Why procurement will become innovation brokers in enterprise organisations
Over the last two years, I've spent considerable time talking to a whole range of people including executives in large enterprises; procurement and innovation teams; strategic suppliers to these enterprises; industry consultants; industry analysts and multiple technology companies ranging from global players to industry-specific start-ups. Without fail, the recurring theme across the board when it comes to what they believe will drive the future growth of enterprise organisations, is the importance of Supplier Collaboration and the subsequent innovation that can be driven from supplier ecosystems.
The evolution of procurement
So what is it about Supplier Collaboration and Innovation that has the power to evolve a whole organisational growth strategy and change how procurement operates within companies?
To look forward and really understand the power and opportunity of supplier collaboration and innovation, we have to start by looking back. Let’s take a moment to look back and remember just what the procurement world used to be like.
Let’s look at where procurement has come from…
Think about it, for the past 30 years, employees have been taught that the primary goal of procurement is cost savings. Companies hit their suppliers over the head until they get that year-on-year cost reduction, with little regard for the detrimental effect this has on any relationship they try to create with their supply base. Employees have been taught that the supply base is there to be engaged with at an adversarial level.
Needless to say, we don’t live in that world anymore. When we think about where organisations are today and where they need to be, we are moving light years away from that approach. We now live in a very different world. Today we live in a world where companies come out of nowhere and leapfrog the established order, relegating them to the fossil cabinet.
We live in the age of hyper-innovation and innovation ecosystems, a very different and not yet widely understood world. A world of huge potential, but a world that also involves huge complexity. A world where you can unlock huge growth potential through collaboration. And in this world, if you can unlock and nurture supplier collaboration and innovation, it pays off in a massively huge way.
When we actually stand back and think about it, what we really are saying is:
“Organisations now exist in a world where supplier collaboration and innovation needs to be at the forefront of a company’s growth strategy.”
In this world, the companies that are doing this, the companies that are embracing supplier collaboration and innovation, these are the companies that are thriving.
When you do a bit of homework, it’s pretty straightforward to see this trend. We can see it when we look at Pharma and look at the revenue growth of leaders in this industry over the last 3 years. In this time period we see that the companies who have embraced collaboration are growing faster and becoming leaders in innovation* when compared to peers in their industry.
McKinsey went out and tracked a number of companies engaging in deep supplier collaboration, and uncovered that they are getting 2x more EBIT growth over their competitors**. The funny thing is that that is not even that surprising when you think about it, because…
The current situation
…80% of large enterprise organisational spend goes on suppliers.
Think about that number for a minute. Think about how much of a figure that is for any company, for your company. It’s huge. For large enterprise companies it represents billions upon billions of dollars. That number is how your company does business.
But not only do you have this huge figure around spend with your suppliers, it’s also not distributed evenly amongst your suppliers. In fact, 85% of that figure you have in your head is spent with only 10-20% of your suppliers. So not only is that number huge, it’s also heavily concentrated. Think about the sheer amount of potential just resting in that concentrated bubble alone.
But guess what. Of the companies who have attempted supplier collaboration and innovation, the absolute most they can do in terms of coverage and managing this segment for true collaboration is between 10-20% max. We find ourselves living in this new world where our suppliers are the fundamental driver of innovation and growth in our organisation…
We spend all our money with them…
And yet we have no way in which to nurture collaboration and innovation in any proven and scalable way.
The potential here is huge. What organisations need to do is to unlock that potential. Actually, what they really need is a scalable way by which they can unlock that potential.
If we know this, why then can’t organisations transition into this new world of growth?
Let’s look at why this is not happening and the challenges that organisations face. These will resonate with you because they are the same challenges I see over and over again no matter who I speak to, and no doubt, ones that you are also faced with right now.
The challenge around supplier collaboration is that it’s a really manual process for every company right now, and this is hugely painful. You’ve got all these excel sheets floating about, you’ve got all these powerpoint docs being emailed around, you have all this stuff sitting on people’s desktops, in Sharepoint, on laptops…wherever they might be hidden away.
It takes a huge amount of time and energy to bring all these distributed, fractured and siloed points of information together, never mind trying to derive some strategy out of them. You can’t proactively report on any of this as you are constantly chasing your tail trying to tie down and see where all this manual info lies. It probably takes a team four weeks to even get a semblance of this information together when needed if they even can. Over time this fails, unravels and eventually dies. Why? Because it’s all manual and the information is buried and remains buried.
You can’t scale this process. Why? Because if you were to try and scale what you are doing manually today, you would need another 100, 200 staff to manage this. Even if you could hire all these people, the sheer expertise and value add that they should be able to bring to the table in terms of strategy and relationship building, would be completely tied up in all those manual processes.
They will be bogged down in all that lower-value work, instead of being freed up to engage in higher-value work that will, first of all, make them happier employees, and secondly contribute to that top-line revenue growth.
A third area around this is this massive mindset and experience gap that exists. Organisations we are not doing enough to educate employees to understand what true supplier collaboration involves. Some people think Supplier Performance Management (SPM) is ‘collaborating’, some think Supplier Relationship Management SRM is ‘collaborating’. Barely anyone understands the concept of collaborating to drive innovation and joining the dots with their suppliers. This fractured approach is crushing collaboration efforts.
For collaborative relationships to flourish, it’s vital that they are supported by a solid framework of governance and infrastructure. It’s vital that the way in which organisations engage with their supply base is digitized. It’s vital that they remove these low-value menial activities, and free up their knowledge workers to engage in, and drive the future growth of their company.
All of these things weigh down on the organisation, they constrain everything it does, everything they try to do. All of this makes organisations default back to what they know, pre-contract negotiation, and steer clear of everything post-contract. What we then see is all this huge effort and activity sitting in the pre-contract bucket and total neglect, along with missed opportunity, over in the post-contract stages.
Research carried out across the full breadth of the Fortune 500 has shown that 75% of savings negotiated as part of strategic sourcing disappear within 18 months of that contract being signed***.
Why? Because of neglect. To somewhat maintain these savings you need, at the minimum, supplier performance in there. But if you want to rocket-ship organisational growth, you need your supplier collaboration and innovation pipeline in there.
So what is the impact of not doing this, or doing it incorrectly? What is the impact of doing nothing and burying your head?
Quite simply, the impact is that organisation is less competitive. The failure to effectively collaborate with your supply base has a hugely adverse impact on an organisations ability to be competitive.
You don’t have any visibility as to where value sits in your supply base. You have no transparency on what is underpinning your future innovation pipeline or where it can possibly grow from. You cannot pinpoint which suppliers can drive your business and corporate objectives. You are running blind with the most important element of what should be the cornerstone of your company’s future growth strategy.
Your organisation is less agile. You are working in a totally transactional way. Staff are not making future-facing strategic decisions. They are bogged down in low-value activities. There is no real-time data, everything…is…slow.
It’s a whole litany of lost opportunities and sunken cost. To 10x your innovation pipeline, actively manage and nurture that pipeline, and ultimately drive growth, you need speed, you need scale, you need digitisation and you need real-time data that can drive all these business decisions.
In this new world, these new standards of growth will result in winners and losers, and lots of procurement and finance departments are either panicking or being dangerously ignorant about this tectonic change happening.
This cannot be dismissed as just a procurement issue, this will impact the whole company, through the business into every facet of its actual existence. The freight train is already in motion. If you don’t get this right, or think that it’s ok to sit back and do nothing, you will start to decline as an organisation, or worse still, become irrelevant.
And so the options here are to become a fossil…or embrace supplier collaboration and innovation and become a rocket ship for growth.
So where in the organisational landscape does this all sit?
We have our categories around transactional payments and invoicing, we call this space Procure2Pay. It’s already fairly mature, and it’s starting to become more and more automated as it matures further. We have the Strategic Sourcing suite, which initially had category management supporting this, but a lot of this has gone into the back office alongside the P2P function too. So now it’s really just the e-sourcing side and analytics that sit within the middle to front office.
So where does the value of the front office for procurement now lie?
I see it’s function as being one where you can manage internal needs & opportunities, and being able to pair these with suppliers capabilities; both current suppliers, and undiscovered startup suppliers that are not even on your radar yet.
That’s where Supplier Collaboration and Innovation exists. That’s where I see the competitive advantages coming through for global companies in the future.
The Future State
So what does this future state look like?
Imagine having a brain that knows and remembers the smallest details about all of your top tier supplier relationships. That knows exactly what your innovation pipeline looks like and how it maps against your organisational work-streams. That can give you a value on what your innovation pipeline can deliver for you over the next few years. And it knows this without you even having to lift a finger.
That future is data-driven, super-charged collaborative innovation with your suppliers.
What this would allow is for enterprise companies to unlock opportunities to get 10x R&D, drive innovation in a scalable way with the business, and then supercharge performance. In turn optimizing the business performance today, but also setting the stage for how they transform the business tomorrow and becoming one of those EBIT doublers.
Run the business today, change the business tomorrow.
What you then have is this business model, that is predicated on continuous collaboration and communication with your suppliers to drive innovation growth. It’s predicated on real-time insights based off the data of that collaboration and interaction.
Early on we realised that the set of systems built for P2P, the systems built for Strategic Sourcing, the systems built for CRM will not deliver this.
We realised we had to built our own system that talks to what Supplier Collaboration and Innovation truly is; shared visions and mindset; governance and stakeholder management; relational performance data; innovation pipeline management; value lever measurement against business objectives; the back and forth communications and collaboration on all of these elements; organisational permissions; three-way interaction on innovative ideas; all these complex ways of working that encompass what a supplier collaboration and innovation program truly is…a system that has to be dynamic and reactive to all of this. A system of intelligence.
All these companies who are re-inventing themselves for the shift to Supplier Collaboration & Innovation; that are building these supplier and growth-centric business models; the ones that are becoming modern companies trying to re-invent themselves so that they are not disrupted by the next startup or their existing competitors, they all find that the systems they have to solve other problems, the systems that they have invested in in the old world over the last 5, 10 and 20 years will in no way be able to support this new business model and they need something new that can.