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Digital Procurement - Part 2

A wave of digital disruption is upon us and we are all being impacted. While this disruption is being led by a few organizations, the ones getting disrupted are trying hard to transform themselves and stay relevant. Most of these organizations are working on their digital transformation strategies to develop new products and services to improve their digital customer's experience.

In my last blog, I had defined what is "Digital Procurement" and provided a high-level approach on how organizations can start on this transformation journey from Digitalization to Innovation

Digitization à Automation à Experience à Innovation

To summarize "Digitalization of Procurement" is re-examining the complete process of acquiring goods and services in order to deliver business outcomes for an organization and rethinking hot to use new capabilities to design and deliver best possible digitalization of procurement experience for users. Based on my experience of several digital procurement transformation projects, I believe any organization can digitally transform their procurement using a simple 4 step approach as shown below :

4 Step Approach To Procurement Digitalization

Procurement Transformation Steps:

1. Digitization

- As per Gartner's IT Glossary, Digitization is the process of changing from analog to digital form, also known as digital enablement. So as a first step of "Digitalization of Procurement", organizations should focus on manual procurement processes to a new system in order to make them repeatable and bring spend visibility. Most organizations have already realized the importance of "Digitization" and have made significant investments in this area. There are three types of technology solutions that can help us in this area:

  1. ERP Procurement

    - This is the basic form of digitalization of procurement and most of the organizations today have already implemented ERPs to digitize their downstream procurement i.e., purchase order and invoice management processes.
  2. Source to Pay (S2P) Suite

    - Many solutions that are in trend nowadays are not competent enough to manage upstream processes in Sourcing and Contract management. While most S2P suite vendors (through a series of mergers and acquisitions) have tried to develop end-to-end solutions including specialized areas like VMS (Vendor Management System) and travel solutions etc.; however, organizations have either not digitized all of these processes or even if they have it is broken due to their use of "best of breed" approach - therefore this still remains the biggest opportunity for any organization.
  3. Niche Point Solutions

    - While S2P suite solutions are helping organizations they fall short on many areas like contract compliance, invoice digitization, tail spend management to name a few. This has resulted in emergence of multiple smaller niche, best of breed point solution vendors that help organizations overcome challenges of S2P suite solutions. This is also a big opportunity as these niche solutions do not cause disruption to the existing landscape and ensure faster adoption as they provide functionality that is very close to the business.

2. Automation

- While the digitalization of procurement processes can help an organization to unify procurement and get spend visibility, it has in true sense not automated the entire procurement process. "Automation" by definition is the technique of making an apparatus, a process or a system operate automatically. But most ERP, S2P and even niche solutions require human effort to run procurement processes on the system. This is also due to the fact that the processes are spread through disconnected systems which cannot be integrated because of cost and other IT challenges. Due to this, the procurement department that ideally should focus on strategic tasks like supplier management gets defocused into handling tactical tasks of operational procurement. Automation can help overcome these challenges. Broadly, there are three forms of "Automation":

  1. Rules Driven or Deterministic

    - There are many procurement processes (or steps in a process) that are repetitive, completely rule-based but still require manual effort/humans to complete the same. For e.g. - Supplier and Material master maintenance, PO Management, PR to PO etc. All such processes (and steps) can be fully / partially automated using RPA (Robotics Process Automation) software.
  2. Data-Driven or Predictive

    - In Procurement, there are multiple processes steps that can be automated based on learning from data (machine learning) and rules. For e.g. - We can automate material master and supplier creation using machine learning that can help us easily identify duplicate materials and supplier creation. Similarly, we can automate or provide decision support for activities like budget compliance, contract compliance etc.
  3. Knowledge-Driven or Cognitive

    - The supreme form of automation requires us to digitize organization's knowledge and co-relate it with data and rules to automate processes steps or provide superior decision support thus making processes faster. For e.g. - We can consolidate all past RFPs, the responses and reasoning of supplier selection to build a knowledge model. Using this model, we can help procurement teams to select the right supplier rapidly.

So as a second step of "Digitalization of Procurement" organizations should focus on "Automation" i.e. create automated procurement systems and automate all process and steps in order to free up end user and their procurement department to do their core functions.

3. Experience

- For any Digital Transformation, "Experience" is the key success factor. In Procurement it is even more important because of the complexity involved due to different user roles - Business (Requester), Buyer (Procurement), Suppliers and different spend types - direct and indirect, goods and services, simple and complex.

For successful digital transformation of the procurement function, we will need to ensure that the experience is contextual and user-centric, to the supplier and to the business rather than just the buyer:

  1. User Centricity

    - It is said that the best "User Experience" is "Invisible". However, the same cannot be said about User experience in Procurement. Most procurement systems cater to only a subset of spend type leading to a multitude of systems thus making it complex for business users. Further, most procurement systems have been designed from only keeping one user type in mind - the buyer. While it may work well for procurement and its processes, business users are not able to adopt as procurement as it not integral to their current role. So for successful digital transformation in procurement, we need to design "User Centric" experiences. For e.g. - A service engineer in the field should be able to order and track a part request from their core service management application. By becoming user-centric we will be able to solve a key "User Adoption" problem which will ultimately benefit the core business of an organization.
  2. Supplier Centricity

    - Suppliers are core to most organizations as they hold the key to make an organization successful or unsuccessful. However, when organizations want to involve suppliers in their core business processes they are again faced with similar issues as end users i.e., current procurement systems including supplier networks and supplier portal are buyer-centric and are designed from buyer organization perspective and not supplier perspective.
    This leads to a big issue as most good suppliers find it difficult to integrate with multiple buyer systems and hence never are a true partner which is a core requirement for Digital Transformation. Hence, it is critical that we develop a supplier portal and network with "supplier at center" to ensure that we help supplier become our business partner easily.
  3. Business Centricity

    - Every organization's procurement is central to their growth as it can impact both the bottom line by reducing cost and topline by helping the organization innovate faster through supplier led innovation. However, the same cannot be said about the procurement system which are one size fits all. Due to this, most organizations do not consider procurement strategic to their business. The needs vary, for e.g., a financial service company buys mainly services compared to a retail company that buys both goods and services vs. a manufacturer who buys raw material, parts etc. But the procurement system tries to generalize everything or provide a solution in multiple systems leading to broken processes. For an effective digital transformation, we need to ensure that procurement systems are designed and implemented with a "Business Centric" approach.

4. Innovation

- Digital is about finding new ways of doing things. Hence, innovation is the key to successful Digital Transformation. While organizations go through the Digital Transformation journey of Digitization to Automation to Experience, innovation is being used to either fix the problems that already exist or simplify how we do procurement today.

We have to look at Innovation from a future perspective as well. We have to look at new technologies and try to find new ways of doing things with a core objective of making procurement "autonomous". This means that procurement operations should run on its own and user intervention is only required to handle exceptions or issues. At the same time, procurement team bandwidth should be focused on the "Next". Procurement should focus on the following technologies in the coming years as these will have the greatest impact both on their function and roles:

  1. Artificial Intelligence (AI)

    - AI will have profound impact on procurement as it will help organization reduce cost through spend forecasting, select right suppliers based on risk analysis, manage contracts better using AI-powered analysis and compliance management, generating purchase request based on historical pattern based on projects or other means, manage supplier performance/risk and better cash flow management.
  2. 3D Printing

    - As 3D Printing technology will mature, it will help organizations innovate rapidly as they can print goods based on design. This will also become a new category with possibly the largest spend. Thus, lead to increased efficiency and savings as there may not be any dependency on suppliers especially in a maintenance scenario.
  3. Blockchain

    - This is another technology that can completely renew how we do procurement today. Given that Blockchain can create one of the most secure forms of digital trust, it can lead to simplification of current day procurement platform and supplier networks by merging the two and creating a common "Uber" like platform connecting both buyers and suppliers in real-time and that is not managed by any central body or organization.
  4. IOT (Internet of Things)

    - As 5G penetration will increase, we will get closer to a connected world where all devices and machines will generate an unprecedented amount of data. This will provide us with visibility into things we do not understand today due to lack of data like market fluctuations, demand patterns, consumption patterns and much more. This will help us create better digitalized procurement solutions and help us create new ways of doing things transforming the way procurement is being done today.
  5. AR / VR (Augmented Reality and Virtual Reality)

    - This is another technology that can transform procurement. Using AR / VR end users can search and view goods and services in a near real environment rather than just reading the description. Similarly, the goods receipt and quality check process can be completely renewed resulting in massive efficiency benefits as goods/services can be checked even before they are delivered.
  6. While any organization on a Digitalization of Procurement Transformation journey can adopt the above approach, it is very important to understand that "People" hold the key to any digital transformation and should be at the center for any successful transformation.