Procurement expert Keith Hausmann offers some perspectives on how the function will utilize new technology to help businesses manage their spend more efficiently and improve the bottom line
Tell someone five years ago that the mid 2020s would be a time of wars, the worst inflation in two generations, and a pandemic that is ongoing and wreaking economic harm, and they might have been incredulous. The truth is that this is our reality. And while businesses are used to dealing with uncertainty, they have never had to deal with this amount of it.
Here, I will outline five ways for the procurement function to step up and play a vital role in dealing with such uncertainty and chaos in 2023.
1 – Indirect spend will become a practical way to optimize cost control
A key element playing into the current chaos is the fact that the tried and trusted methods that CFOs and others in the C-suite could rely on to improve the bottom line simply don’t work as well as they used to. Primary here is the default way for curbing spend—concentrating on direct spend, and looking for discounts on the input side of your processes—isn’t as effective in a time of rising inflation, when everyone’s costs are increasing.
Meanwhile, indirect spend has been a poorly understood area for businesses for too long. Organizations are vague about all the outlays incurred outside of producing the main product or service they offer to the market, ignoring the money spent on marketing, technology, real estate. Accountants say that indirect spend accounts for anything from 20 to 40% of organizations’ budgets, but they are unlikely to offer a more granular breakdown.
That lack of visibility is due to a lack of good data on what indirect spending is going on. We assume that the purchase order approval process means there is accountability for spending across the business—but approval governance isn’t necessarily the same thing as comprehensive strategies to ensure fair market value on these types of expenditures. And if it’s a choice between optimizing spend on training or consulting services and media purchases or making layoffs, then managing indirect spend probably is a better strategy in today’s pressurized market. Estimates show that just a 5% reduction in indirect spend can translate into a 1 to 3% impact on a company’s bottom line.
2 – Automation will bring control over indirect spend
Technology is the best way of managing that indirect spend as new platforms—utilizing leading-edge Machine Learning and Artificial Intelligence techniques and algorithms—are emerging that provide deep insights directly into it.
To date, automation and robots tend to have had an impact on repetitive, low-value tasks. But as these technologies mature, they are assisting in business functions higher up the value chain. The automation we see having the most impact for customers is in procurement. Budget holders and purchasing and contracting teams would appreciate technology that reliably optimize workflows in this area. They want interfaces that would be quicker to use than the complex ERP systems they struggle with (and require expensive training on).
Use of automation could help smaller teams streamline staffing and do more with less. And AI-enabled indirect spend management will promote data-driven optimal supplier selection, guiding budget owners toward making the best decisions, especially when their spending is directly impacting the company’s profitability targets.
3 – Skillsets will shift from today’s transactional focus to a much more strategic one
So, the procurement function will get new tools and be able to work better and more efficiently with areas of the business whose spend it has previously struggled to manage. This will allow them to do more valuable work as a result.
As successful use of data, advanced analytics and automation become more widespread, organizations won’t need as many transactional skills in procurement. Instead, problem-solving with external partners and internal colleagues, will rise in importance. The successful procurement teams of 2023, empowered by the ability to leverage insights derived from modern spend management tools, will deliver a stream of optimized, data-driven sourcing decisions, but also offer expert market and operational guidance to the C-Suite. This will bolster overall efficiency, free up team members’ time for more rewarding contributions, and free up budget.
4 – Chief Procurement Officers will face a growing war for talent
We’ve now established that the 2023 procurement specialist is better supported, doing a more essential job, and extending their reach.
From this, many organizations will realize that their talent pool in areas like marketing or technology buying are not staffed to address the needs or opportunity. A big factor in that is that the procurement specialist who’s good at negotiating with product manufacturers is not necessarily suited to negotiating deals for media, healthcare or software—the two areas are not comparable.
CPOs can’t easily recruit the new class of market-informed procurement experts they need, and the answer is complementing humans with competences and knowledge through third-party help or machine-derived intelligent insights and support.
5 – CPOs will become critically important to business
As inflation remains stubbornly high and the economy slides into some form of recession, this prediction will be borne out by the next few months.
The leaders of your procurement function will become the central accountable point for the C-suite. Leaders will flex the strategic vision, the IT roadmap, while the CPO and his team will apply all their firepower to seeing how OpEx and CapEx can be spent with maximum utility from a cost and value perspective to improve the bottom line.
As custodians of billions of dollars in spending that a typical Fortune 500 company generates, as well as the data associated with that spending, the CPO will be handling an increasingly strategic lever that helps organizations properly and comprehensively manage costs while prioritizing resources in key areas. And given the reality we’re in, that’s the best foundation for managing the next couple of years of economic disruption.