Organizations know by now that enhanced and efficient procure-to-pay processes can save money and boost efficiency. But how, and by how much? A new report from The Hackett Group aims to put some definitive numbers behind the trend to uncover just how beneficial an enhanced procurement strategy can be.
In its report, "Raising the World-Class Bar in Procurement Through Digital Transformation," researchers Laura Gibbons, Christopher S. Sawchuk and Srinivasa Rao Dabbera explore how organizations' efforts to digitize the procurement function result in cost savings and overall improved company performance.
"There is a tremendous opportunity for procurement organizations to apply digital technologies — including cloud-based infrastructure and applications, business analytics and more — to transform their service delivery model," said Sawchuk, The Hackett Group's principal and global procurement advisory practice leader, in a statement announcing the report on Tuesday (Aug. 21). "It can make them faster, cheaper, smarter, much more responsive to their customers and, quite simply, a more valuable partner to the business."
According to The Hackett Group, digital engagement, robotic process automation (RPA), analytics-driven insight, modern digital architecture, digital workforce enablement and cognitive computing are the six key "digital accelerators" of the procurement function.
Organizations that embrace these technologies may deploy interorganizational communication platforms to make it easier for employees to collaborate (digital workforce management), or deploy supplier discovery software to streamline the strategic sourcing process (modern digital architecture). Implementation of technologies like artificial intelligence (AI) and RPA can yield cost savings and boost productivity, as well as support businesses' overall long-term strategies.
A look at The Hackett Group's calculations of the financial impacts of these accelerators suggests organizations cannot afford to retain their legacy systems and processes. For the typical organization, costs can be cut by as much as 30 percent as a result of digital transformation. A business with $10 billion in revenue could yield as much as $6 million in annual savings by deploying these digital accelerators.
Organizations that are already "world-class procurement" firms — that is, they have already successfully digitized their procurement functions and deployed these accelerators — have generated more than 10 times the return on investment (ROI) than their peers, with two to three times fewer transaction discrepancies, and experience a lower staff turnover by one-third. Investment in these technologies enables world-class procurement organizations to reduce costs per order by up to 70 percent, the report found, while process costs can drop by up to 22 percent.
These are incentivizing statistics, but companies that are amid their digital transformation journeys may not necessarily be able to obtain these cost savings. According to analysts, "cost reductions and savings are forecasted to level out in coming years, making it necessary to find new ways to continue to unearth value."
Robert Derocher, principal for The Hackett Group's Strategy and Operations Practice, said companies must be wary of adopting technology for the sake of technology, expecting that these innovations will automatically transform their procurement functions.
“It’s important to understand that while digital technology is a powerful new platform, on its own, it will not deliver the full performance improvement potential," Derocher said. "New technologies may lead the way, but they must fit within a larger strategy — one based on a well-designed service delivery model that includes rationalization of ERPs and other legacy technologies, along with [the] redesign of processes, information, talent and organization.”
For organizations looking to establish themselves as “world-class” procurement firms, executives must not only explore how their procurement teams can seamlessly adopt technology to boost savings and revenues. The procurement function must work to use those savings as a way to continuously progress in the digitization process.
“Digital technologies will allow procurement to significantly accelerate headcount reductions,” Derocher continued. “But procurement then has to dedicate the resulting savings to fund more technology investment, while redeploying or hiring new resources for higher-value activities.”