Executive Summary: Achieving Digital World Class excellence
In the face of economic challenges, companies are recognizing the value of resilience and agility. Research shows that Digital World Class organizations – those with top quartile performance in business value and operational excellence measures – navigate uncertainty more adeptly. They excel in data utilization, efficient execution and talent attraction. These leaders operate 21% more cost-effectively, with 86% higher perceived value as business partners.
Their advantage stems from six dimensions:
- Technology: Automation mastery streamlines transactions and processes
- Data: Skilled analysis leads to more accurate forecasts and informed decisions
- Cloud: Agile architecture enhances performance
- Operations: Insourced work and partnerships yield tangible gains
- Partnering: Effective business partnering helps achieve enterprise objectives
- Talent: Investments yield skilled, aligned professionals
Proactive digital leadership propels companies toward Digital World Class success, positioning them for growth and efficiency amid uncertainty.
Digital leadership drives resilience
Multiple macroeconomic factors – including inflation, geopolitical unrest, supply chain challenges and workforce labor dynamics – have created unprecedented levels of uncertainty for procurement leaders. Additionally, growing concerns about an economic slowdown have increased the focus on profitable growth. While controlling cost is always critical, we cannot underestimate the importance of agility in unlocking the full value potential of procurement. Companies that champion resilience are better able to absorb shock, navigate trials and accelerate past their peers.
Our research shows that resilience is closely tied to digital leadership. Digital World Class organizations – those with top quartile performance in business value and operational excellence measures (see The Hackett Value Grid™) – are better at navigating uncertainty, risk and complexity than peers because they are more disciplined at maintaining strategic focus and more adaptive to rapidly changing circumstances.
Their edge over the competition lies in their ability to harness data more efficiently, provide swifter and superior insights, and use it to inform smarter decisions. They also execute more effectively, focusing on the things that matter most in times of uncertainty. These strengths are attractive to top talent, further positioning them to consistently attract the best minds in the industry.
Digital World Class procurement organizations are more efficient, running at a 21% lower cost than peers – a $6 million advantage for a typical $10 billion enterprise – with 32% fewer full-time equivalent (FTE) staff and are 86% more likely to be perceived as a valued business partner within their organizations.
Why Digital World Class matters
Our analysis shows a strong correlation between Digital World Class and superior enterprise procurement performance. When we compared companies with at least one business services function operating at a Digital World Class level with their industry median, we found a five-year average performance premium across several key financial metrics. While this advantage is not solely due to the presence of Digital World Class business services, these companies do tend to display greater innovation, and operational and commercial capabilities, in part because of their higher-caliber talent, analytical capabilities, and technology architecture.
The Hackett Value Grid™
The Hackett Group defines Digital World Class organizations as those that achieve top-quartile performance in business value (a composite of stakeholder experience, digital enablement and traditional effectiveness metrics) and operational excellence (a composite of efficiency and business process automation metrics).
Built on insights from over 25,000 benchmarking engagements, involving nearly 8,800 major global companies spanning various industries – including 97% of the Dow Jones Industrials, 93% of the Fortune 100, 73% of the DAX 40 and 52% of the FTSE 100 – the Hackett Value Grid is a useful compass for charting the course toward top-quartile performance.
By evaluating their own benchmarking results in the context of industry peers and top-tier performers, companies can gain a unique understanding of their competitive positioning and identify opportunities for growth.
The Digital World Class procurement gap remains stable
The Hackett Group annually measures the gap in cost between Digital World Class procurement functions and their peers. Over the past year, the cost structure for both peer and Digital World Class companies has risen due to recent high inflation rates.
Both the peer group and Digital World Class procurement functions have operating costs similar to 2021, which is likely a reflection of the increased activity that has been demanded of all procurement organizations as they have dealt with supply disruptions originating from the COVID-19 pandemic and grappled with inflationary price increases spurred on by continued economic challenges, while simultaneously being asked to bring robust support to environmental, social and governance (ESG) initiatives. Despite that, Digital World Class organizations have still maintained a cost advantage of 21% in 2023 compared to the peer group.
Elements of Digital World Class procurement
Top-performing procurement organizations have a 38% greater technology cost as a percentage of spend compared to the peer group, demonstrating the investment in technology that Digital World Class procurement organizations are making. This investment supports efficient transactional processing and enables strategic procurement activities with emerging functionality such as category management tools, project pipeline and savings dashboards, and supplier risk and performance management.
While overall operating cost rose for both peer companies and Digital World Class procurement teams, there is a marked 15% increase in technology costs for top-performing organizations from 2022 to 2023. Not all technology investments are associated with labor-eliminating automation, however, as the most important technology investments enabled a shift to higher value-added activities.
Digital World Class procurement organizations have traditionally run with far fewer FTE staff than peers and that gap remained at 32% across all procurement FTEs in 2023. Digital World Class procurement organizations slightly decreased total FTEs per billion in spend than peers for operations and compliance, sourcing and supplier management, and management and administration roles. The most notable difference in staff allocation is seen in operations and compliance roles, where top-performing teams have 56% fewer FTEs compared to peer companies. On the flipside, procurement planning and strategy roles comprise 11% more FTEs for Digital World Class procurement teams. This shift of resources into higher-value roles explains their superior value contribution. It also enables them to have a 15% greater management span of control (ratio of staff to managers).
There is convincing evidence that peers have not embraced automation at the same level of Digital World Class procurement organizations. For example, Digital World Class teams electronically process 27% more requisitions and have 1.7 times more integration of procurement’s primary application with other procurement functional applications.
The Digital World Class procurement advantage
Beyond operating with a 21% cost and 32% FTE advantage, Digital World Class procurement organizations excel across all facets of business value and operational excellence. Here are some highlights:
Greater spend influence
Being able to manage and influence a company’s spend is a key enabler to driving cost savings for an organization, and Digital World Class procurement organizations influence or manage 20% more spend than the peer group. Top-performing procurement teams are also 23% more likely than peer companies to get involved at the start of the sourcing process when requirements are being defined. This usage of strategic sourcing enables procurement’s ability to guide the selection of suppliers that will best meet business requirements. Our benchmarking analysis shows that greater influence helps Digital World Class procurement teams improve supplier management by streamlining the number of suppliers being used by the enterprise to 3.6 times fewer per $US billion in spend as compared to peers.
More focus on value creation
All procurement teams have been battling hard against inflationary price increases, as reflected in higher levels of total procurement cost savings for both Digital World Class procurement organizations and the peer group when comparing year-on-year savings generated in 2022 and 2023. Top-performing teams, however, return 1.9 times more overall cost savings as compared to peer companies, and have also increased the savings contribution from 2022 to 2023 at a rate that is 4.9 times faster than the peer group.
Digital World Class procurement teams also exhibit superior value creation when measuring return on investment (ROI). Top-performing companies in 2023 have an ROI that is 2.4 times greater than the peer group.
Digital World Class procurement organizations experience a 17% shorter sourcing cycle time – the business days from communication of requirements by the end user to the signing of the supplier agreement. For transactional processes, Digital World Class procurement teams also react faster than peer companies, such as 42% quicker ad hoc purchases, and 66% faster catalog order processing. This enables them to react faster and influence a higher level of spend – a key source of sustainable competitive advantage.
Process automation allows these teams to work faster and deliver value sooner. For example, they are 1.3 times more likely to electronically process purchase requisitions and purchase orders (POs), while also electronically processing 5.2 times more PO change orders.
Elevated stature as a business partner
Advantages in spend influence, value orientation, and speed contribute directly to greater enterprise agility and resilience. It is not surprising then that Digital World Class procurement organizations are 86% more likely to be viewed as a valued business partner. This also carries through to internal customer ratings of procurement services where top-performing teams are two times more likely to be rated as exceeded expectations (i.e., excellent) versus peer companies.
That said, both Digital World Class procurement organizations and peers have significant room to continue improving their stature as a business partner. Procurement executives ranked this as a top 10 priority in our 2023 Key Issues Study.
Digital World Class procurement organizations get it done by focusing on six key dimensions
1. Technology enablement
Procurement technology adoption has traditionally focused on enabling core transactional processes with both upstream and downstream procurement tools. According to the 2023 Key Issues Study, the most commonly adopted technology was spend analytics (93%), followed by e-procurement tools (77%), e-invoicing and contract life cycle management (76%), e-sourcing and service procurement (74%), e-payables (70%), and supplier onboarding portals (68%).
The adoption of supplier life cycle management tools and supporting/emerging technologies, however, is not as extensive. Digital tools, such as robotic process automation, artificial intelligence, chatbots and blockchain, are not widely adopted. There is still opportunity for procurement teams to reimagine how to use technology to enable more strategic aspects of procurement beyond transactional processing.
Digital World Class procurement organizations excel with core transactional processes, achieving 100% electronic processing of purchase requisitions, POs and PO change orders. They are also adopting value-enabling technology to source 6.9 times more spend through eAuctions than the peer group.
2. Data and analytics
The heightened demand for a faster and more accurate insight-driven approach to decision-making is forcing organizations to rethink their existing data analytics approach and required tools. In our 2023 Key Issues Study, improving analytics and insights capabilities was again a top 10 procurement function priority (No. 5). A critical enabler is making ever-expanding sources of reliable, up-to-date, and forward-looking data and intelligence available to end users to support procurement executives’ other top priorities such as ensuring supply continuity, combating inflationary price increases, and strengthening third-party risk management visibility and capability.
Overall, 48% of procurement teams have started to deploy advanced analytics tools, with 73% reporting that these tools are meeting or exceeding expectations. Digital World Class procurement organizations have a head start in developing this key capability because they have 11% more staff (FTEs) focused on procurement planning and strategy.
3. Modern cloud architecture
In the Digital World Class procurement transformation, legacy systems are integrated or retired, focus is put on adopting modern technologies, applications are migrated into the cloud and data is integrated. Modernizing architecture design and managing it effectively are critical for simplifying the complexity. The Hackett Group’s 2023 Key Issues Study found that 40% of procurement executives thought that current legacy applications are limiting agility, functional capabilities and the ability to be competitive. Additionally, 38% of procurement executives said their organizations have legacy solutions that must be replaced.
The most impactful aspect of procurement architecture modernization is the transition to the cloud. The Hackett Group’s 2023 Key Issues Study found that 32% of organizations have implemented a cloud-first approach to new applications in the past five years, and 31% are planning to migrate most transactional and analytical functions to the cloud in the next three to five years. Nearly one-quarter (23%) of respondents expect their organization to be 100% in the cloud by 2025 – a significant increase from the 7% of companies that run completely in the cloud today.
4. Operating model evolution
Future operating model success depends on decisions about scope, modality and placement of work that leverages organizations’ centers of excellence (COEs), customer-facing business units, global business services (GBS)/shared services and strategic outsourcing partnerships.
In The Hackett Group’s 2023 Key Issues Study, the distribution of strategic work volumes remained stable from 2022 to 2023. Study participants report most work remains in corporate procurement teams (53%), followed by business units (26%), GBS/shared services (11%), COEs (8%) and outsourcing partners (2%).
The use of a COE allows procurement teams to consolidate activities requiring critical and/or specialized skill sets, with a focus on developing it as a core competency. According to The Hackett Group’s 2023 Key Issues Study, activities most provided by a procurement COE were:
- Support strategic sourcing (63%)
- Knowledge management (58%)
- Performance measurement, savings and value tracking (57%)
- Technology support (57%)
- Contract and commercial excellence (51%)
5. Business partnering
Increasing expectations are placed on procurement teams as their wider organizations look to procurement to enhance their risk management capabilities, support the digital transformation agenda and enable corporate ESG objectives. As procurement continues to evolve its value proposition and elevate its trusted advisor status, formalizing a business partnering approach is critical to engage and influence at a more meaningful level across the company.
Digital World Class procurement organizations are 86% more likely to be viewed as a valued business partner. This also carries through to internal customer ratings of procurement services where top-performing teams are two times more likely to be rated as exceeded expectations (i.e., excellent) versus peer companies.
In The Hackett Group’s 2023 Key Issues Study, the most common actions to improve business partnering capabilities are collaborative in nature: establishing a formal governance model with the business (67%) and improving the information flow with business stakeholders (65%).
6. Talent management
Although aligning skills and talent with changing business needs fell out of procurement executives’ top 10 priorities for 2023 in The Hackett Group’s 2023 Key Issues Study, it is still featured as the top procurement improvement initiative for 2023, with 68% of teams focusing on talent management. Procurement executives also report an advanced level of maturity in this area, reflecting the confidence that organizations feel in their ability to address talent management challenges in 2023.
In The Hackett Group’s 2022 Source-to-Pay Talent Study, 84% of respondents in top-performing organizations reported that executive leadership view people/human capital as either the single most important or a major factor that impacts overall enterprise performance.
Digital World Class procurement organizations are again leading the way on key talent management performance compared to peer companies. Top-performing teams have a voluntary staff turnover rate that is 28% lower for manager employees. For these same manager employees, tenure with the organization is 1.5 times longer. Digital World Class procurement teams also invest more in training, with 2.6 times more external training hours and 1.8 times greater internal training hours. These teams also manage the retention of critical talent more proactively, being 3.4 times more likely to have a formal retention plan for high-potential employees.
An action plan for achieving Digital World Class
With so much uncertainty all around us, this is the time to be proactive and accelerate digital leadership. Companies that forge ahead with confidence will be best positioned to accelerate growth, gain market share and – yes – run more efficiently. Here’s how:
Are you ready to close the gap to Digital World Class procurement performance?
Backed by our unparalleled benchmarking data and best practices repository, as well as experience across the full transformation life cycle, The Hackett Group is ready to support:
- Performance benchmarking and best practices
- Digital transformation strategy, smart automation and analytics
- Procurement and supply chain service delivery model design, implementation, and optimization
- Talent management, skills and competencies, role definition, and career pathing
- Digital procurement solutions strategy, blueprint, tool selection and road map
- Technology road map, cloud migration and modern architecture
- Performance management and analytics
- Master data management and architecture
- Spend management and analytics
- Working capital and cash acceleration
- Sales, general and administrative cost optimization
- Transformation management office, change management and communications implementation
Contact The Hackett Group to start your journey toward Digital World Class success.