2024 Procurement Key Issues Research – Transcript

January 30, 2024
Season 5, Episode 11

Chris Sawchuk:

When you look back at last year, our No. 1 priority was supply continuity, followed by combating the inflationary increases that we were dealing with. And No. 3 was reducing cost – spend cost. What we see this year is those same top three, but the order is different. No. 1 is improving spend cost reduction. Not only is there a focus on improving the margins in using cost to help us do that, but it’s the velocity that we see organizations having to get at this that has been quite remarkable.

Announcer:

Welcome to The Hackett Group’s “Business Excelleration Podcast.” Week after week, you’ll hear from top experts on how to avoid obstacles, manage detours and celebrate milestones on the journey to Digital World Class® performance. How have the priorities for procurement leaders changed for 2024? What role will generative AI and technology overall play in helping procurement achieve its goals? On today’s “Business Excelleration Podcast,” we discuss findings from The Hackett Group’s 2024 Procurement Key Issues research with Senior Research Director Amy Hillcox and Global Procurement Advisory Practice Leader Chris Sawchuk. Amy and Chris, welcome to the podcast.

Amy Hillcox:

Hello. Thank you.

Chris Sawchuk:

Yeah, thank you, Gary.

Gary Baker:

Amy, why don’t you get us started by telling us a little bit about the Procurement Key Issues Study overall?

Amy Hillcox:

Thanks, Gary. I think one of the most important things about the Key Issues Study is this is a study that we run each year. I’d say it’s probably our cornerstone study. It’s a cross-functional study, so we’re going to talk about procurement today, but we also run this study with our other sort of functional areas like finance, human resources, information technology, and GBS. And one of the unique things about this study is it’s geared toward executives. So we’re really looking at the viewpoints and perspectives that leaders across some of these functions have in terms of what they expect to be happening in the upcoming year. The studies run from September to October of – would’ve been 2023 – the prior year. And this is really a great study because it gives us a pulse – if you like – in terms of where people are when they’re looking forward to 2024 and looking at what they think they need to accomplish. And also what business environment they’re going to be operating in, in the upcoming year. It’s a little bit of a crystal ball – if you like – view of what people and teams are expecting for 2024.

Within the procurement respondent base, we have a very senior perspective – 72% of our respondents this year were at director level or above. The members and the people who participate in this study tend to come from our member base, which is large multinational companies and brands. And this year we have a fairly even split between manufacturing and services companies. It’s usually more weighted toward manufacturing companies. So this year I think it’s a bit more balanced in terms of the overall perspective. And 63% of our respondents come from North America. That’s not surprising because that’s where the bulk of our member base is, is in North America, but we do have representation in the data from all of the major regions. So we have respondents from Europe, APAC, Central and South America, as well as Middle East and Africa. So it does give us a global view of what’s going on in the world of procurement for 2024.

Gary Baker:

So, as you said, we get respondents from all across the world of business services – not just HR. What are some of the key takeaways this year from an enterprise perspective?

Amy Hillcox:

That’s great because one of the things that we do is we will ask a set of what we call enterprise questions. And these questions are geared toward understanding from the executives across the different functional areas, what they expect to happen in 2024 for their organization. So what’s the business environment going to be like? What things are they thinking about in terms of their planning when they’re looking ahead to 2024? And one of the questions that we ask is about threats to business success.

And when we look at that specifically for 2024, I think it really reflects what we’ve seen from a macroeconomic perspective over the last couple of years. Coming into 2024, many economists are once again saying this might be the year we have a recession. Slower economic growth is being projected for the third year in a row. And the other thing that we’re seeing out there from a macroeconomic perspective is headline inflation rates. While they have decelerated, we’re still in an inflationary environment, so inflation is still something that organizations are having to grapple with. Just the rate of inflation isn’t growing as quickly as it was in 2023, maybe 2022. So we’re still in an inflationary environment, and there’s a lot of uncertainty around exactly where the economies will go.

The other thing that we’re seeing is a stat recently saying that about 50% of the world’s population is going to be voting in a major election this year. So the U.S. – that would be the presidential election we have coming up. United Kingdom has a general election to reelect prime minister. So there are lots of governments that are potentially changing over. So I think there’s some built-in uncertainty as well around which direction countries might be headed as they reelect new leaders. So when we asked the question around what are your threats to business success in 2024, unsurprisingly, at least for me, knowing where we’re at and where we’re headed from an economic perspective, our top three concerns were around the economy. So No. 1 was inflation. No. 2 was recession. No. 3 was interest rates.

We also saw, if we’re going to round out the top five concerns, at No. 4, there were concerns around talent. So having the shortage of skills or workers that you need to achieve your objectives. And No. 5 was competitive threats. So if we kind of think about what organizations more broadly are concerned about for 2024 and being able to achieve success, it’s economic, talent and competition concerns. But when you look at their priorities for 2024, so we also said, “What are your business objectives? What are your main priorities for 2024?” The top two are, again, sort of economic-related. It’s margin improvement or protection and revenue growth. The third one is customer focus, which really helps with one and two. And the fourth one is agility. And that’s really that ability to be able to pivot and react quickly.

So when we talk about agility in the Hackett sense of the word, we’re talking about your ability to react quickly and pivot to new priorities. So for me, if I look at the priorities, it’s really all around managing the impact of the uncertainty that you have in the economy and being ready to react as things potentially change in 2024. We also asked a question around risk mitigation. So what are you doing about it? Most organizations were looking at process efficiency type of activities, so making your processes more efficient, automating processes where you can. Also focusing on working capital, which isn’t surprising since we’ve seen increasing interest rates as well over the last couple of years.

The thing that I found interesting if you look at those risk mitigation activities, the focus is on what I would consider sort of plastic, trying to do more with what you already have. So being more efficient with the set of resources you have. Some of the more drastic or dramatic things that we saw, particularly like in COVID times, around hiring freezes, staff reductions, salary freezes – those are low on the list. So when I look forward to 2024 and look at what enterprises are thinking about and considering, they’re really preparing to be able to react to the uncertainty that shows up and also to be prepared should there be an economic downturn – be prepared to deal with that rather than reacting to it as it happens to them.

Gary Baker:

No, that’s a great look at the enterprise perspective. Chris, can you take a dive into the top 10 list for procurement’s key priorities and kind of walk us through some of the highlights?

Chris Sawchuk:

Yeah, sure, Gary, and what I want to do is sort of going along with what Amy highlighted. I think it’s important that organizations understand the context of the broader environment as they start to consider and in some ways may react to what are these priorities that we have in procurement and supply management. As Amy highlighted earlier, we’ve been doing this study around these priorities for quite some time. I think it’s been over 15 years. And as you look at this, I think first it’s important to understand how we gather this information. And we went out to a larger population, as Amy has highlighted, to gather this information. But in understanding the top priorities, there’s really two steps that we went through to understand what they are. One is we went out with a listing that was over 20 different priorities that organizations had the opportunity to vote on. Is this a priority for my organization in 2024 and a bit beyond?

The second thing is once I understand is it a priority, to what degree of a priority is it? Is it a critical priority? Is it a high priority, a medium priority, etc.? And that helped us to rank these various priorities of the top 10 for all of these organizations. So what I want to do is go through what those top 10 are, and there are some surprises, I think, comparatively to what we have seen over the last couple of years. So when we look at the priorities, the first thing that’s evident is that the top three priorities that were the top three priorities in 2023 and the year before, are the same three top priorities in 2024. Now, it’s a different order. When you look back at last year, our No. 1 priority that was highlighted from this global set of procurement organizations was supply continuity, followed by the whole struggle, and I’ll say combating the inflationary increases that we were dealing with as organizations. And No. 3 was reducing cost – spend cost within our organization.

What we see this year is those same top three, but the order is different. No. 1 is improving spend cost reduction within our environments. Not only is there a focus on improving the margins within our company and using cost to help us do that, but it’s the velocity that we see organizations having to get at this that has been quite remarkable. And this all really started in the beginning of 2023, and I’d even argue, at the end of 2020. And as we went through 2023, the focus on spend cost reduction only increased throughout the year. As we’re looking at 2024, that is on a global basis the No. 1 priority. Now, I would be remiss not to highlight some of the regional differences that we see within organizations, and one of the ones that I wanted to highlight is the difference between what we’re seeing in North America specifically and more dominated by the U.S., and what we’re seeing in Western Europe.

And so when we look at those top three priorities I mentioned on a global basis, what we are seeing is that cost being the No. 1 objective. But when we look at that on a regional basis, cost is No. 1 within the U.S. North America. But when we look at Europe, actually it’s the whole focus on dealing with the inflation within the environment. So we do see some of these regional differences between organizations and the population of organizations in these different areas. Now, as we further go down and we look at No. 4, one of the things that we see here is something that’s perennially been in the top five for the most part over the last five years, and that is procurement acting as a strategic advisor to the business. How do we become more strategic?

And when I say a strategic advisor, what you define that is somebody that’s being sought after for their opinion, for their guidance, for their insight, for their intelligence in terms of what can they help us understand. How can we leverage more effectively to supply markets to create advantage in our go-to-market efforts, or are there risks that we have to be concerned about, etc.? And so what you’re seeing is that procurement understanding that if we’re going to be, and procurement’s going to bring more value to enabling the success of the business, it needs to be more of an advisor to them. And that requires a key enabler. And one of those enablers is having the intelligence – the insight as to what’s going on within the supply markets – that can be leveraged by those businesses themselves. Now, something different at No. 4, something that we haven’t seen in the top 10 for a number of years, and this is actually focusing on the operating model – the procurement organization itself – transforming that operating model. And what’s interesting about this and why I believe it sort of elevated itself is because of the current environment.

I mentioned earlier that one of the key areas of focus for organizations in 2024 in procurement is reducing the spend cost of our organizations, getting back at really rearchitecting a more cost-effective supply base itself, trying to claw back some of that inflationary increases that we’ve taken on over the last couple of years. And so as part of that, that’s not only focused on our external spend, but we’re also looking at that from our operating model itself. I would also argue that as we look at transforming the operating model, there’s a lot of other things that have emerged over the last year, and more specifically areas around generative AI, and what might be the impact on our organization from those types of technologies and capabilities as we look forward, understanding that those impacts can be more substantive as we look forward.

No. 6 is something that’s related to No. 5, but it’s really something that we have seen in our top five for a number of years now, and it really started to emerge probably about five years ago, and it’s the whole focus on digital transformation. How do we take a more digital-first, technology-first view when we look at the transformation of our organizations and modernizing the landscape of that environment? As we go to No. 7, what we see is something that we dealt with over the last several years and that is risk and the disruptions, starting with the disruptions that occurred as a result of the COVID pandemic starting in 2020, and then you went into ‘21 and you had the Texas freeze, and then we went into ‘22 and we had the Ukraine-Russian War and other disruptions that were disrupting our supplies. What we have seen is this elevation of focusing on risk – not just the supply continuity – which is No. 2, but also broader risk, whether that’s risk around the intellectual property and the protection of our intellectual property within the supply chain itself.

No. 8 is focusing on analytics and the ability for us to create insights and intelligence from the information that we have access to within a supply management organization. One of the things that we highlight with organizations is that critical to our future and our success is the data that we have access to and growing that data in terms of volume, in terms of the validity of that data, in terms of the insights and the recency and the timeliness of that data, the velocity by which we can get access to that.

What that does provide us is a level of intelligence. Many ways, if you look at supply management over the last several decades, a lot of our focus has been on our ability to execute processes. And what you have seen with the more access to data and our ability to transform that data into intelligence and doing it in a much more efficient and fast way provides an advantage, especially if we’re able to do it faster than our competitors and peers in the market are able to do that. And by being able to do that, it does allow us to continue to enable our No. 4 priority, which is being that strategic advisor to the business.

Now, one of the areas that’s surprising to some organizations is that at No. 9 is to focus on embedding sustainability within our environments – within our supply bases, our supply networks, our supply chains. And this has been something that has been a focus of our organizations. And if we went back two years ago, sustainability was No. 4 as a priority. Today, it’s a little bit further down from where it was before, and we certainly see geographical differences, with sustainability more elevated at a higher than nine position in Europe versus the U.S. and North America where it’s further down and not necessarily in the top 10.

People ask, they say, “Well, Chris, why do you believe that is?” And I think where we are is a couple of things are happening. First is the focus on cost and the current concerning environment economically that we have has elevated some other priorities. At the same time, we do believe that sustainability and this focus in this area has become much more embedded in what we do. And in some ways it’s not gone away. It’s just become much more embedded in the way that we do business. And so some of the pivot that we’ve made more recently on some of the economic concerns where cost has sort of overtaken that and sort of in some ways just restructured the ranking of these priorities.

The last area, and again, this is sort of aligned with what Amy was saying when she was talking about agility as being one of those areas, it’s No. 10 on the procurement list. And as Amy highlighted, agility, it’s not the only the ability for us to be able to react quickly to something or a disruption that occurs within our environment, but it’s also the ability to be able to be more predictive – to get ahead of things that may be happening.

And so with that, what we see are these priorities, but the key thing, I believe, Gary, as you asked about this, is that we do see these variances. I want to mention one variance that I do see in the priorities, and one of the things that we saw in North America in the top 10 priorities was this idea of creating competitive differentiation within the supply management organization – and not necessarily within the supply management organization – but our ability to create differentiation for our companies – competitive differentiation. We believe that this is something that we have to think about more and more on a go-forward basis. It’s not just about our ability to deliver on the spend cost reductions, etc., but the real question is whether or not what we’re doing either through the intelligence that we have access to, the cost reductions or risk reductions and mitigation, etc., does it create an advantage for our company? And this is where we started looking at and start trying to determine how do we actually show that and make it visible to the overall organization itself.

Gary Baker:

Chris, thanks so much for that. Amy, sometimes it seems like generative AI is all anybody’s talking about today. What’s happening on that front in the context of procurement?

Amy Hillcox:

We’ve heard lots and lots and lots about generative AI over the course of 2023. We did ask some questions sort of across the enterprise level to get an understanding of where organizations are on their AI journey, and the majority of organizations are still in those initial stages of exploring and trying to figure out how they can take generative AI, adapt it, and apply it to their environment. And then also in those initial processes, sort of defining your strategy and how you want to potentially implement this technology. There’s only a very small sort of portion of our respondent base – I think about 15% – that said they’re actually piloting within some of their business areas. So it’s still early days. So despite all the hype and the discussion around generative AI, I think it’s still early days for generative AI.

For me, that makes sense because if you kind of think about ChatGPT, which I think has been the impetus of the interest in generative AI for a lot of people, ChatGPT is based on a large language model, which is basically the internet. So great if you want to find out about hunting dogs, which is what I’ve used it to do, but not so helpful if you’re trying to find domain-specific knowledge and expertise. So I think there’s a data challenge, if you like, for organizations to solve in terms of how do you use those large language models that you need to drive generative AI to help with the specific business challenges that you have.

Now, having said that, when we ask procurement teams, “Are you having a look at generative AI and how you can use it?” about half of our procurement respondents are evaluating the use of generative AI in procurement. And the following question we then ask is: “Well, what opportunity areas are you looking at?” So we ask the following question around opportunity areas for generative AI in procurement. Where people see the most potential at this point in time is around spend analytics and contract life cycle management and category management.

Now, for me, most of those areas make sense, particularly contract life cycle management, if you think about the ability to have a tool that can help you with offering, can help you with some of the automating actually getting to the data that sits in your contracts. I’m sure lots of people have contract databases that have a lot of information, but the information isn’t accessible because it’s sitting in a PDF format. So if you can use generative AI to start solving some of those sort of what would be manual processes for you, that makes a ton of sense. Category management is another area where it makes a lot of sense to use generative AI. If I think about the traditional process you would go through to build your category strategy, you go through a process of figuring out what are we spending today, which then means you’re probably in there trying to clean spend data so you can get a clean view for your spend category of what you’re spending – who you’re spending it with.

Then you need to lay in those projections on what you think you’re going to be spending. Then you’re going to want some external market intelligence layered in on that as well as some of that expertise around if I’m managing facilities, for example. What are some of the key levers and approaches that I can use within that category of spend to optimize our commercial outcomes?

So if you can apply generative AI to that scenario where it takes a lot of what’s traditionally been manual work to pull together those different sources of information to provide you with a view of what that category strategy for that category should be, then you can start to ask yourself the question, “OK, well, I used to have to spend two, three weeks pulling together my category strategy. What can I be using that time for now?” And then that sort of moves you into some of these questions around your operating model. So instead of category managers in the future, are we going to have these types of resources who are business partners for specific spend categories? So how do you use those resources? How do you get the value out of generative AI?

I think the other area that is going to be interesting to see how it plays out is when I look at procurement and some of the challenges you have in managing, especially the strategic aspects of procurement. Part of that is around the fuzziness, if you like, in the data. Either your ability to, if you think about something like risk, if I want to manage risk, how do I go get the information I need about my specific suppliers, whether it’s news media information, whether it’s the financial health of that supplier. It might be sustainability – ESG information – I need to build into my risk profile. A lot of that, again, it’s bitty and it sits in different places. And if you can start using generative AI to solve some of these pieces to drive better visibility to the people who are involved in the procurement activity, then I think there’s a lot of really great potential for application of generative AI within the procurement space. But we’re definitely in early days, but it’ll be interesting to see how it evolves over the next couple of years.

Gary Baker:

Yeah, very interesting to see where that’s going to go. Chris, you are the global leader for our Procurement Advisory programs at Hackett. So you spend a lot of time across the table from procurement leaders. What are you hearing from them face to face about the year ahead?

Chris Sawchuk:

It’s interesting, and one of the things that I feel that is a great opportunity is when I have the opportunity to review some of the priorities with organizations. And I’ll give you an example there. Even earlier today, I had that opportunity with a set of leaders of procurement to review what we’re seeing from our research. And the opportunity is then ask them, “What do you think of these? How many of these align to the priorities that you are focusing on as an organization?” And what’s interesting, if I went back five years ago and I would’ve asked organizations after I reviewed the top 10 priorities, “Which of these priorities are ones that you are focusing on as an organization?” And five years ago or maybe even seven years ago would’ve been told, is that No. 1 is a priority, maybe No. 3 is a priority and No. 8. Another organization might’ve told me it was No. 2, No. 4 and No. 7. I was getting a subset of the top 10.

What’s changed fundamentally today and what organizations are telling me is that all of the areas that I’m covering on these top 10 that I just started to review with organizations, that’s that they’re all priorities. What you find is that organizations today have much more on their plate than they did, say, five years ago. Cost savings is one of those areas that’s a perennial top priority for a supply management procurement organization. And then what we saw was that back in 2018, ‘19, the elevation of other areas like sustainability and diversity, etc., these didn’t replace the priorities that were there before. Cost savings didn’t go away. What happened is they augmented it. And so what you’re finding is that organizations have a much fuller plate of priorities than what we saw, say, five plus years ago as we talked with organizations. But if I was to pick one area that organizations have highlighted, it probably would not be surprising that I mention AI, and specifically generative AI is an area that if I’m in a conversation, that tends to be part of it.

As Amy highlighted, we’re in a very exploratory phase here. In our study that was wrapped up at the tail end of October, 50% of the organizations that participated really were not yet doing much with generative AI in procurement. It’s not saying that they’re not doing something with their broader enterprise, but within supply management and procurement. So it was about 50/50. I would venture to bet that if we were to run that same survey with that same population of organizations today, that it would be north of 50%. So we’re starting to see more and more organizations exploring, but pretty much every conversation that you get involved in, including the ones that I had earlier today, generative AI comes up. Organizations are very much in an exploratory phase. They’re trying to absorb as much as they can to understand this particular area and, more importantly, the potential impact it may have as we look further out in our organizations.

I think the last thing that I would highlight, and we didn’t cover this in detail, but one of the other questions that we asked in the study was not just about the priorities, but if these are your priorities, what are you doing to improve the capabilities of your organization and where have you planned to improve capabilities in the organization in the next year? Maybe not surprising, No. 1 was around data. And we already know that data is critical in terms of giving us better generative AI because generative AI – for it to work – it needs access to data that is digital and digitized. And so with that, as we continue to grow our population of data, it gives us much more raw material to work with and apply some of these capabilities, not just around AI, but generative AI.

Right behind that, in terms of the capability improvement areas, data being No. 1, is talent. And why I find that interesting, because I see the future, at least over the next five plus years, it’s truly a blending. It’s a blending of human capability and digital capability. Years ago, I used to show a visual of trying to understand this concept of us blending these capabilities together, and I used to show a picture of Ironman – an individual, a human, a very capable human, an Ironman – who put on that suit, which augmented the capabilities that that individual had in terms of intellectual, because it basically was flying with a supercomputer, ability to fly, the strength, etc. And so what I believe we’re seeing and why talent is identified as an area of improvement for 2024 and beyond is that we understand that we have to continue to upskill and continue to evolve our human capabilities – our talent – to better blend, to better integrate, to better model, and engage with the technology environments that we are building.

Gary Baker:     

Well, great insights I think from both of you guys. Thank you, guys, both so much for joining us today.

Chris Sawchuk:

Thank you, Gary.

Gary Baker:

The 2024 Procurement Key Issues research is available for download now from the Procurement and Sourcing Insights page of our website. We’ll also include a link in the show notes and stay tuned for more in our series on the key issues research in the various functions.

Announcer:

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