The role of procurement is changing fast in today’s ‘new normal’ induced by the Covid-19 pandemic. Naresh Kumar, Ray Berglund, David Jones – experts at Alvarez & Marsal – outline four procurement trends that are poised to become more relevant to procurement, operations and finance professionals in the coming months and years.
Adoption of cloud and AI-based spend analytics
Obtaining third-party spend visibility has become less onerous with the rise of deep data analytics and data visualisation applications. Too often, spending data is tangled up in complex enterprise resource planning (ERP) systems. Today, affordable AI-based tools help stakeholders collaborate effectively and optimise indirect spend rather than getting lost in spreadsheets.
Increasingly sophisticated ‘analytics as a service’ providers can also accelerate value creation. In all, around 75% of indirect spend can be positively impacted, making regular spend assessments led by zero-based budgeting methodologies a strategic imperative.
The disruptive rise of digital procurement and e-marketplaces
Employees use slick e-commerce platforms like Amazon in their personal lives, but this is not often the case when it comes to procuring on behalf of their employers. Most procurement processes are still geared around compliance and use old and rigid frameworks, slowing down businesses with excessive bureaucracy.
‘Plug-and-play’ buying platforms with ‘digital by default’ content and processes are transforming the procurement experience for early adopters, building cost-conscious culture while improving employee experience. Services buying focussed E-marketplaces like Globality, which standardise the requirement-gathering process for services such as IT or marketing, have started to gain more traction with corporates.
Besides connecting buyers and suppliers, these marketplaces are delivering win-win outcomes by standardising the requirement gathering process, speeding up sourcing timelines and avoiding giving sub-conscious preferential advantage (via excusive but unnecessary requirements) to a specific supplier.
Collaborative sourcing and spend aggregation across portfolio companies
Collaborative buying consortiums, such as Group Purchasing Organisations (GPOs), can enable more effective management of indirect spend. Firms like Blackstone, KKR and TPG have saved millions through GPOs such as Core-Trust, harmonising prices and terms on cross-sector categories such as hardware and office supplies.
Meanwhile, similar results can be seen in the private equity sphere. Investors such as 3G Capital and Danaher have unlocked value with leveraged procurement, creating a ‘capability stack’ including on-demand spend visibility, volume aggregation, zero-based budgeting policies and IT-enabled end-to-end buying processes. In-house procurement teams are essentially paid for by supplier rebates at no cost to portfolio companies, and – if aided by a robust private equity mandate and management buy-in – can deliver double-digit return on investment.
‘As-a-service’ business process outsourcing
Sales, general and administrative activities are by definition not core to revenue-generating operations, which has made business process outsourcing (BPO) a mainstream choice since the discipline’s emergence in the 1980s. In general, multinationals don’t aggregate spend and contracts across regional business units, to avoid untangling messy contracts that can complicate performance and make monitoring more complicated.
However, outcome-based outsourcing deals can help deliver on value creation targets while mitigating the risks of in-house centralisation. Three- to five-year outsourcing arrangements can help companies capture full profit and loss (P&L) potential, and as with so many other areas of business, ‘as-a-service’ BPO infrastructure is making the outsourcing process easier than ever before.
Whether or not to outsource indirect procurement is a nuanced debate with different pros and cons, but indecision can result in stagnation or actually erode significant value. If the business case for internal indirect procurement improvements appears unconvincing, leaders should be bold and push management to outsource spend to BPO players specialising in indirect procurement.
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