Sizing Up the Digital World Class™ Advantage – and the Procurement Operating Model Transformation Required to Achieve It

October 4, 2022
5 Min Read

As companies navigate the impact of both inflation and slowing growth, strategic sourcing, business partnering and supplier management capabilities remain under particularly intense scrutiny. Today’s top-performing procurement organizations have an effective procurement strategy, they help their organizations respond to this environment – in part by running at a 22% lower operational cost than peers. But according to The Hackett Group’s most recent benchmarking analysis, their contribution goes far beyond that.

Let’s take a closer look at their procurement strategy, operational cost and other advantages of procurement organizations performing in the top quartile of both business value and operational excellence – what we call Digital World Class.

 

Digital World Class procurement organizations deliver greater business value

  1. They have a higher degree of digital business enablement through e-procurement.
    Differences in digital business enablement were significant. While many organizations have established e-procurement capabilities, Digital World Class procurement organizations make much greater use of this technology than peers. For example, they have 36% more spend channeled through electronic RFX solutions and 6.9 times more spend sourced through an electronic auction.
  2. That makes them more effective.
    The top-line indicator for most procurement organizations is the ability to drive cost savings. Digital World Class procurement organizations – which influence or manage 27% more of the company’s spend than peers – enjoy a 90% advantage compared to peers on this key metric. Looking beyond this to procurement’s return on investment (i.e., spend savings over the total cost of procurement), the performance gap widens, with Digital World Class procurement organizations achieving a 2.4 times advantage over peers. This is only possible by driving higher spend savings levels while simultaneously reducing overall operational cost.
  3. As a result, they provide a better experience for stakeholders.
    Commensurate with their enhanced performance, these organizations provide an exceptional experience – whether that is working with a department head on a strategic sourcing event, elevating
    third-party risk management, enhancing supplier management capabilities or making it easy for stakeholders to execute routine purchases. Digital World Class procurement organizations are 78% more likely than peers to be viewed as valued business partners and two times more likely to be rated as “exceeds expectations” by internal customers.

 

Digital World Class procurement organizations are operationally excellent

  1. They have significantly greater process automation across e-procurement.
    As an example, these procurement leaders process 34% more purchase requisitions and 41% more purchase orders electronically.
  2. Their team is more efficient.
    They can deliver the business value described above with 33% fewer full-time equivalents per billion of spend. Another example of their efficiency is a 77% lower cost for processing a purchase order.
  3. Their superior efficiency lowers operational costs.
    Because of their superior efficiency, Digital World Class procurement organizations can operate at a 22% lower operating cost than peers. For a company with $10 billion in annual revenue, this translates to a $7 million cost advantage. This enables greater free cash flow to invest in new supplier management, third-party risk management, talent management and other capabilities they need to maintain their advantage.

 

Business value leaders, operational excellence leaders and Digital World Class procurement organizations all deliver real impact

Performance along any location on the yellow “arch” of the Hackett Value Grid may be an appropriate procurement transformation goal, depending on your industry and business strategy.

 
The Hackett Value Grid
 

Business value leaders: typically are companies in fast-changing, growth-oriented industries, such as software and technology, which are primarily focused on driving value through innovation and customer-centricity. Once they have achieved business value leadership, focus can shift toward improving efficiency and propelling the organization into the Digital World Class quadrant.

Operational excellence leaders: generally operate on thin margins, so they have made it their primary focus to drive operational cost-efficiency by capitalizing on continuous improvement opportunities.

In some industries, there may be more variance. For example, a large life sciences company that has less new product development in its pipeline and is maximizing value of the current portfolio may focus on elevating operational excellence, while a smaller, innovation-led life sciences company may opt for a business value leadership strategy.

Our analysis found that, in some cases, procurement business value and operational excellence leaders have significant performance advantages – including lower operational cost and superior return on investment – even compared to Digital World Class.

procurement strategy
 

Orchestrating your own Digital World Class procurement strategy and transformation

Most procurement organizations still have a lot of work to do to move toward performance leadership. Rather than continuing to make incremental performance improvements, you will need to accelerate digital transformation and build a next-generation procurement operating model designed specifically to perform at a top-quartile level. This requires focus in six key areas:

strategic sourcing
 

  1. Technology enablement
    Technology enablement is at the heart of the Digital World Class performance advantage. Procurement process automation initiatives have traditionally focused on transactional areas of e-procurement such as purchase order and receipts processing. But enabling more processes, such as contract life cycle management or supplier performance management through technology, can reduce or even eliminate manual intervention, thus significantly lowering operational cost.

    These organizations have also made substantial inroads in automating knowledge processes, freeing up staff capacity to perform value-adding work in areas such as strategic sourcing and third-party risk management, and building strong capabilities for insight generation and self-service reporting and analysis.

  2. Modern digital architecture (powered by cloud services)
    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. Probably the most impactful aspect of this is the transition to the cloud. Our recent Cloud Services Study indicates that 70% of technology infrastructures will be cloud-based within two to three years.

    Digital World Class procurement organizations are at the forefront of cloud services migration. They have developed clear capability ownership models within procurement via process ownership roles and forged effective business partnering relationships with internal technology groups.

  3. Customer-centric service design
    The expected pace of digital transformation underscores the importance of end-to-end procurement process design and ownership – with customer-centricity at the forefront of design. Customer-centricity is vital to allow procurement teams to increase the level of influence they have over third-party spend. One of the leading impediments to procurement transformation is process and technology complexity. Dedicated global process owners oversee and govern the process, data and technology capabilities and, therefore, can spot bottlenecks and make changes before they have significant customer impact.
  4. Data and analytics centricity
    The coronavirus outbreak and its impact on supply risk management lent new urgency to improving procurement’s data management practices. In our 2022 Key Issues Study, turning data into insight was the No. 6 initiative on the chief procurement officer (CPO) agenda, while reducing supply risk to ensure supply continuity topped the list. The heightened attention to areas such as strategic sourcing and third-party risk management is forcing organizations to rethink their existing data and analytics approach and required tools. Sophisticated procurement teams are creating an end-to-end view of the data and analytics process, automating data collection and embracing new analytics techniques such as predictive modeling.
  5. Procurement operating model evolution
    Digital World Class procurement organizations are evolving their operating model from primarily labor-centric to a hybrid model leveraging advanced technologies and highly skilled labor. Accordingly, the procurement operating model will shift from predominantly functionally aligned resources under the control of the CPO to a hybrid model of functionally and enterprise-aligned resources – creating a future operating model with a more fluid network of resources that can be deployed to support the highest-value activities across the enterprise.
  6. Talent management
    As processes become more technology-enabled or migrate to digital operations centers, leading procurement organizations continue to invest in their workforce by increasing head count in more strategic areas such as third-party risk management and supplier partnering that strengthen supplier management. 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 analytics acumen to drive insight, as well as emotional intelligence for effective business partnering, innovation, and change orientation. In our 2022 Key Issues Study, 72% of procurement leaders said their organizations are already developing plans around addressing persistent structural skill gaps that prevent them from executing on a digital transformation program.

 

Digital transformation matters more than ever

Ongoing geopolitical risks, talent challenges and high inflation threaten the return to stability, growth, and predictable performance – keeping the spotlight firmly on strategic sourcing, third-party risk management and supplier management capabilities. In a recent analysis, The Hackett Group found that companies with a well-coordinated response have a significant pretax margin improvement opportunity – but capitalizing on that requires digital transformation to be a critical part of the response. Without it, margin opportunity dropped nearly in half.

This is why it is so important to accelerate the journey toward Digital World Class procurement now.

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