TRANSFORM ORBE TRANSFORMEDHOW DIGITAL INNOVATION AND THE ADVENT OFAI WILL CHANGE PROCUREMENT FOREVER

IntroductionTransform or be transformed is the call to action for all organizations in the digital age. Driven by AI-powered solutions, the digital promise offers several advantages, not the least of which is the promise to free procurement professionals from mundane and repetitive tasks to focus on more strategic endeavors. Through this transformation, procurement professionals will be able to drive greater value that will significantly impact enterprise success beyond the bottom line.

Despite the opportunity for more significant gains, several obstacles make it difficult for organizations to bridge the divide between the promise of digital AI and realization.

Leveraging the results of our exclusive survey of 100 procurement professionals and the key challenges they have faced with digital implementations, including their views on the potential for AI to offer practical solutions, the intent of this paper is threefold.

1. To start, we will focus on what digital transformation and the advent of AI-driven solutions mean for the procurement profession. We will also discuss AI’s impact on the procurement department and the enterprise as a whole.

2. Second, we will examine the main obstacles to AI realization in the procurement world, including implementation and user adoption challenges.

3. Finally, we will present the next steps procurement professionals and organizations, in general, must take to successfully transform the enterprise to compete in a rapidly evolving global marketplace.

For many, digital transformation and the emergence of AI-driven solutions are relatively new realities. However, what we see today has been a long time coming from the standpoint of universal recognition followed by definitive action.

So, when it comes to the digital transformation of procurement, where does this leave us today – especially in a post-pandemic world going through its “own” significant transformation?

The SIG Survey

In 2021 SIG surveyed 100 procurement professionals from Fortune 500 and Global 1000 organizations on digital transformation and the use of AI in procurement. This report examines key challenges they faced with the digital transformation of the supply chain and their views on the potential for AI to offer practical or viable solutions.The survey indicates that procurement’s priorities lie with how AI technology can streamline the roles and processes to deliver meaningful and sustainable results.

In this context, when it comes to digital transformation, the survey identified the following three areas of primary interest for survey participants:

• The importance of current experience with digital AI technology• The extreme challenges with data management and the need for a sound data

modernization strategy• Improving the procurement management process

Not surprisingly, the above-referenced points of interest align with the focus points of this paper, and therefore we will reference the survey results extensively in this document.

Section I – Building for The Way the World Should Work

In his famous tweet about Uber, Box founder Aaron Levie wrote that the company was building a solution for the “way the world should work versus improving the way it does work.”

While Levie was not referring to procurement’s digital transformation when he made the statement, his words apply to AI’s impact — or potential impact. This latter point represents the promise of emerging technologies – to reimagine the procurement process and the role that professionals will play in this brave new world, starting with the end-user experience.

The Importance of User Experience

Why start with end-user experience versus providing a high-level overview of the many benefits of digital transformation, including tangible cost savings and bottom-line impact?

The answer is simple; AI technology does not drive the outcome; the end-user leveraging said technology produces the desired result. Therefore, transforming the end-user experience is what empowers the technology to deliver on its promise. In other words, the transformation process begins with people and not the technology, and a big part of that is understanding the “user experience.”

Understanding that transforming the user experience is essential for procurement AI success, SIG asked (on a scale of 1 to 5, where 5 was a high rating of importance) how survey respondents would rate the quality of their user experience. The average rating was 4.37.

A Better User Experience Could Radically Change Procurement Activity

Given the importance of user experience, it is clear that improvement in this area would radically change how the procurement professional works now to how they should be working in the future.

In this context, most SIG survey respondents believe that having the best possible user experience would impact their procurement activity. A slim majority (51%) say that it would radically change their ability to execute and allow them to tackle new problems. A slightly lower percentage (47%) say it would improve efficiency and speed “a bit.”

According to another survey, CPOs have consistently expressed the belief that their current teams lack the required skills to deliver on their strategic objectives.

Considering survey results, it would not be unreasonable to conclude that part of the problem is that organizations have not provided their procurement team with the needed tools to deliver optimal outcomes. In this regard, enhancing the end-user experience to leverage emerging AI technology effectively will have a positive and reverberating impact across the procurement function and the entire enterprise.

However, there are significant obstacles that the implementation of an AI solution alone will not address. The following section will discuss data access and quality and its impact on digital transformation success, including employee performance.

Section II – Data Modernization

Distinguished Professor of Supply Chain Management at Bank of America University, Rob Handfield, said that “digital transformation is impossible without clean data.”

Handfield then added that until an AI solution can automate the data cleansing process, “AI ROI will be limited to the useful yet nominal returns from periphery AI such as chatbots.”

While the limitations or degree of limitations of AI’s impact on a procurement practice is up for debate, there is no doubt that the ability to turn raw data into actionable knowledge is key to digital transformation success.

Earlier studies estimate that between 1% and 5% of data is ever analyzed, which would suggest that while we may aspire to be data-driven, we are driving blind.

According to the SIG survey (see below graph), most responding procurement professionals (82%) indicate they are experiencing similar data challenges, with only 18% feeling confident that their data is under control. The high percentage of the former clearly shows that data is a significant problem area in procurement.

While data access contributes to the above results, problems persist even when “captured and available” for analysis.

Making Sense of Data is a Struggle

One of the most telling results from the SIG survey is the revelation that 56% of respondents struggle to make sense of their data.

While many business leaders see emerging digital technology as a possible solution to addressing their challenges with analyzing their organization’s data, a March 2020 Harvard Business Review article stresses that leaders must create a data-driven culture to drive efficiencies.

In addition to culture, most executives (95%) also mention organizational and process challenges as impediments to big data and AI initiative adoption. In short, data quality is a people, process and leadership issue. Therefore, the best way to address the data quality problem is for CEOs to view data through a practical lens of increasing employee efficiency and effectiveness. Through this same “efficiency and effectiveness” lens, we will assess both the importance and benefits of a progressive data modernization strategy.

Bottom-line Impact and Employee Effectiveness

When SIG posed the question, “To What Degree is Your Effectiveness Hampered by Data Issues?” the survey results were telling.

The majority of procurement respondents (53%) stated that data issues had hampered their effectiveness in doing their job, at least “to a moderate degree.” Another 40% said their efficacy had been negatively impacted “to a large degree;” the combined total indicates 93% of respondents have experienced an adverse impact.

Improving Data Management Could Enhance Employee Efficiency

As part of the SIG survey, respondents were asked to identify how improving data management could enhance their job results. The most common responses were improving data accuracy, enhancing its integrity, and making it easier to trust. The other most frequently mentioned improvements are as follows:

• Optimize visualization of an existing situation• Strengthen analysis of trends• Improve spend management• Increase the quality of reports (e.g., more consistency)• Enhance decision-making, particularly in supplier negotiations

Below is a selection of additional responses, included to provide an idea of the full scope of views:

• Provide a single, centralized source of data• Reduce the volume of errors• Enhance risk mitigation• Offer real-time updates on transactions• Create a greater balance of workloads• Increase timeliness of work completion• Make actions more proactive than reactive

As indicated earlier, the challenges with the digital transformation of the procurement practice using AI are complicated and diverse. However, and like creating a good end-user experience, providing procurement professionals with access to quality data on a timely basis is a critical element of realizing an optimal return on your digital transformation strategy.

Section III – Reimagining Procurement

The 2021 CPO Survey reports the procurement function “isn’t just about cost savings and operational efficiency anymore.”

Citing innovation and digital transformation as two of the top areas where CPOs must focus their energies, reimagining procurement is about building “for the way the world should work versus improving the way it does work.”

That said, and per the graph below, there are specific starting points to lay a solid foundation for procurement’s digital transformation in core functional areas such as contract management, data analysis, and accounts payable.

In the SIG survey, respondents were asked to rate the expected impact of AI (on a scale of 1 to 5) on procurement operations in different areas. Not surprisingly, and based on our findings in the previous section, those responding to the survey believe that AI will significantly affect data analysis (average score of 4.42). The additional areas for which there is a high expectation of significant impact from an AI strategy standpoint are accounts payable, contract management, and purchasing.

The Parts of the Procurement Process in Which AI Utilization is a Priority

In this part of the SIG survey, respondents were asked to identify which elements of the procurement process they would like handled by

• Purchasing management• Reporting• Supplier sourcing• Invoice processing• Supplier performance management

Based on the above response, we will focus on contract management.

How Procurement Contracts Are “Managed” Within the Business

When asked about the process for managing procurement contracts, procurement respondents paint a mixed picture. A slight majority (55%) responding to the SIG survey stated that awareness is often lacking among people in the business (see below graph). The survey also found that not all respondents use or are aware of the contracts.

About 18% said there are announcements for some contracts, but it is not always clear which ones they should use. Only 14% indicated that things tend to run smoothly, with employees ordering what they need and their procurement systems ensuring that orders are “routed” to the correct supplier. 13% of those responding to the survey stated that there is an announcement for every contract. They also indicate that they are encouraged to switch to new suppliers if needed.

Measuring Contract Utilization and Compliance is a Manual Process

A significant majority of respondents revealed challenges in measuring contract usage and compliance. Specifically, 68% stated they measure contract utilization and compliance manually, first obtaining reports on purchases made and then locating applicable contracts for comparison purposes. Approximately 17% have a dashboard that illustrates contract usage in real-time, while 15% stated that they receive a regular report showing use and compliance for each contract.

Harnessing Off-Contract Spend

According to several studies, rogue or off-contract spend can reach “as high as 80% of total spend in some organizations.” Given the previously referenced findings from the SIG survey, we can see how off-contract spend continues to be a significant challenge for most organizations. The resulting disconnect between the contract and the purchase order is likely the single biggest breakdown in the end-to-end procurement value chain.

Of course, off-contract or maverick spend is not a new problem. Unfortunately, the problem persists despite procurement’s best efforts to negotiate and execute contracts aligned to strategic value opportunities. The introduction of traditional Contract Management Software – which has been around for many years, has failed to remedy the situation. When you consider the lack of progress to address off-contract spend successfully, the SIG findings clearly indicate that the contract to signature phase is only a small and first step towards achieving contract compliance. The more significant step is to get the contract to work.

Getting the contract to work is where AI-powered usability and visibility can make a huge difference. By leveraging the power of AI to crunch the data - turning information into actionable insights, it becomes much easier to create a “living contract” that can, for example, proactively alert you when it is not being utilized or when the prices aren’t being honored.

When it comes to the digital transformation of the contracting process leveraging AI, organizations will become more proficient at creating the right contracts. AI will also effectively monitor contract adherence and usage to drive purchasing behavior and maximize the value from each contract.

SUMMATION – A Unified Approach To AI

A February 2021 article about reimagining the role of procurement to “accelerate the next (transformation) and beyond” emphasizes how “organizations must reimagine how their procurement function operates and assess the new capabilities it will need to better respond to rapidly changing market dynamics.”

To achieve this level of transformation, the authors talk about the need for “smarter procurement practices” and the importance of having “data-driven insights.”

The results of the SIG survey that we have covered so far confirm the veracity of the assessment. The question this raises is, where do organizations begin their transformation to realize this procurement efficiency level?

A “Unified” Approach to Procurement

A successful digital transformation strategy leveraging AI must eliminate the loss of value between each step or phase of the end-to-end procurement process by providing a single data-centric system.

This unification of the procurement process ultimately preserves the integrity of information as it flows from analysis to planning to sourcing to contract to catalog to order and invoice.Unlike traditional procurement solutions, a unified platform does not consist of different suites of procurement applications. Instead, it is a complete and fluid end-to-end architecture that creates a single, reliable source of truth throughout the entire source-to-pay (S2P) cycle empowering procurement to optimize real-time decision-making and achieve strategic objectives.

Great Awareness of Unified Procurement Platforms

In a unified procurement platform, all relevant functions, including sourcing, contracting, supplier management, and purchasing, are features of a single system. According to the SIG survey, a high percentage of procurement professionals (86% of respondents) are aware of this type of platform.

Potential Value of a Unified Procurement Platform

In asking respondents about the potential value of a unified procurement platform, the SIG survey reports that slightly more than half (53%) stated that a “unified system” (one combining all functions) is the best way to drive efficiency. The next most common response is “it depends, as long as the software does what is needed” (22%), to be useful. About 14% of respondents said that ensuring the best software for each role will bring value.

AI and the Unified Procurement Platform

AI both enables many of the functions of the unified platform today and will appear more and more as the driving force behind new capabilities extending the single platform. For example, the unified platform model permits the procurement operation to take on more of the value chain and gain visibility and control over a wider remit.

Demand planning, inventory control, category management, budget planning and direct material sourcing are now all capabilities available in a single system alongside procurement’s heartland of source-to-pay. This total business management system will continue to expand, bringing procurement, supply chain and operations teams together, and AI is the enabling technology that makes it possible.

To learn more about the Unified Procurement Platform and how to leverage AI to maximize procurement’s impact on the emerging global enterprise, we invite you to visit the GEP website at https://www.gep.com/innovation/unified-procurement-platform

About GEP

GEP delivers transformative supply chain solutions that help global enterprises become more agile and resilient, operate more efficiently and effectively, gain competitive advantage, boost profitability and increase shareholder value.

Fresh thinking, innovative products, unrivaled domain expertise, smart, passionate people — this is how GEP SOFTWARE™, GEP STRATEGY™, and GEP MANAGED SERVICES™ together deliver supply chain solutions of unprecedented scale, power and effectiveness. Our customers are the world’s best companies, including hundreds of Fortune 500 and Global 2000 industry leaders who rely on GEP to meet ambitious strategic, financial and operational goals.

A leader in multiple Gartner Magic Quadrants, GEP’s cloud-native software and digital business platforms consistently win awards and recognition from industry analysts, research firms and media outlets, including Gartner, Forrester, IDC, and Spend Matters. GEP is also regularly ranked as a top supply chain consulting, and strategy firm and a leading managed services provider by ALM, Everest Group, NelsonHall, IDC, ISG and HfS.

Headquartered in Clark, New Jersey, GEP has offices and operations centers across Europe, Asia, Africa and the Americas. To learn more, visit www.gep.com.

About SIG

Sourcing Industry Group (SIG) is a membership organization that provides thought leadership and networking opportunities to executives in sourcing, procurement, outsourcing and risk from Fortune 500 and Global 1000 companies and the advisors who serve them.

SIG is widely known as a forum for sharing “next” practices and thought leadership through live networking events, virtual forums, and a comprehensive online SIG resource center (SRC) developed by and for professionals in sourcing and outsourcing. The organization is unique because it blends practitioners, service providers and advisory firms in a non-commercial environment.

SIG is also the parent organization for SIG University, which offers a one-of-a-kind certification and training program for professionals and executives seeking deep expertise in sourcing and governance for themselves or their teams. SIG also publishes the Future of Sourcing, which provides unrivaled digital content for the opinion-formers and decision-makers at the heart of the outsourcing space.