January 29, 2021
2021 Procurement Key Issues
According to The Hackett Group’s 2021 Key Issues Study, spend cost reduction is firmly back at the top of the procurement agenda following an extremely volatile year, including a global health pandemic, substantial economic disruption, a tense political climate and growing calls for social justice around the world.
In times of such great uncertainty, procurement must provide stability to the enterprise through spend cost reduction and supply assurance. As expected, supply risk management has emerged as the procurement function’s second most important objective in 2021.
Procurement must also support enterprise stabilization and recovery strategies by expanding its role as a strategic advisor that can quickly realign to changing market conditions and business priorities, and add new sources of value to the business – for example, new and innovative sources of supply and early warnings of potential supply risk. Other procurement objectives reflect the function’s need to adapt more quickly as conditions change, as well as digital tools, strong talent and improved analytics capabilities. Notably, meeting corporate sustainability goals makes the list of 10 key issues for the first time.
1. Reduce spend cost: Even companies that fared better during the pandemic must still brace for ongoing instability for some time. Procurement must continue to focus on its core mission of spend cost reduction, leveraging digital tools and business partnerships to maximize savings. For example, specialized procurement technologies can elevate the strategic sourcing process, and leveraging new data sources can widen the marketing intelligence available to sourcing teams.
2. Reduce supply risk to ensure supply continuity. Supply assurance became top of mind at the board level during 2020. As a result, procurement is now tasked with further strengthening third-party risk management. While many procurement organizations feel confident in their existing risk management programs, the mandate is clear to accelerate and enhance these capabilities. This means engaging risk monitoring across a broader set of risk exposures at earlier stages of the supplier life cycle – during the beginning of the sourcing process – and continuing to monitor and mitigate risks using real-time data and insights through the full supplier life cycle. Visibility and timeliness are key in risk management. Procurement must use the proper digital tools to maximize visibility throughout the supply chain, and leverage market intelligence data from multiple internal and external sources.
3. Act as a strategic advisor to the business. Organizations acting as trusted advisors leverage top talent to deliver consistency, agile behavior, and a deep knowledge of both the business and supply market. That allows them to maintain a collaborative, proactive partnership with stakeholders, and enable business success. In the next normal, procurement will elevate the role of its business partners to business enablement leaders – strategic procurement leaders who are aligned to key stakeholders and business delivery points to maximize a procurement business partnership. Business enablement leaders coordinate business support across operating model nodes.
4. Accelerate procurement digital transformation. The crisis pushed procurement beyond its traditional hesitancy to adopt new tools. In the future, success will depend, in large part, on broader implementation and adoption of modern enabling tools, including newer capabilities such as artificial intelligence (AI) and smart automation. While procurement teams have been experimenting with these technologies in limited use cases, it must now scale up to apply these technologies to more novel use cases to expand adoption throughout the function. Modernizing legacy technology platforms are critical, but to achieve transformational change, these projects must be treated as broader business change projects that have an impact on roles, responsibilities and skills, rather than only involving technology transformation.
The adoption of AI-enabled and cognitive tools is expected to remain constrained, with executives forecasting a 11% increase, despite their support of analytics and machine learning to provide better answers more quickly. They project a similar increase in the adoption of chatbots, which reduce friction in the human/machine interface, using natural language recognition. More broadly, we anticipate an increase in deployment of portals, data visualization tools and advanced analytics. Combined, these new technologies provide the opportunity for procurement to become much more data and insight driven, allowing teams to unlock more savings value, to improve process delivery and the end-user experience.
5. Improve procurement agility. Procurement agility is critical for success, yet falls short of business expectations for the second year in a row. Top performing procurement groups can predict and quickly respond to changes in the external marketplace, as well as business expectations, but they require an agile operating model and related processes to enable that flexibility.
In a procurement context, the meaning of agility varies by organization, but some capabilities are broadly applicable, such as transitioning orders quickly to back-up suppliers, mitigating external risk factors, preparing for merger and acquisition activity, or preparing for other supply chain risk and disruptions on an ongoing basis. This applies to indirect procurement – for example, personal protective equipment during the COVID-19 crisis – but it has the highest impact and meaning in direct procurement.
6. Modernize procurement application platforms. Modernizing – consolidating, upgrading and migrating – the technology supporting the procurement function is critical for efficient processes, customer-centric workflows and user-friendly interfaces. These tools will enable agile behavior and free up time for strategic work. According to the 2021 Key Issues Study, procurement is halting investment in legacy or on-premise solutions, while 29% and 22% of organizations plan to grow cloud-based core procurement applications and best-of-breed solutions, respectively. This indicates a widespread move to digitally enabled procurement operations.
7. Align skills and talent with changing business needs. Adapting the procurement talent model is long overdue. Procurement will need to update both soft skills (e.g., strategic thinking and business acumen) and hard skills (e.g., analytic decision-making and technology savviness). Organizations also need to consider how organizational models are changing and the general increase of virtual work. This means adapting teams to become global or agile and ensuring employees have the tools they need to succeed in new environments.
8. Improve analytical and reporting capabilities. Among the top procurement issues, this was designated as having the lowest ability to address. And accordingly, 74% of organizations report having a current initiative underway to enhance and further develop data, insight, and analytics capabilities. Developing modern analytical capabilities is a complex process. Setting up a strong master data management program is the first – and one of the most critical – steps. Without access to extensive, trustworthy data, little can be gleaned from its analysis. Procurement must also carefully place resources with strong analytical skills and provide them with modern digital tools. Developing analytical skills – internally and through external hiring for highly skilled roles – is essential for strategic decisions, predictive insights and agile behavior.
9. Enable corporate sustainability goals. For the first time ever, sustainable procurement has become one of the function’s top 10 issues, representing a broader shift toward a heightened importance of corporate social responsibility. In the past, sustainability meant little more than complying with regulations. Today, it generates business value through reduced costs, risk management and improved brand value. Over the years, environmental protection has become more important to government, businesses and consumers. It is also now at center stage in many discussions on corporate responsibility – many companies, in fact, have disclosed aggressive targets to the market that need to be fulfilled. The increased exposure has led to a sharp rise in the number of organizations and people willing to invest in sustainability initiatives. Additionally, business ethics continues to be an area that procurement groups target when working to attain more sustainable efforts and development. And labor and human rights – the third pillar of sustainable procurement – addresses the cultural well-being of people.
10. Increase spend influence. Increasing spend influence is a constant focus of top-performing procurement organizations. Business partnership, customer-centricity and agile processes are all factors in spend influence, but none is more important than procurement’s ability to bring something new to the table. Procurement must first understand what the business is looking for and then organize around those needs – for example, negotiations expertise or market intelligence – to deliver value.
Understanding the hurdles to procurement transformation
According to our 2019 Procurement Transformation Poll, fewer than one-half of procurement transformation initiatives consistently meet or exceed management expectations. According to the procurement executives surveyed, obstacles to success begin with stakeholder resistance to change or cultural resistance. As procurement enters the new normal, it is critical to bring employees and stakeholders along at the right pace and with as much information and buy-in as possible.
The second-greatest challenge is procurement’s lack of critical skills. Procurement must have the appropriate skills and competencies to support its own transformation efforts, or progress is impossible. Overall, procurement’s hurdles in 2021 look much like they did in 2020, indicating the need for continued focus on people development and engagement.