The past two years have brought unprecedented instability. Yet, when we conducted our latest annual Key Issues Study – during the fourth quarter of 2021 – some executives were already seeing and expecting smoother sailing. About one-third of companies reported stabilized business conditions. Over one-half predicted stabilization in 2022, and only 11% expected instability to continue into 2023 or beyond. That was before news of the COVID-19 Omicron variant, before the reality of emerging inflation and talent risks set in, and before the conflict in Ukraine.
In this article, we highlight results from the 2022 Key Issues Study and implications for procurement leaders in planning through uncertainty – during 2022 and beyond.
Understanding the enterprise priorities
Enterprise digital transformation remains the No. 1 priority, with 61% of companies having a major initiative on the 2022 agenda – up from 53% the previous year. In the face of talent challenges, companies have also stepped up their focus on diversity and inclusion initiatives. More than one-half – 58% – now have such initiatives, compared to just 35% two years ago. On the other hand, sales, general, and administrative (SG&A) cost optimization dropped further down the ranking – from third place in 2021 to fifth place in 2022. This is consistent with an observed shift in focus from margin preservation to growth.
The backdrop of disruption and rapidly evolving business conditions clearly influenced procurement executives’ 2022 priorities – illustrated in the image below. Notably, executives expressed concerns about their ability to meet business expectations in one-half of these areas. Three of these critical development areas – improve analytical, modeling and reporting capabilities; align skills and talent with changing business needs; and improve procurement agility – are closely linked to the ability to reduce supply risk, which was the top overall priority.
Collectively, these 10 top priorities reflect four key themes.
- Developing capabilities to deliver on broader value expectations is critical.
Traditionally, procurement was viewed primarily as a cost-cutting function. Evolving supply market conditions and socioeconomic preferences continue to push supply risk mitigation and corporate sustainability higher in priority, reflecting the ongoing need to shift expectations around the function’s role and value contribution.
Supply chain scarcity, pricing volatility and inflation have elevated topics, such as third-party risk management and visibility of supply, to the board level. Forty-two percent of companies expect higher price and cost volatility to be an enduring characteristic of the post-pandemic business environment – nearly double the percentage that expressed that view last year.
Additionally, sustainability – part of the environmental, social and governance (ESG) agenda – is rapidly becoming a strategic priority for many companies, even in North America. Diversity and inclusion rose to the second most prevalent enterprise initiative last year and held on to this spot in 2022, with 59% of companies now having a major diversity and inclusion initiative in place. Environment/sustainability is not far behind, with 39% of companies running or planning a major initiative. This has important implications for procurement organizations, which must adapt to support the ESG strategy and execution of operational plans.
Collectively, these are issues procurement has already been addressing but for which it hasn’t been measured or given due credit when the singular focus was on cost.
The Key Issues Study also assessed perspectives about key risks to the business in 2022. While concerns about cybersecurity risk remain at a very high level compared to 2021 in light of the current business environment, executives surveyed expressed dramatically greater acknowledgment of supply chain disruption and commodity price volatility. Inflation, which wasn’t even on the risk radar at the time of the previous year’s Key Issues Study, is also considered a moderate business risk now. Most respondents expect these risks to intensify – and procurement will be at the center of efforts to address them.
- Procurement must find the right rigor and focus around digital transformation.
A majority of companies surveyed this year expected accelerated technology innovation and a shift to digital delivery channels for goods and services to be enduring characteristics of the post-pandemic environment. Accordingly, digital initiatives are among the most prevalent major enterprise initiatives planned for 2022: 61% of companies have an initiative related to enterprise digital transformation – more than any other type of initiative – and 39% plan a major technology platform upgrade or new technology introduction.
For digital transformation to be successful, procurement organizations must focus on talent and data, as well as technology. Procurement executives understand the critical importance of developing data and analysis capabilities as a means of achieving their top functional priorities. The percentage of companies that have data analysis and reporting initiatives planned for 2022 is comparable to those purchasing new digital procurement tools and transactional automation capabilities.
Digital workforce enablement and core procurement application suites (cloud-based and legacy) have the highest levels of large-scale adoption to this point, but data visualization and master data management tools are not far behind. The latter two, along with advanced analytics, are expected to be among the fastest-growing technologies in adoption in 2022. These projections reflect the recognition that data and analytics will be key to realizing procurement objectives. Digital operating models require a modern digital architecture, and the research shows that cloud-based core procurement application suites are replacing legacy applications at a rapid pace. These will also be among the fastest-growing technologies in 2022.
It is important to note that the technology adoption expectations of this year’s panel are generally lower than in recent years, and historical projections have not fully come to fruition. For a significant percentage of companies, technologies fell short of expectations.
- Procurement executives remain concerned about the next-generation workforce.
The Key Issues Study confirms and quantifies what procurement executives already know: Every year, they must find a way to do more with less. In 2022, the procurement workload is predicted to increase by 11%, reflecting a broadening of priorities, but with no increase in head count and even a reduction in operating budget. This creates both a productivity gap and an efficiency gap. A 7.5% increase in technology spending – after remaining static last year – demonstrates the growing reliance on technology to increase procurement productivity, efficiency and effectiveness.
This analysis, however, doesn’t tell the whole story. For one thing, the efficiency gap does not take into account anecdotal feedback that procurement salaries are rising. This will lead companies to become more reliant on technology and assess lower-cost workforce options such as physical location. Additionally, the gap in full-time equivalent staff does not consider the perspective of skills. The combination of significantly changing roles and external factors, such as escalating salaries and unprecedented voluntary turnover due to the Great Resignation, will put great pressure on procurement executives as they try to elevate the function’s role as a strategic business advisor and deliver on top priorities.
It is impossible to know how persistent these trends will be and how profoundly they will impact business. But in 2022, there is no escaping them, and procurement organizations must develop specific talent retention strategies to mitigate the impact. Nearly three-quarters of procurement organizations are already developing plans around addressing persistent structural skill gaps that prevent them from executing on a digital transformation program.
While remote work is disrupting the procurement operating model, it is proving to be viable for procurement staff in most industries. This trend supports cost reduction and environmental objectives, making it a win-win for procurement and the enterprise. Remote working appears to be stabilizing and was expected to be at about 89% of the procurement workforce at the start of 2022. However, the balance of work is shifting away from predominantly work-at-home arrangements to a hybrid model.
Disruption will continue – but procurement organizations are preparing
Procurement executives cited the transition to virtual working as the most likely disruptor to their operating model, with the as-a-service deployment model and innovation in artificial intelligence as somewhat likely scenarios. Many procurement organizations are actively planning for these and/or already executing response plans. Nearly two-thirds are currently executing work-from-anywhere plans, while 39% are taking action to establish an as-a-service deployment scenario in three to five years. The fact that so many executives are currently planning their responses to the persistent, structural skills gap suggests that they already consider this a very real issue rather than a potential one.
Sharpen your focus
It’s clear the turmoil of the past two years is not coming to an end – at least yet. The research findings above represent a very broad and ambitious agenda. Procurement leaders will need to be laser-focused – making sure they are investing their time and resources in the areas most critical for elevating their value to the enterprise.
So, where should you focus? That, of course, will depend on your specific needs and operations, but based on our work in the market, we believe the following six areas apply broadly to most procurement organizations:
- Double down on digital transformation
- Produce better insight
- Improve supply chain visibility
- Modernize and virtualize the procurement operating model
- Mitigate the impact of structural talent shortages
- Provide leadership for the enterprise sustainability agenda
Collectively, action in these areas creates agile organizations that can weather continuing change.