Procurement leaders have been counting on technology and digital transformation to accelerate performance improvement. But how high can you reasonably expect the bar to go? Now, we have a clearer idea.
In 2021, we incorporated the structural changes associated with technology innovation and digital transformation into our annual benchmarking methodology, creating a new target that we call Digital World Class. Here’s what we found:
In 2021, Digital World Class procurement organizations are operating at 25% lower cost than typical procurement organizations (i.e., peers), with a 33% productivity advantage. But their advantage is not just about cost. They are also able to deliver higher-value services – for example, better stakeholder engagement, supplier relationship management and product innovation. In fact, Digital World Class procurement organizations enjoy a 2.5-times return on investment (ROI) advantage over their peers and are 85% more likely to be viewed by stakeholders as taking a proactive approach to supply risk mitigation.
The bar will continue to go up from here. In this article, we highlight the performance characteristics of Digital World Class procurement organizations and the six key levers that they pull to get there.
Digital World Class™ procurement organizations deliver superior performance on three dimensions
Understanding the sources of Digital World Class™ performance
Rationalizing the legacy technology environment has traditionally enabled top-performing procurement organizations to operate with a lower overall cost, despite incurring greater technology costs. Digital World Class procurement organizations continue to modernize the technology landscape, which explains why their technology cost is 20% greater than that of peers. This also includes investments in emerging technologies such as smart automation, advanced analytics, and collaboration tools that enable greater automation.
Their cost, productivity and technology advantages reflect their ability to substitute tactical areas of labor with technology while also supplementing more strategic roles. As the procurement service portfolio shifts toward higher value-added services, leaders also invest to equip their expanding pool of knowledge workers with modern digital tools.
Furthermore, they employ 33% fewer full-time equivalents (FTEs) than peers per billion dollars of spend; however, the gap is much greater for operations and compliance management FTEs (57%), enabling them to deliver those processes at a 55% lower cost.
Digital World Class™ cost advantage and resource allocation shift
Digital World Class™ procurement organizations excel in six areas
Technology enablement is at the heart of the Digital World Class performance advantage. However, to fully unlock the potential of technology, your organization must also transform in five other key areas. Here’s a look at how Digital World Class procurement organizations do it.
- Technology enablement
Procurement automation efforts have traditionally focused on transactional processes such as purchase order and receipts processing. By upping the automation quotient, the function has been able to reduce or even eliminate manual intervention, thus significantly lowering process cost. Digital World Class procurement organizations have a clear lead in transaction automation over peers and in some cases have reached maximum levels. For example, they have automated dissemination of 100% of purchase orders to suppliers, versus 70% for peers. And 100% of requisitions are processed electronically, versus 67% for peers.
These organizations have also made substantial inroads in automating knowledge processes, freeing up staff capacity to perform value-adding work and building a strong data architecture to enable insight generation and self-service reporting and analysis. For example, 68% of organizations currently have self-service portals or networks deployed, with an expected increase of 21% during 2021.
- Data and analytics
The coronavirus outbreak and its impact on supply risk management lent new urgency to improving procurement’s data management practices. In our 2021 Key Issues Study, improving analytics, modeling and reporting was the No. 8 transformation initiative on the chief procurement officer (CPO) agenda, while reducing supply risk to ensure supply continuity was No. 2. The heightened demand for faster and more accurate data is forcing organizations to rethink their existing data analytics approach and required tools. Sophisticated procurement teams are beginning to create an end-to-end view of the data analytics process, automating data collection and embracing new analytics techniques such as predictive modeling. In fact, 86% and 77% of services organizations and manufacturing organizations, respectively, are currently expanding or planning to expand data sources for risk data and supply/market intelligence.
- Cloud-based modern architecture
The Digital World Class procurement transformation involves integrating or retiring legacy systems, adopting emerging technologies, migrating applications into the cloud and integrating data from disparate sources. Modernizing architecture design and managing it effectively are absolutely critical for simplifying the complexity. Probably the most impactful aspect of procurement architecture modernization is the transition to the cloud. Our 2021 Key Issues Study projects 31% year-on-year growth in adoption of cloud-based core procurement application suites, and most procurement best-of-breed applications are now deployed in the cloud. Digital World Class procurement organizations are at the forefront of architecture modernization and cloud migration. They have developed clear capability ownership models within procurement via process ownership roles and forged effective partnerships with their internal technology groups, leveraging the deep technical skills required in both procurement and the technology organization.
- Operating model evolution
Digital World Class organizations are evolving their operating models from primarily labor-centric to a hybrid model leveraging advanced technologies and highly skilled labor. This transition has far-reaching implications for the procurement operating model. The model will shift from predominantly functionally aligned resources (i.e., under the control of the CPO) to a hybrid model of functionally and enterprise-aligned resources.
One key change will be the digital enablement of global business services capabilities, creating digital operations that fast-track companies’ digital and technology-enablement aspirations. In this future state, the relationship among the procurement organization, internal technology group, and the evolving digital operations organization, as well as external service providers, shifts from a rigid hierarchy to a fluid network of resources that can be deployed or redeployed to support the highest-value activities across the enterprise. Our analysis projects that procurement resource allocation will shift from 14% enterprise aligned today to 53% enterprise aligned in the future model.
- End-to-end process design and ownership
The expected pacing of transformation and deployment of new capabilities underscores the importance of end-to-end process design and ownership within procurement. It is therefore critical for the function to ensure it has capabilities designed to deliver the expected outcomes. Customer-centricity must be at the forefront of these designs. When a process is executed in piecemeal fashion, it is not only more expensive; it also undermines the ability to respond quickly to changes in business conditions or stakeholder demands. Dedicated global process owners oversee and govern the process, data, and technology capabilities from start to finish and, therefore, can spot bottlenecks and make changes more easily. Case in point, about 70% of companies have single process ownership over the source-to-pay processes – an increase over prior years.
With many processes becoming more technology-enabled or migrating to digital operations centers, leading procurement organizations continue to invest in their workforce by increasing head count in more strategic areas. Digital World Class procurement functions have 70% more staff in product design and development roles than the peer group and 15% more in supplier partnering. A highly skilled strategic workforce is at the core of Digital World Class companies as advanced technologies provide new tools to deliver better service for stakeholders and suppliers. These roles require advanced analytical acumen to drive insights, as well as emotional intelligence, relationship management, innovation and change orientation. These roles also require enhanced understanding of business operations and stakeholder needs. Those in digital operations roles will also require new skills. For example, they must understand process mining, intelligent automation techniques and customer-oriented service design.
Mobilizing your journey to Digital World Class™
The key to moving forward is to start by understanding where you can unlock new value:
- Create a baseline of key performance indicators for your current levels of efficiency, effectiveness and experience.
- Assess the capabilities and maturity of your current procurement operating model, resource allocation, and technology effectiveness based on leading and emerging best practices.
- Identify and prioritize performance gaps that outline critical focus areas for accelerating digital progress and future business needs.
From there, you can begin to design future capabilities to advance your digital agenda and chart the road map for achieving your Digital World Class aspirations.
 Procurement operating cost as a percentage of spend; for a $10 billion company, this represents procurement cost savings of $6.9 million.