Digital World Class® Procurement: Latest Benchmark Metrics and Key Findings – Transcript

Vicky Kavan:                      

The data shows that those Digital World Class^® procurement teams are spending on average 24% less on labor. And in terms of the size of teams, when we are looking at the full-time equivalents – the FTEs – we can see that the Digital World Class^® is also operating with 32% fewer human resources.

Announcer:                       

Welcome to The Hackett Group’s “Business Excelleration Podcast.” Week after week, you’ll hear from top experts on how to achieve Digital World Class^® performance.

Vicky Kavan:                      

Hello, good afternoon. Welcome to The Hackett Group’s “Business Excelleration Podcast.” I’m your host, Vicky Kavan. I’m a procurement advisor based in the UK. Today we’re going to be talking about Digital World Class^® procurement, and the latest Hackett benchmark metrics and some key findings.

With me today I have two colleagues – Kurt Albertson who is a principal in our Procurement Advisory practice, and Jamila Williams who is principal in our Strategy and Business Transformation practice.

Welcome both. Thank you for being here.

Jamila Williams:                

Thank you. Glad to be here.

Kurt Albertson:                

Thank you as well. I look forward to it.

Vicky Kavan:                      

Well, let me just start with a quick explanation of Digital World Class^®. Now, if folks are intentionally listening to a Hackett podcast, they’re probably very familiar with the term. But just for any new joiners, our colleagues in the Benchmark practice plot all of their benchmark clients on a grid of operational excellence against business value. So operational excellence covers efficiency – how quickly something can be done, how cheaply can it be done, cycle times, productivity levels and so on. And then business value covers the outputs – the effectiveness of that function. So how well are we doing – quality savings, in our case, in procurement? How happy are our stakeholders with their procurement experience?

And then there are a small group of procurement teams who achieve top- quartile performance in both operational excellence and business value. And it’s this group of procurement teams that we refer to as Digital World Class^®. So we use that term quite a lot. The median data point is the one that you’ll generally see us refer to. And I guess the key point to take away is that these are all real- life companies and empirical data points.

So when the data for this year was updated and released a couple of months ago, our research team analyzed some of the key differences between the Digital World Class^® procurement functions and the rest of the peer group. And probably the first key point to call out is on the cost to deliver. So once it’s normalized for external spend, the Digital World Class^® functions cost 21% less than your average peer group procurement function. So these teams are spending less on labor, outsourcing, and overheads, but – and this is the really interesting part from our perspective – they don’t spend less on technology. So the data shows that the Digital World Class^® companies are investing around 30% more on supporting technology for their procurement functions.

And Kurt and Jamila, this will be one of the points obviously that I want to get some more perspectives from you as we go through.

Kurt Albertson:                

And I think that trend has only accelerated over the last several years since we’ve been looking at this study. So that trend of spending more on technology is certainly a fundamental trait of those Digital World Class^® performers.

Vicky Kavan:                      

Terrific. And then the next key thing that I would like to call out really from those findings is how the labor is allocated by activity. So the data shows that those Digital World Class^® procurement teams are spending on average 24% less on labor. And in terms of the size of teams, when we are looking at the full- time equivalents – the FTEs – we can see that the Digital World Class^® is also operating with 32% fewer human resources.

And secondly, how they spend their time is also very different to the peer group. So we have fewer than half of the hours being spent on transactional procurement activities within those leading teams. Approximately 10% to 15% fewer FTEs on the sourcing, supply management, and functional leadership, but actually more resource is carrying out the planning and the strategic activities for procurement.

So just a quick recap on those numbers before we move on to some of the other output performance measures. We’ve said the Digital World Class^® procurement teams are spending approximately 20% less on running the function, but 30% more on their procurement technology investment, and they’re also operating with 30% fewer full-time equivalents, significantly less in the operational area, and an increased amount of time and investment in the planning and strategic activities.

Kurt Albertson:                

Yeah. I was just going to say Vicky – this is Kurt Albertson – I think you’ll see that trend or that what’s driving that, which is an ongoing trend. That’s been the name of the game for a while now – loan out that technology for labor swap in the less strategic processes and then reinvest those resources where they can add more value in those strategic areas within procurement. That’s been the name of the game for a while. And it’s only in terms of the performance gap that we’re seeing. And I think that’ll come out as we get into some of the other metrics as well. You’ll really see that trend.

Vicky Kavan:                      

Jamila, maybe I could bring you in here to talk a little bit about some of the operational excellence differentials that we see as well between the Digital World Class^® procurement functions and the peer group.

Jamila Williams:               

So when we think about operational excellence, I think the phrasing has evolved over time, but we think about just truly how efficient are we in our business processes. And so when we’re thinking about efficiencies, there’s some key outputs that we’re focused on. A lot of that has to do with cycle times, costs, productivity and all that supported by higher automation.

Some things that I think about in terms of what you were just sharing earlier on, there’s more of a swap towards investing more in technology and some of these excellent metrics that are shorter cycle times as it relates to sourcing. A lot of my clients as they’re even just thinking about their business case in terms of why should we spend this money in technology, what do we get for it? One of the key things that’s highlighted is, hey, if we can shorten the time that we go out to market, obtain competitive bids, identifying sourcing opportunities, and do that faster, we can see benefits in a lot shorter time frame.

And so what we’re finding with those Digital World Class^® leaders is that they are leveraging technology to really see this improvement. In terms of 23%, we’re seeing that they’re able to reduce their cycle times. Additionally, when we’re even thinking about just the cost per order, think about from once you’re looking to procure to pay the cost that it relates to FTE involvements – the people that need to touch something – technology is allowed for a lot of our Digital World Class^® leaders to be able to lower that purchase cost per order by 76%. And that’s a huge benefit in terms of operational excellence.

And again, what I’m seeing and what we’re helping our clients on the ground think about is, how do we frame that business case so that as we’re thinking about investing in technology, what do we get out of it? And our Digital World Class^® leaders see that technology is the heart of really seeing that improvement in cycle times, productivity, and overall total cost reduction.

Kurt, anything that you would add to that?

Kurt Albertson:                

Boy, I think you covered a lot of it, Jamila, great points. Just a couple of points I’ll add. I mean, I think we’ve been hearing about that labor swap we just saw, and Vicky talked about in terms of swapping out the operational resources for technology. You certainly see that on some of these metrics, particularly the one around 81% more indirect spend transactions requested via electronic catalogs, so really using those self-service solutions so that you don’t have to have resources touching all those orders is a big one.

The only other thing I’ll add to this – and it’s certainly obviously a key theme out there in the market today – is this use of AI is just growing. I mean, we’ve seen Digital World Class^® leaders have performance gaps across shorter cycle times, productivity, greater adoption of self-service type technologies like we’re seeing in some of these metrics. But with the implementation of artificial intelligence and all the solutions wrapped around it, I think it’s Hackett’s perspective that those Digital World Class^® leaders are only going to continue to outpace those

that don’t have a road map to really harness AI across that source to settle space.

Jamila Williams:               

Yeah. When we think about business value, I just, again, I work with a lot of organizations that are indifferent – I’ll just say the stages of maturity in terms of how is procurement as an organization perceived in the business. And so what we’re finding is that Digital World Class^® leaders really focus on and leveraging technology to get that – to your point – more spend under management, greater insights, so that they can partner better with their business partners in really achieving the organizational goals.

So one of the metrics that really stands out to me about superior business value is that we’re finding that our Digital World Class^® leaders have one and a half times more, as we say, higher ratings in terms of internal customer satisfaction as it relates to exceeding expectations. Because with greater technology comes data analytics insights to be able to proactively work with your business partners to provide them with opportunities, sourcing savings, and that again, changes that visual that, let’s just say, perception of procurement – of just being order takers, bottlenecks in the process, but truly delivering a relationship and value to their business. So that business value – 1.5 times higher in terms of rating – is something that stands out greatly.

One additional thing that stands out to me in terms of just business value as it relates to our leaders within the digital transformation space is that I would say 59% are seeing less savings loss due to maverick spend as it relates to buying and contract noncompliance. Technology, again, is just an enabler, allows for people to do things the right way. So we spend a lot of time working with organizations thinking about what are our risks that we’re looking to manage. A lot of times it is that rogue spend, getting visibility about what people are buying, and pushing them to the right buying channels. And so a significant output in terms of business value is being able to reduce that. We’re seeing 59% less savings loss due to this loss in terms of mavericks’ buying because they have the right tools, the right policy, and the right organizational structure in place to be able to, again, let people do what they’re doing in terms of buying, but doing it the right way, and making it easy to do so.

Those are two things that stand out to me. What about you, Kurt?

Kurt Albertson:                

Well, I think you hit all the key metrics on the business value side – the more likely to be perceived by your internal stakeholders as exceeding expectations.

Really it’s all about becoming that trusted advisor. When we think about driving business value, the biggest issue that procurement generally has is influencing engaging stakeholders. Very few procurement organizations have the luxury of working in a command and control type of environment where whatever you say, stakeholders do. We have to influence. And the only way we do that is to be perceived as this trusted advisor, which when we look at Hackett’s key issues

study for the last six, seven, eight plus years, it’s been a top three – certainly a top five priority of almost all procurement organizations – is really that perception that stakeholders have of procurement as a trusted business advisor. So we can do things like get involved at the start of sourcing processes, which Digital World Class^® organizations do to 15% more often, compared to once a supplier has been selected and ask just to negotiate a contract. So it really is on the business value side about that influencing. You talked about more influence of spend manage. It all comes through that influence model of becoming the trusted advisor.

But I loved, Jamila, the metric you pointed out – the 59% less savings lost due to maverick buying. I’ve been around for a while – 25, 30 years in the procurement space – and maverick spend has always been a big issue. And to see such a big gap – actually those contracts, those strategies being put in place, actually translating to the bottom line in terms of usage and savings to almost a degree of 60% less savings – 59%, is absolutely outstanding.

And it does take us into this area. We’ve been talking – I know you and I have talked about this in the past – this idea of the guided buying. How do you get your requesters to the contracts – to use the right suppliers under the right contracts with the things they need? And this is a really exciting area that some of the advanced technologies – some of the AI solutions out there right now – are really starting to help support this guided buying process to a much higher degree.

So a stakeholder, simply the interaction it’s going to have with the technology might be through a chatbot, for example, and just by talking into the chatbot or typing into the chatbot, the next thing you know it guides them through the intake process to the right supplier – the right contract – so that we can continue to drive down that maverick buying. So a great place for artificial intelligence – for those who are able to harness it. And we’re seeing a lot of that built into the solution provider’s technologies that our clients are implementing these days.

Vicky Kavan:                      

Thank you very much, Kurt.

I also was just thinking a little bit about the data we got on e-auctions and those Digital World Class^® organizations using still eight times more e-auctions than the peer group. And I think that’s quite an interesting one because there’s certainly anecdotal feedback that nobody is doing those anymore, but that’s certainly not what our data says.

Just going back to the AI point – and I suppose digital in general – where would you suggest that folks listening today get started with their own digital journeys?

Kurt Albertson:                

I’ll make a quick comment on this, and then Jamila can talk about her experience. I think you take a step back here. You see what’s happening in the markets – all this conversation about artificial intelligence – and the gap between those that are AI-based companies in terms of stock price versus those that aren’t. It’s really driving conversations at the investor board level and then on down.

So what we’re seeing with our clients is there is an expectation from investors carrying into the board that, look, you have to harness AI. If you don’t, you’re going to be at a disadvantage. It’s such a powerful solution these days. You’re going to be at a disadvantage against your competitors. And so you’re starting to see that or have been seeing that getting cascaded down – not only across the company but down into the G&A functions like procurement. And expectation is that procurement leaders need to have a plan in place to harness these AI technologies that are out there.

And if you look at Hackett research, we put some research out in the market that said, if you look at a glide path over the next five, six, seven years across the G&A functions, including procurement, you’re going to reduce 40% or free up 40% of those resources. Tying back to the conversation we were having at the beginning, what do Digital World Class^® organizations do really well? They free up their resources so that they can focus on these really value-added opportunities within procurement and driving the return on the investment as it relates to savings and other business value that we’ve already highlighted.

So how do you need to get started here? You got to have a plan. If you’re a procurement leader, you got to be out there in the market looking at what’s going on out here and put together a road map of where the opportunities are for you, and then translate those into value. And then get started on that journey in areas like – everybody, if you hear, if you’ve been paying attention at all – the big areas are around contract and life-cycle management. For AI, the category management and category strategy areas or big opportunities areas, this guided purchasing experience that I already talked about. Certainly around risk management – a big topic over the last five, six years certainly, and going to continue to be a big area, harnessing AI, Gen AI to support better risk management of your supply chain and supply base. And then certainly when we get into the ongoing management of your suppliers and through the supplier relationship management, supplier performance management processes, certainly we’re expecting AI to have big impacts there as well as a lot of other areas – market intelligence, spend analytics, so on and so forth.

So plenty of opportunities out there to harness AI, but we’ve got to start by putting together a road map, understanding what others are doing, understand the business cases internally for us, and then moving down that path. You can’t just wait for your solution providers to bring you this technology. You need to embed it into maybe the discussions with your suppliers, as well in the requirements that you have as you’re going out and selecting technology.

Jamila Williams:               

Yeah, I think that you definitely have touched upon some of the great examples on how to practically use AI – what sort of tips to accelerate.

One thing that I would just add is that in that whole effort of knowing where you stand and what makes sense for your organization, I would just caution the tendency to get to bogged down and analysis paralysis. This technology moves quickly, and as Kurt has highlighted, that you don’t want to wait until someone’s coming to you with the opportunity, but really you want to really quickly identify from a top-up perspective. What are those prioritized use cases that make sense for you and your organization so that you can start moving down that path quickly?

What I’m seeing from our clients in the marketplace is some of the points that you also raised Kurt, is that they are being encouraged from their senior leadership to, “Hey, there’s this AI, what are we doing about it?” And so sometimes there’s a bit of, “I’m not sure, but I’ll look into it,” and that ends up being a year or two years. But I would encourage – and what we’re seeing our clients do – is reaching out to companies such as Hackett to help to accelerate that view for opportunity identification and helping to help even size the prize.

So some of those areas – like contracts, and sourcing, and supplier management, and risk management – are clear, but you also need to think about what does that mean for you? What does that mean for master data changes? And so I would encourage organizations or leaders that have been tasked with how do I make AI – how do I take that forward – is to reach out and take advantage of some of the research and knowledge that’s already out there to help build your case for change.

Kurt Albertson:                

Great point, Jamila. And certainly with Hackett’s AI XPLR^™ solution, it’s exactly that. It’s really harnessing Hackett’s know-how across the G&A functions, and marrying that with our data, and case studies, and our case study repositories to help our clients understand and prioritize that road map. So AI XPLR^™ – we’re about to release our next version of that here at Hackett – is a great tool to help our clients to do that.

Jamila Williams:

It’s definitely an exciting time. I think that our Digital World Class^® leaders embrace this change. Change is always challenging, but there’s a lot of great opportunities, and I’m excited to see what’s going to happen next for procurement technology and this artificial intelligence that’s coming our way.

Vicky Kavan:                      

Yeah, likewise. I think it’s a very exciting time to work in procurement.

Well, thank you both very much for joining me today. A pleasure to speak to you both, as always.

Jamila Williams:                

Great. Thank you, Vicky. Thanks, Kurt.

Kurt Albertson:                

Thank you, Vicky. Thank you, Jamila.

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