Happy New Year! It’s the start of 2020 and to start the ball rolling for Pragmatic Digital Transformation, I would like to do a deep dive into the procurement function and how to approach digitization to reap maximum results.
Connecting to the Digital Economy
The key trend that has defined, and continues to define, the last decade of technological development is connectivity. People and businesses are becoming connected through social networks and business networks, where millions of companies – suppliers, customers and payment systems – engage one another seamlessly. SAP AG estimates that, by 2020, 2.5 billion people or one third of the global population will be connected by social networks, 75 billion devices connected via the Internet of Things, and USD 65 trillion worth of global trade between connected businesses.
What this means is that it is becoming increasingly important, if not critical, for all companies to participate in the Digital Economy, to be well connected to relevant business networks and to conduct business digitally.
Digitized processes and operational efficiency
Being connected to the right business networks is just one element of Smart Procurement. Businesses must also be equipped to collaborate digitally in an efficient manner. This means that their internal processes must be digitized and operational efficient.
Indeed, according to Basex Research, collaboration inefficiencies still cost companies worldwide about USD 650 billion each year, despite efforts and billions of dollars spent on personnel, systems and reengineering to improve internal processes and information flow. And inefficiencies persist where it matters most – when buying, selling and exchanging cash with other companies, i.e., in procurement.
While there are many areas for improvement, we highlight four major areas that will make the biggest difference when addressed.
First, cost savings by rationalizing and aggregating spend with better sourcing. Industry studies indicate that it is quite easy to achieve 4% to 15% cost savings in the first year of operations.
Second, drive process efficiency by converting manual and paper-based processes to digital processes, for example, digital ordering, eInvoicing, ePayments etc, with direct collaborations with suppliers. Industry studies show that 60% to 70% of the processes are still manual and paper-based, indicating immense potential for improvements.
Third, enforce control and compliance. The Hackett Group estimates that contract leakage to be about USD 4.6 million, on average, for every billion in spend. And 50% of pre-negotiated discounts are never captured. This can be easily addressed through a tightly integrated digitized procurement process.
Four, rigorous analysis of spend data. Despite analytics and big data being key trends, companies worldwide still lose about USD 260 billion each year from not organizing and analysing their spend data. This seems to be pervasive with 90% of companies still using spreadsheets as their primary analysis tools.
SAP Ariba and vVolve as accelerator for Smart Procurement
While Smart Procurement might seem daunting, and it would have been just a decade ago, it need not be so.
One way is to “plug and play” into an existing system built with a certain level of supply chain performance in place, i.e., with the best practices and technology infrastructure needed. Better yet, if this system comes with a network of suppliers in a marketplace where one can immediately start buying and selling. This means no need to spend time sourcing.
This solution exists in SAP Ariba with a very extensive array of modular solutions to address different customer needs. While it is not yet a magic pill that solves all procurement problems instantly, SAP Ariba’s Intelligent Procurement Solution on the Cloud, and with a ready Ariba Network of suppliers with 4.2M supplier base, it is among the most effective ways to transform your supply chain. Indeed, we are seeing increasing interest from finance and procurement executives because the solution is easy to use and offers in-depth functions.
To address internal processes and inefficiencies, one way is to tap the knowledge base and expertise of an experienced consultancy that has helped many other clients with the same problems. This way, you do not need to start from scratch re-designing processes, with trial and error. Better yet, if the consultants bring with them prebuilt solutions that can be used as a starting point. vVolve has invested quite significantly in this area, and we discuss one of our prebuilt solutions, Digitized Procure-to-Pay, in this post.
At vVolve, we believe that digital transformation is evolution, not revolution. By focusing on getting tangible results in the areas that matter, clients can fully reap the ROI on a sustainable basis.
Vivek Veeramareddiar is Co-Founder and Partner at vVolve Management Consultants, and our SAP & OpenText Solutions Director.