Transformation is one of the most overused words in business. When applied to discussions about procurement strategy, it often means the adoption of digital solutions to solve problems and deliver efficiencies.
That’s a big part of it but, especially in uncertain times, leaders have to think about more than just how to apply new technologies to overcome business challenges.
Old working models that were built on formal organizational charts, top-down management, 3-year plans, and data secrecy need to be revisited before it is possible to enjoy any transformation success through implementing digital solutions.
True transformation is driven by people.
5 shifts in Procurement mindset
Besides addressing structural and operational obstacles in how a company operates, we need to focus on improving the cultural climate.
Organizational culture is built over time and is based on the behaviors of executives and the individuals in their teams. It starts at the top. Changing people's minds is a process without an end date. A healthy culture promotes innovation, supports experimentation, and empowers employees to contribute to positive change.
Recently Matthias Gutzmann from Digital Procurement World shared this summary of organizational transformation by Aaron Sachs and Anupam Kundu from Thoughworks. See the infographic below and think about how this relates to procurement.
Any procurement transformation initiatives must be aligned with overall business goals. For procurement to become a strategic partner and a trusted advisor to other business units, this mindset shift must start at the top of the organization with a clear vision.
Even with this support and direction, procurement leaders need to have a strong sense of purpose and the tenacity to make a success of their digital transformation initiatives. Without senior-level buy-in, it is difficult for CPOs to move forward.
The most profound business challenge we face today is how to build organizations that can change as fast as change itself. – Gary Hamel
The five mindset shifts identified for organizational transformation apply equally well to procurement transformation.
1. From Cost Savings to Purposeful Relationships
Cost savings are often mistaken as the primary goal of procurement. In reality, procurement's goal is to improve profitability through sustainable relationships with suppliers and internal stakeholders.
In leading organizations procurement is actively contributing to the company’s profitability through more than cost reduction projects. These top teams align themselves with the company’s main purpose, which is being sustainable, i.e. staying in business. This entails managing supplier relationships, ensuring continuity of supply, and minimizing risk as well as containing costs.
Procurement’s main purpose is also to satisfy its stakeholders and end-users i.e. its customers. Their satisfaction is achieved by applying clear thinking and the appropriate digital tools to create efficiencies across procurement activities from spend analysis through strategic sourcing to negotiations and contracting. A clear digital strategy, properly communicated to stakeholders, within an agreed time frame, will deliver long-term value.
2. From Hierarchies to Value Networks
In the past, procurement organizations were very hierarchical. You would have clear divisions of the responsibility down from the Chief Procurement Officer down to buyers and category managers. They in turn would organize supplier relationships down in tiers of importance from strategic to non-critical items.
Many procurement teams are hampered by outdated organizational structures and formal supplier relationships often because of historical management inertia. Hierarchies that were originally designed to suit the purchasing environment are no longer fit for purpose. As a result, people are finding it difficult to work effectively with internal stakeholders and external third parties.
Strict power structures are now being replaced by shared networks. These fluid networks use electronic lines of communication with suppliers (and even with suppliers’ suppliers) on a shared secure platform that facilitates automated transactions. The key to designing an appropriate procurement network is to make sure it is aligned with the wider organizational strategy, culture, and goals.
3. From Cost Controlling to Empowerment
Too many people still see procurement as a rubber stamp function for cost controls. Purchasing approvals are often the first or only way to interact with a procurement organization. In the future, procurement needs to transform into an empowering sourcing partner.
Moving away from tight hierarchies to networked organizations does not mean losing control. Adopting technologies that streamline and automate traditional activities is not losing control, it is empowering. Online tools can provide value in the form of self-service capabilities for the use of suppliers, partners, and end-users. Approval processes and controls can be automated.
Shared reports and real-time spend information allow customers and suppliers to feel respected and supported leading to a better overall relationship with the procurement organization. Dialogue based on facts and the bigger picture can encourage a change in mindset. Empowering people is key to instilling a shared sense of ownership and confirms that they are contributing to the decision-making process.
4. From Process Planning to Experimentation
Most larger organizations have a detailed n-step procurement process outlined in Powerpoint slides. In reality, these rigid procurement plans and processes often don't fit the speed of modern business. Transformation requires more agility.
In unpredictable global environments, long planning cycles are not flexible enough. The less certain the situation, the shorter the planning time frame. CPOs are now required to be more agile and experiment with different solutions and have contingency plans in place as circumstances change. It could mean adapting systems and processes or replacing them.
New technologies provide the opportunity to both drive down costs through data analysis and, at the same time, respond to customer needs and manage strategic issues around uncertainty and risk. Resource planning and shortage of skills may drive a rethink of employment practices and possible innovative solutions such as outsourcing. Innovation is the outcome of an open mind, appropriate behavior, and a supportive culture.
5. From Privacy to Radical Transparency
In the past, procurement organizations were very secretive about costs and pricing, especially when negotiating with suppliers.
Sharing of information between buyers and sellers was never the norm. It has come to light that guarding and hiding information is not in the best interests of either party. Companies that form strategic partnerships with their key suppliers can create a win-win situation if they are open and transparent about the data.
Online cloud-based platforms provide mutual access to the same information in the same time frame. Secure access is provided to prevent misuse. This level of transparency promotes trust and builds lasting relationships.
It’s not only about the tools
Procurement excellence is not about software solutions, it is about what they can deliver. The Hackett Group’s 2020 study identified five areas where procurement has critical capability gaps that need to be addressed. These are:
- improving procurement’s agility
- becoming a trusted advisor to the business
- aligning skills and talent with business needs
- modernizing application platforms
- improving analytical and reporting capabilities
Digital solutions are rapidly changing how every procurement process from spend analysis to contract management can be managed. The uptake has been swift in some forward-looking organizations but in others, it has been slower due to a wide range of problems, not least of all, legacy systems, cost considerations, and resistance to change.
There is a noticeable shift towards cloud-based solutions which are becoming easier to adopt and more affordable. Enterprise-wide systems are becoming less relevant to the solutions required by procurement.
Lasting transformation is led by people.
There’s no doubt that software tools are providing solutions to many of procurement’s problems. However, the real transformation can only take place when the mind shifts take hold. The entire organization must be engaged in developing functioning networks, empowering employees, and laying the foundation for innovation.
Procurement transformation is not the adoption of new technology, it is the change procurement leaders can deliver through a fresh mindset and smarter ways to interact with suppliers.