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Digitalisation key to procurement's transformation into a blossoming function

rose-illustration

A flower blooms. It’s a ‘plantoid’ – a robot or synthetic organism designed to look, act and grow like a plant – created by art collective Okhaos.

 

Its petals are made of polished metal and its centre is a sphere of glowing glass. While the flower exists in the real world, its roots reach deep into the blockchain to feed on bitcoin donations from patrons. Once it has amassed sufficient donations, the flower commissions artists to sculpt new versions of itself. It creates self-executing ‘smart’ contracts to regulate the supply relationship with artists.

 

The plantoid’s primary purpose is to explore how a synthetic life-form could thrive in a digital ecosystem. But it’s also an experimental entity known as a decentralised autonomous organisation (DAO). This means it manages its funds, market approaches and contracts without the involvement of any humans, other than those who coded it into existence.

 

The most well-known, or perhaps notorious, DAO is “The DAO”, a crowdfunded venture-capital (VC) vehicle that flourished briefly in 2016. The DAO had no employees or management structure and operated as a stateless digital entity. Statelessness was something regulators struggled to understand, and The DAO’s open-source (publicly viewable) code base tried to allay governance fears through total transparency. The DAO’s noble goal was to disintermediate the flow of capital from the financial services industry. A system vulnerability was exploited to misappropriate one-third of The DAO’s assets shortly after launch. Although they were recovered, the blow proved fatal and its repercussions damaged the Ethereum blockchain on which The DAO operated to the point that it split in two.

 

The plantoid and VC-funded DAOs are pure constructs of the digital age. They have taken blockchain and purposed it to fresh ends that could not have been achieved in other ways. Although they were created are very different purposes, the flower and the fund share a boldness of vision in pursuit of their goals.

 

This is relevant to procurement by way of contrast. The disruptive thinking that created DAOs makes the function’s stance on emergent technologies and ways of working look predictable, quaint and slow.

Operating within the paradigm

Procurement professionals are becoming comfortable with the concepts and operation of new technologies, such as blockchain, to the point where technical authors no longer have to write thumbnail explanations for readers. The terms and abbreviations of the digital age are now used casually and confidently.

 

Early adopter case studies are being written and industry whitepapers published. This growing body of work signposts how procurement teams are deploying these technologies and a blueprint is taking shape:

  • Big data can deliver better supplier and supply chain insights, many of which will come from Internet of Things (IoT) devices.
  • Artificial intelligence or machine learning will lead to robotic process automation (RPA), which will herald operational efficiency gains and allow teams to refocus resources on higher-order tasks.
  • Blockchain is the enabler of self-executing contracts and a means for providing quality and provenance assurance in supply chains.

A 2017 Everest report suggested 20%–50% of procurement jobs could be lost to automation in the three years to 2020. An AT Kearney study, meanwhile, put the figure at 60%–70% over the same period. It’s not hard to see from the above blueprint where those jobs could come from, and the implications can’t be downplayed from a human and cost-base perspective.

 

Although its consequence for jobs is profound, the premise of the blueprint itself is not radical. It’s really just the 21st century equivalent of procurement outsourcing. What used to be done in low-cost locations can be accomplished for even less in the cloud, which frees up funding for procurement to take on new work. Existing workloads can be digitised and processes streamlined. Solutions of this nature are tactical in that they shift the cost base, but they do nothing to reimagine the function’s operating framework.

 

Procurement is cautious by nature and remit. It is not inclined to follow fads. Procurement processes have been designed and refined to insulate enterprises from bad commercial decisions. But they were not built for an increasingly situational and dynamic business environment, and the function now stands accused of barring the path of progress by many executives responsible for modernising their organisations.

 

One of the most respected condemnatory voices is that of Mike Bracken, the architect of the UK’s Government Digital Service. Tasked with reinventing government service delivery in the wake of the global financial crisis, Bracken named procurement as one of four barriers to digital transformation. His “square of despair” model ranks procurement alongside inappropriate governance, funding and IT choices.

 

Industry and public-sector leaders readily identify how the square of despair thwarts the momentum of their digital transformations. These transformations are often the most significant initiatives in their portfolios, and, perhaps, their careers. Their frustration and dismay are compelling reasons for procurement chiefs to look past digitisation to radical reinvention.

 

It’s tough to break out of a frame of reference that has provided the professional formation for generations of buyers and has so clearly advanced the function. As humans, we’re programmed to opt for a tweak to a proven strategy over discontinuous change and its unknown risks. As commercial practitioners, our experiences in the field reinforce our beliefs about what works. We’re better equipped to make judgements that reference the past than to take a punt on a future we do not understand.

User-centred design

This is one area in which expertise creates unspoken solution constraints. We can borrow a practice from human-centred design to counteract this effect and ask: “What is the user requirement?” This question powers all digital transformations, including that of Mike Bracken. The emphasis of the digital design practice is to understand what the user needs to do and to make that straightforward to achieve.

 

Aside from the possibility that users might also be a supplier, a typical response would be expressed using a format prevalent in agile working practices. For example: “As a part-time buyer, I need to acquire reliable things at an affordable cost so my organisation can consume them as raw materials, or for its own operation”

 

The user is not going to identify a need for a procurement process. They probably won’t express a need for a procurement function, either. Although this may seem a little confrontational, it is also curiously liberating. Users do not have a need for procurement to conform to a leading practice framework. They have no expectations of processes, methodologies or personnel. Nor should we. If we pair design thinking with emerging technologies, we can create a user-centric alternative future for procurement that’s unlike what we have now.

 

Commercial contracting aside, there are a few obvious candidates for change. Large chunks of procurement practice are essentially unchanged since the 1980s, when strategic sourcing rose to prominence. Rigorous and robust request for x (RFX) approaches have become ubiquitous, nudging towards sacramental expressions of what sourcing professionals do.

There’s a lot to unpick in the RFX model: There’s the unvoiced but central precept that the action of going to market is effective in creating contestability and the assumption that a detailed market test will materially improve the outcome. Where the user already has a preferred solution in mind, there’s a belief that an RFX-as-compliance exercise has some sort of value.

 

Then there’s the reliance on those most basic of procurement levers – the aggregation of demand and the introduction of competitive tension. The RFX process was built around these levers, but pulling them is only effective when a certain level of scale is desirable, neither too small nor too big; and where competition really will improve the supply proposition, normally where it encourages suppliers to drop their price.

 

These propositions make little sense to users; they just see bureaucracy. If they could, users would short-circuit the whole process and jump into a commitment.

Shorter procurement cycles

It is possible to support users with contestability models that do just this. Market constructs aim to deliver the same outcomes as an RFX in a different and faster format and can cut three months off a traditional go-to-market approach. They enrol sellers upfront to provide buyers with the same data that they’d solicit in an RFX without a separate market approach. They stimulate competition through transparent pricing and buyer ratings. They encourage evaluations by presenting seller offerings in a standardised format that allows buyers to directly compare attributes.

 

Markets can be made government-grade robust. The UK’s Digital Marketplace and Australia’s new
Buy.nsw provide surety for buyers by signing sellers up to government contracts and comply with international trade agreements.

 

Both these markets are open source. That means CPOs could build their own platform from government templates in about four months with no licensing fees. Or they could investigate Amazon Business, created last year as the B2B complement to the firm’s existing market. It’s already winning large contracts thanks to its promise of low pricing, free delivery and procurement system integration.

 

There is no reason for a go-to-market approach to be continuous. Buyers can take a leaf out of the lean startup playbook to hack their go-to-market strategies with a ‘minimum viable’ approach. They might start with a lightweight brief and, only if that fails to surface a winner, go to a more detailed process that is halted as soon as clarity emerges. The traditional claim is that you can’t source infrastructure in a lean way. The Chinese are challenging this assumption with highly modular designs, offsite fabrication and SWAT-team-style onsite assembly.

 

We should consider whether the commercial process matters. More radical functions may wish to focus their transformation on creating transparency around decision-making, establishing accountabilities for outcomes and tracking the effectiveness of decision-making to create learning loops.

Supply dynamics are changing, too

Alternative contestability models will come with a new set of practices for procurement that include active supply base management, the curation of offerings and supply market education. Engagement and communication skills will be as valuable as negotiation prowess in this environment.

 

The notion that suppliers are identified by procurement will change. In the new paradigm, sellers are likely to onboard themselves. This means traditional supplier relationship management practices will have to evolve from their current focus on large, established enterprises. Consolidating or intermediating small suppliers to reduce the cost and complexity of administering a seller record can no longer be the default option.

 

Savvy buyers will encourage supplier diversity and use technology to manage a larger supply base. They will be rewarded with a rich new seam of value in the form of niche expertise and innovation. Large multinationals will lose intellectual property (IP)exclusivity in a number of ways, which will require buyers to more actively manage supply dynamics.

 

Universities will mature their commercialisation arms and form research relationships with corporates. Entrepreneurs will gain corporate experience before moving to startups as credentialed experts rather than starry-eyed idealists, and low barriers to starting a business will encourage more people to choose this path. The connected world is making it easier to orchestrate contributions from multiple suppliers and single-source enterprise deals will lose their appeal in many supply categories. Last, open source communities and sharing economy participants will mean physical resources and IP will be more freely shared.

 

There are, however, emerging technologies functions should not approach with unbridled enthusiasm. Blockchain, in particular, is at the peak of its hype cycle right now and the procurement function is not alone in being irrationally bewitched by it.

 

Sure, you can track containers using IoT sensors that write to a blockchain. But expensive, complex technologies should not be used where cheap solutions such as barcode scanning already work well. While blockchain is a good solution to digital rights and asset management, it has challenges tracking the provenance of physical goods. Unless the data lodged on it immutably identifies a real-world object – such as a bird’s DNA or its unique plumage pattern – it is vulnerable to fraud.

What we gain and what we leave behind

Digital reinvention means procurement professionals are going to have to leave some core beliefs behind. Among these are the notions that competition trumps collaboration; price is tightly coupled to value; probity can be managed through process compliance; uncertainty and risk are images of each other; documentation must be exhaustive; and concealing knowledge confers power. In doing so, they will not only ready themselves for the future but will think and act in contemporary ways that will lead to further iterations in the function.

 

Savvy CPOs will hire and retrain staff for future roles. They’ll look out for coaches to establish and guide communities of practice; for professionals who can orchestrate buyers and sellers; and for problem-solving naturals who can interpret patterns in data to find the next big thing.

 

In setting up more adaptive and autonomous teams, these CPOs will broaden their influence. They will shift the dialogue from third-party spend management to broad-spectrum commercial management. Ultimately, this approach will create opportunities for the function everywhere the enterprise spends money.

 

Cath Thompson is a cofounder of digital transformation advisory firm Hypereal and a former CPO. She likes to write about topics at the intersection of innovation, technology, ethics and supply chains.