We believe that effective procurement change must be evolutionary.
The Wall Street Journal had a light-hearted piece to mark the New Year in which they asked Chief Information Officers about buzzwords they would like to see fade away.
Here’s the CIO of Cardinal Health, Brian Rice, on “digital transformation”:
“We’ve struggled with that one ourselves, like, what does ‘digital’ mean? What does ‘transformation’ mean? What does ‘digital transformation’ mean? So, I think trying to find a better way to describe that would benefit us all.”
The phrase has lost all meaning. It is like when you repeat a word over and over again.
It’s a useless word jumble in that everything today is ‘digital’ and everything is also ‘transformation.’ It is a cliché to point out that we live in a world of change characterized by 1s and 0s.
It is the kind of claptrap that management consultants perpetrate in the name of driving certain, locked-in revenue for themselves upfront, even as the benefits only occasionally and coincidentally appear to arrive post-implementation.
The argument goes something like this, here in a procurement context. Fully deploy digital tools and realize big operational savings. Take the Big Leap. Spend less on your procurement organization while improving outcomes to obtain the mythical Win/Win.
“Through full deployment of digital tools, typical procurement organizations can reduce operational costs by up to 45 per cent, achieving efficiency levels below those of today’s world class procurement organizations while at the same time enabling them to improve effectiveness and customer experience, according to new research from Hackett Group, Inc.
“World-class procurement organizations, which spend 22 per cent less than their peers, can also reduce costs by additional 33 per cent with comprehensive digital transformation, according to the research.”
“Last year alone, companies poured $1.3 trillion into transformation initiatives – 70% of which was wasted on failed programs at companies like GE, Ford, and Procter & Gamble. Among those that didn’t fail, only 16% saw improvements in their performance and ability to sustain change over the long haul. Even for digital-first industries like tech, media, and telecom, only 26% saw success.
“The truth is, people aren’t the problem; it’s the organization’s failure to communicate effectively with its people that sets them up for digital transformation from the start.”
It’s no wonder that these kinds of projects are disappointing, especially in procurement.
“Despite recognising digital technologies, their impact and imminent uses, few organisations appear to be progressing at the rate their c-suites consider necessary for achieving overall goals. Indeed, in the majority of areas, the level of impact has declined and the forecast application of recent technologies is low … The level and speed of digitalisation across procurement functions is lower than expected and needed.”
The argument that “digital transformation” initiatives fail because of communications is only partially.
These projects fail because they are overly broad and because they emphasize the digital over the transformation.
Digital transformation too often translates to “high risk, low reward.”
Another source of failure is the disappointment with the outcomes of prior projects. Here is Elouise Epstein from A.T. Kearney:
“While the potential advantages of digitalisation are well understood, many organizations are finding their programmes are not delivering the anticipated benefits because of deficiencies in previous technology offerings. Critically, these inhibited adoption.”
Nowhere is this truer than procurement.
“One of my overriding arguments – and it’s not really that shocking a finding – is that, historically, most procurement technology has been horrible. If not the actual functionality, it’s certainly the adoption, and it’s certainly the return on investment (ROI) that is horrible. And procurement technology has nothing to do with being digital. So, over the last few years, many organisations have been severely impaired having overpaid for technology that has vastly under-delivered, she says.” [Emphasis added.]
Effective change, especially for small and medium-sized organizations (even those housed within a larger enterprise context), is focused and limited in remodeling business processes. Given the way we work today, any such restructuring will use digital tools inevitably. My nomination for the replacement of “digital transformation” as meaningless jargon? “Business process evolution.”
How do you judge a good procurement transformation project? It must be in the context of the ultimate goal of procurement: to provide value at a strategic level to its internal business unit customers. Procurement is a service organization. It is as good as the business users think it is.
Epstein is unambiguously correct when she says that cost savings aren’t anything more than table stakes:
“Procurement needs to throw cost savings out the window. Just get cost savings digitised and move on. The days are numbered for the CPO [Chief Procurement Officer] who has a focus solely on cost savings.” [Emphasis added.]
How should we evaluate procurement’s performance?
Does Procurement Help the Business Generate Cash?
The best way to talk about creating value is to think about cash. If the business is creating a benefit for its customers, then they will pay for it. Procurement should be critical to increasing the delivered value and to retaining as much of what the customer pays in the form of free cash flow.
Does procurement help the business create this benefit for the customer? Do they provide valuable intelligence to marketing and product? Do they help the business deliver that benefit cost-effectively? Is the company purchasing the right things from the right suppliers at the right price?
Does the Business Include Procurement in Important Decisions?
One sign of procurement’s contribution to value and cash generation is the willingness and urgency of procurement’s inclusion in key decisions.
Do business units and the c-suite see procurement as tactical or strategic?
Does Procurement Accelerate Cycle Times?
Another way to help the firm generate cash is to accelerate cycle times. Can procurement assist product to accelerate the delivery cycle? What does this mean for working capital?
Does Procurement Reduce Risk?
Covid has reminded people who had forgotten about the risk in supply chains.
Is procurement managing this risk well? Or are they taking risk for marginal cost savings?
Does Procurement Help the Firm Compete?
Does the c-suite think of their procurement department as something that gives the firm a sustainable competitive advantage? Does procurement have better relationships with suppliers so that the firm can get preferential access to constrained supplies when times are tight, for example?
Does Procurement Promote Collaboration, Internally and Externally?
How frequently does procurement engage other members of the firm? What tools do they use? What metrics about collaboration do these tools give us? Does procurement share structured data with the rest of the organization that leads to insight and inference?
Does Procurement Help the Firm Meet Its ESG Goals?
How does procurement source from startups and from diverse suppliers, most of which are small and mid-sized businesses? How does procurement contribute to the firm’s environmental sustainability?
Put these all together and we can see why “digital transformation” in procurement has failed. Overly broad projects focused on the wrong things. It employed ham-fisted technology that costs far too much money to implement and operate, destroying any chance of a return on investment.
The best kind of restructuring is evolutionary, with low up-front costs, and demonstrable improvement in the strategic contribution. Emphasis on the return. De-emphasis on the investment.
This is what we have built with EdgeworthBox.
EdgeworthBox is a platform designed to get the most out of sourcing.
It’s an exchange with tools for hosting structured procurement data; standardizing and simplifying onboarding and RFx; and speeding up the sourcing process.
EdgeworthBox has little to no implementation and training cost. Buyers and suppliers alike access the tools, data, and community for free. Buyers pay a small transaction fee each time use EdgeworthBox to host a reverse auction like an RFP or RFQ. There is no risky commitment.
Our approach increases the quantity and the quality of responses buyers receive. Sellers like the simplicity and exposure to potential customers with the right product-solution fit.