016. All rights reserved.
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Procurement in 2016—The Supply Chain Goes Digital

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