2014: The year procurement changed
Jonathan Cooper-Bagnall and Guy Strafford
Dec 11, 2014 11:54:00 AM
Year end reflections are usually about the changes that will happen ‘next year’. 2015 will be the year when (insert as appropriate!) will finally take off...
But this year, we first want to reflect on the year gone by. It’s hard not to make bold statements about how much procurement and the management of suppliers have come to the fore. Take three examples that have shaped the front page news.
Food giant Tesco had to restate its profits because it appears to have over-stated profitability related to supplier payments. Premier Foods controversially asked suppliers to make upfront payments. Lastly, the UK government faced down G4S and Serco on the subject of over-charging.
There are many other examples ranging from slavery in supply chains through to the previously dusty world of statutory audit where new rules on compulsory tendering have forced the board to take a fresh look at how they buy professional services.
We cannot remember another year when procurement was defining the news so consistently (which informs our prediction for 2015).
The news is catching up with reality – companies have virtualized and procurement is at the heart of it.
Increased publicity over the past 12 months has pushed business leaders to take more of an interest in their supply management operations (as highlighted by The Harvard Business Review piece), and has shone a bright light onto procurement – presenting a great opportunity for us stewards-of-supply to reiterate our role into 2015 and beyond.
For example, one of our major clients was holding internal meetings ahead of half year results to decide what to tell the analysts. The overall picture was none too positive. But procurement, which had recently outsourced its indirect spending to Proxima, was looking good. The formerly flakey pipeline of initiatives had been dusted off; it was forecast to beat a tough contribution target; stakeholder feedback was great.
The CEO asked: “Can Proxima do manufacturing and sales?”
That’s the kind of testimonial we love, of course. But more importantly, it illustrates that procurement can be a driving force behind improved business performance – something the CEO can take to market.
Research early in 2014 by The Hackett Group explained that to become that true business partner, procurement can no longer focus on simply cutting costs. (That’s the mistake we see most often.) Progressive procurement leaders should be engaging with the business around innovation, risk management, reputation management and shareholder value. As 2014 emphasized, the discipline has to keep evolving alongside the businesses it supports.
Technology continues to shape the profession
Indeed, the launch and rise of social networks exclusively for procurement professionals this year (such as Procurious) shows that procurement teams are benefiting from social media in their everyday operations just as much as any other department.
Big data was also a big challenge for many organizations in 2014 – mainly, how to effectively turn masses of data into meaningful and actionable insight. Procurement teams, in fact, sit at the very center of this trend, armed with an incredible wealth of transaction and usage data. A recent Procurement Leaders poll showed that 61% of procurement executives were committed to investing in their big data capabilities throughout 2014. A further 22% stated that while not committed at the time, it was something that they were considering for the latter half of 2014.
Why? Because there’s a huge payoff in developing perfect processes to deliver information that helps stakeholders make more informed decisions – and solidifies procurement’s status as a true business partner. It is also true that there is an extraordinary asymmetry between the insight businesses have on what they sell, and what they buy.
Delivering a complex service – pushing new boundaries
Getting results and adapting to technology, then, were big drivers for procurement in 2014. But there were regulatory factors, too. Take the thorny issue of statutory audit rotation. The European Commission and the UK Competition and Markets Authority (CMA) reforms forcing many companies to tender for their auditor – and switch supplier at regular intervals – look set to alter the longstanding relationships that companies have with their auditors.
Our research into the state of the UK audit market showed that many companies are eagerly jumping to tender before they are required to in a couple of years. We realized, though, that too many complex professional services like audit are bought in solely by the Chair of the audit committee or the CFO. In the US, the rate of audit quality issues continues to increase – which raises questions around: Why specialist procurement teams aren’t more routinely involved in this high profile area of business spend?
Some argue that procurement teams are often unexposed to the audit market. But, in the UK, with the CMA’s rules yet to be finalized, it seems as though there is still time for procurement to get up to speed with this highly sensitive, complex spend area. And, after all, the discipline of smart, tightly managed tendering is just as applicable to professional services as it is IT or utilities.
Regulatory change is crystallizing a paradox – process v agility
In the recent IACCM ‘Ask the Expert’ panel discussion the point was made that over time, procurement has made an industry out of complexity – creating processes rather than genuine strategic thinking. Business leaders can become perplexed by the rigidity and the number of these processes. Then in complex areas like audit, legal services or corporate finance advice, they (often rightly) prize their own knowledge of the requirements, and the personal relationships with the supplier, above “paperwork”. Businesses want agility, accessibility and the power to apply expert bias in light of increasing complexity.
But they also want quality assurance to ensure risks are mitigated and that there is a sufficient paper trail, particularly in the regulated sectors of the economy. And they don’t want to miss a trick – to end up contracting services that leave them exposed strategically or short of needed capabilities.
What to do? How can we all deploy the right knowledge, expertise and support, at the right time, without incurring rigid processes that hinder agility or inhibit the customer experience?
We think we’ve answered that question for many clients in 2014 but it’s going to remain perhaps the most important issue as we look toward to what will no doubt be another challenging year ahead.
So here goes –
Three key predictions for 2015
- There will be at least three big supplier related front pages in the news / Supply chain risk will reach boiling point
The data is on our side; if 70% of a business’ revenue goes to suppliers, often only the front end of a longer supply chain, not a single reader should be surprised that:
- There is a lack of visibility of what happens in supply chains
- Unexpected things will happen which cannot be mitigated
- Some procurement functions will be asked to press suppliers to improve profitability and will take it too far
- Supplier management continues to be under-resourced and so a lot of big engagements will end in tears
More and more well-known and respected brands will suffer reputational damages stemming from issues that occur throughout their dispersed supply chains. We can expect to see more media coverage around infringements on human rights, ‘supplier bashings” (forced payment plans) that backfire and issues of wastage (further down the supply chain). We're already seeing the same old issues around poorly managed suppliers making the headlines. In the US, restaurant chain Chipotle has resorted to taking one of its most popular products off the shelves and suspending a supplier following a breach of its strict animal welfare standards. In the UK, analysts are already predicting that the planned renewal of Government IT contracts will play “havoc” with public finances - not exactly a glowing reccomendation for procurement. For public companies, these reputational damages can also have a knock-on effect on share price. We expect to see business leaders start to adopt more progressive supplier management practices, to ensure risk is mitigated as much as possible and to better understand the impact of supplier issues on their businesses – in terms of operational, financial and reputational risk. Business leaders will be looking for greater visibility into the company’s extended supply network (Who are our suppliers’ suppliers? What is the risk rating of the most critical suppliers in our business? What is the action plan in light of a supplier failure?) If you don’t have the answers to these questions, you better start doing your research.
- The ‘sharing economy’ trend breaches the business world
A lot of hype has built up around the concept of the ‘sharing economy’ – the idea that every day people can turn their owned assets (cars, spare rooms, jewelry etc) into new revenue streams. While the verdict is still out as to whether this is a sustainable trend or not, there are some lessons learned here that business leaders are incorporating into their own corporate philosophies. One of these is that value and customer experience stem from flexibility, agility and intimacy - not economies of scale. The traditional concept of ‘shared service’ (think F&A – labor arbitrage, transactional processing centers) is quickly becoming outdated as progressive companies are now looking for low-cost intelligent delivery centers which can add insight on top of a ‘transaction’. This means specialist knowledge around categories, processes, technologies and wider industry knowledge is required. For a single company to attain all of this (cost effectively) in-house is simply not possible, though how well recognized this is, or quickly this will occur, remains to be seen.
Thus we expect to see a greater use of intelligent delivery centers (multi-client, outsourced) which are able to deploy specialist expertise, in addition to basic transactional processing - which will require less human involvement to ‘turn the handle’ as technology continues to evolve, but more intelligence around what the data means – actionable insight.
- Technology and the rise in visibility of software ‘bots’
Technology will continue to play a pivotal role in the delivery of procurement services but not as you know it. Business leaders have come to expect transactional processing capabilities as a core offering in their procurement teams and are demanding more ‘intelligent’ outputs in the form of insights and foresights, faster than what their competitors can get. Big data, predictive analytics and continued growth of social media tools means that data is being generated not only by people, but by machines now. Couple this with the announcement of 5G communication technology (reported to enable users to download 33 HD movies in one second), and it will make The Internet of Things concept a reality – and start the advent of machine–to-machine communication. All of this information floating about will create a strong desire from the executive team to connect human behaviors (consumption patterns, usage statistics) with spend patterns to reduce wastage within their business. Technology will become a driver of business agility BUT will still fall short of providing intelligent insights on its own – there is still a need for a human intervention. So be wary of putting all of your proverbial eggs in the technology basket, for now.
At some point, the cumulative noise in the news will force boards to start to think more clearly about what they need from their suppliers and how to use procurement as intermediary to deliver this. We are not there yet, but it is coming. Do not under-estimate how the big news stories have changed the questions that are being asked by execs and non-execs around the board room table.
Overall, 2015 will be a year where procurement will come under increased pressure from the business, and the public. The need for flexibility and agility will be critical – to respond to events as they occur in real time, not after you have read about them in the morning’s paper.
Finishing on a more positive note, we’d like to thank you for your continued support and involvement over the past 12 months, in the pursuit of redefining what procurement stands for in businesses today. We look forward to working alongside you again in the new year.
And please, don't forget, if you have any of your own reflections on 2014, or thoughts on what might await in the year ahead, please do add them below.