Procurement's Report Card
t’s been a busy couple of months from a research report perspective this month, with quite a few 2021 reports being launched, sol I thought id write a blog to review a couple of them and see how they agree or disagree with each other.
There’s been some interesting finance and payables reports and news that id like to reflect on.
Hackett Key Priorities in Procurement 2021
This is a recurring annual report that Hackett produce and is one or about 3 or 4 deeper procurement research reports that they produce.
Ther was an accompanying webinar with this as well that’s worth a watch (about 40 mins long) and goes into some pretty good details. But let’s summarize the report here
The disruption that many companies felt meant that organisations will continue to focus on cost reduction and supply assurance, therefore the need to provide safety through savings and supply assurance was critical, and is going to continue to be. Interesting the report mentions that Supplier innovation is undervalued by procurement, and that this can deliver big opportunities, and that this can deliver differing ways to reduce cost (number 1) and increase influence with their stakeholders (number 10)
The interim Deloitte CPO report in November 2020 revealed that 90% of organisations didn’t have visibility in their supply chains, which has an effect on broader sustainability initiatives which is the highest its been at number 9, and at number 11 are Supplier Diversity programs.
Supply Risk Management is a top 5 issue for the first time – probably not surprisingly, really. There was an Ardent Partners report in early 2020 which identified the lack of strategic supplier risk management programs which gave an early indication at the issues that many organisations felt. The report identifies that the goal of many professionals is to integrate risk management centrally - tying it to enterprise risk management and really tracking and monitoring all of those outcomes.
This has an impact in the on-boarding and contracting of suppliers. During the contract how do we measure and manage these risks and keep track of the mitigations that have been put in place? Some of these will be a KPIs on a supplier. What the report also recognizes is that off-boarding contractors is a risk management issue and will increase as the contingent workforce usage goes up. The need to tie this into risk management is an area that many procurement leaders will seek to address.
Number 6 talks about modernizing application platforms and number 4 talks about driving digital transformation. Modernizing legacy technology platforms are critical, but to achieve transformational change, these projects must be treated as broader business change projects that have an impact on roles, responsibilities and skills, rather than only involving technology transformation.
But talking of technology…….
Many organisations are looking to increase their usage of networks, according to the report. Many companies who have it felt that they had met or exceed the expected value, and 21% of organisations are looking to expand into this area in 2021.
One last point from the webinar itself. During the session there was a quote that resonated with me and the audience. “Procurement wants to be a strategic advisor to the business (it was number 3 on the chart). It’s hard to be considered a strategic advisor to the business, if your day to day systems don’t allow for the user to do basic things.” That’s a key message, how do your solutions allow you to become a strategic partner to the business.
Deloitte CPO Report
This is the 10th year of the survey, there is an accompanying comparison chart which is available which makes for some interesting reading,
Some highlights for me on the comparisons.
· Reducing cost has been twice as important that other priorities in 2011 but only 1.5 times in 2019
· Since 2011 there has been a 45% increase in the use of a tactic “reducing transaction cost”, (i.e. how much does it cost us to do something) which suggests a greater understanding of business processes.
· Since 2014 supplier collaboration and spend consolidation have been the main approaches to managing risk, however due to the pandemic, this has evolved to now 66% of organisations pursing cost reduction strategies, 47% of them expanding supply base, and 25% looking at digital infrastructure
· The biggest barriers to embracing digital since 2013 is limited stakeholder engagement with 67% of organisations stating that this is their biggest issue which links to the need to really get multiple personas involved early
OK so on to the main report. Overall, it’s just over 30 pages so it’s worth a read,
I mentioned that in the Hackett 2021 report, that they talked about procurement as a strategic advisor, there is a similar theme here in that Deloitte suggests that the growth in complexity of risk and the need for supplier innovation has opened the door for procurement to become that partner.
Deloitte also suggest that leading CPO’s have a broader approach to value (ie more than just cost savings), that they focus on relationships both internally and externally, and they look for agility including service delivery models (ie the way they deliver the services to their stakeholders, centralised, decentralised, hybrid etc).
For the first time in its history, cost isn’t number 1!
Driving operational efficiency is now number one, albeit closely followed by cost reduction. Clearly these all work in harmony with each other, being efficient, delivers benefits and is generally informed by digital transformation.
You can also see digital transformation is increasing from 2019 in fact its jumped 20% since 2019 and 48% of leaders see this as a strong priority.
The largest increase was in CSR (up 22%) and this links to the second graph about what procurement teams are measured by.
Overall, the procurement value proposition has always been about more for less, it’s just the way the “more” has been measured is evolving.
So looking at what is measured you can see its still largely spend driven, but look at sustainability and diversity (also a feature in the Hackett key priorities) and the report details the other areas that are rising in importance , ie measuring more than just savings.
There was a separate section which looked at the differences between high performers and others,
and what they are both measure doing, and what is being achieved. This is a key difference between the Hackett report and this report, as it seeks to identify the existing high performers.
Some key standouts –
High performers meet or exceed savings at 97% - others 67%
Working capital – only 21% of high performers don’t measure, whereas 38% of others don’t (suggesting they don’t have a program) – note that 20% are not meeting their targets
Sustainability is a key differentiator between leaders and others. Nearly 75% of high performers exceed or meet, as opposed to under 50% of others
Innovation – 52% of high performers meet or exceed, but nearly 60% of others don’t measure
Agility is also a key topic in this report, and repeats some messages from Hackett group
What is clear is that those organisations willing to embrace digital are significantly more agile than those that are not. The top 3 benefits that are reported by CPO’s for digital are
· process efficiency
The number three digital technology area is networks, and with only 17% of leading respondents fully deployed, and 17% piloting but still lots not yet started (42% of leaders, nearly 70% of others) shows that this a key discussion linking back to process efficiency.
Overall, there are some common threads, cost is important, but the way that this is measured is changing. Process efficiency and a drive to embrace networks and digital solutions as a pathway to embrace agility is something that both reports talk heavily about. I found both interesting reads and
AP Metrics that matter
Overall, the report states that AP value is increasing to organisations. Upto 60% of organisations rate AP as very or exceptionally valuable which is up from 55% previous year.
According to the Deloitte CPO report above, 56% of organisations stated their key suppliers went bankrupt or severely hampered by the pandemic, hence the report states that 53% of business planned to change how and when they paid suppliers. One of the central issues of the report is that there are several areas holding AP back in doing this, namely that its tough to pay your suppliers quicker if the approvals take too long, if they have a high percentage of exceptions and is still paper based
The report states that 22% of AP staff time is spent resolving queries, probably from suppliers asking when they are going to get paid!
So on the AP agenda for 2021 is all about continuing their journey toward improved visibility of payment processes and delivering value to the organisation, 48% state increasing reporting and analytics, and 38% eliminating manual tasks, 32% enabling suppliers to submit electronic invoices and 29% implementing AP automation are the main areas for achieving this.
The report goes into quite some detail about specific metrics, showing average and best in class. I’ve pulled out the key metrics from the report. Bearing in mind the earlier reports assertions around digital and automation driving efficiencies, its useful to benchmark your organisation against these.
· 51% Invoices received electronically
· 57% payments made electronically
· $10.89 cost to process an invoice
· 10 days to process an invoice
· 30.4% invoices touchless
· 24.6% flagged for exceptions
When thinking about driving process efficiency in the p2p and thinking about the core activities being done well to allow procurement to become a strategic partner, understanding how you stack up and how you can better these is a key deliverable.
Finally, the report identifies the digital technologies that has been adopted so far and again similar to the Deloitte CPO report, and the Hackett report there is a clear call out for a business network having only 35% adoption so far and a complete p2p solution at 41%.
Supply Chain Finance
Finally, was an interesting article written in Beroe about supply chain finance. Now you may have read and heard stuff about Greensill, and the article was likely written to clarify some issues around that.
It states that Procurement need not worry about the collapse of Greensill because the SCF market is “much more than the troubles faced by one particular company." Which is a good point, this was a Greensill / reverse securitization issue, not a fundamental SCF issue. However, it does shine a light on a couple of areas
· Who am I doing business with? Are they reputable,
· Are they going to push for terms extension past industry norms
· What is my overall reliance and willingness for exposure with SCF?
The article advocates that “SCF should be a standard practice in the toolbox of every procurement executive and that SCF should go hand in hand with working capital management.” Which I agree with as If I can provide my supply chain with financing cheaper than what they can get themselves, I can negotiate better pricing because the cost of financing has been reduced for them.
Erik further stated that it is logical for Procurement teams to benchmark themselves against industry peers on parameters such as accounts payables, net payment terms, and cash conversion cycle time.
Which is why SCF needs to only be a facet of the program, alongside terms management, Dynamic Discounts, Cards and an FX solution.
The need to ensure that Treasury are included (if not leading) these discussions was enhanced when the article identified that 2/3 of all SCF programs are led by the Treasury department, and 1/3 is led by the Procurement.
For a successful implementation, you also need to take your suppliers along, especially your key suppliers. The supplier on-boarding process is crucial. And the alliance between Treasury and Procurement is the most crucial for a successful implementation of the SCF solution.
On the subject of working capital, a quick call back to the ardent report
Three years in a row, now they have seen early payments captured rise. A direct quote – “as more business adopt AP automated solutions, they will be in a better position to capitalise on early payment discounts which offer significant returns and direct impact to cashflow……”
Ardent identified the payment strategies, below and when we think of these strategies, many organisations are now having a specific payment strategies for differing types of suppliers both during and coming out of the pandemic, which could be to prioritise payments so some suppliers, or pay early, or even extend payment terms.
Hope you got some value out of this blog, I’ve noted that there are another couple of reports coming so will be back with some further insights from them also