building-agility-and-resilience-procurement-digital-economy_1 (1)

Procurement Executive Insight Management Issue August 12, 2016Building Agility and Resilience IntoProcurement for a Digital EconomyBy Patrick Connaughton and Christopher SawchukExecutive SummaryThe turmoil in commodities, emerging markets and financial markets in 2015 shows no signs of abating. In addition,companies continue to grapple with the threat of disruptive innovation, intensifying competition and pressures totransform their business models to compete in the digital age. Against this backdrop, procurement must becomemore agile in the way it delivers services. It must not only manage through short-term headwinds but alsostructurally transform itself for the mid-term and long-term. As in all times of rapid change, these challenges alsoo er unprecedented opportunities to create competitive advantage.Procurement Agility in a Digital AgeOnly 17% of procurement organizations studied byThe Hackett Group rank their currentbusiness environment as stable.The vast majority are dealing with a dynamic set ofcircumstances, including the threat of disruptive innovation, intensifying competition, andpressures to transform their business models to compete in the digital age (Fig. 1) .FIG. 1 Rat e of c hang e in business en vir onment Percentage of companiesStable 17% Highly HIGHLY DYNAMIC: Shrinking produc t dynamic lifecycles, high risk of disruptive innovation, intense competitio n 33% MODERATELY DYNAMIC: Stable productModerately 50% lifecycles, moderate risk of disruptivedynamic innovation, new competitio n STABLE: Long product lifecycles, low threat of disruptive innovation, well-known and understood competitorsS ource: Pr ocurement Agility P oll, The Hac kett Group, 20 16© 2016 The Hackett Group, Inc.; All Rights Reserved. | 6000181 Procurement Executive Insight I The Hackett Group I 1

Procurement Executive Insight Management Issue August 12, 2016Building Agility and Resilience IntoProcurement for a Digital EconomyBy Patrick Connaughton and Christopher SawchukExecutive SummaryThe turmoil in commodities, emerging markets and financial markets in 2015 shows no signs of abating. In addition,companies continue to grapple with the threat of disruptive innovation, intensifying competition and pressures totransform their business models to compete in the digital age. Against this backdrop, procurement must becomemore agile in the way it delivers services. It must not only manage through short-term headwinds but alsostructurally transform itself for the mid-term and long-term. As in all times of rapid change, these challenges alsooffer unprecedented opportunities to create competitive advantage.Procurement Agility in a Digital AgeOnly 17% of procurement organizations studied by The Hackett Group rank their currentbusiness environment as stable. The vast majority are dealing with a dynamic set ofcircumstances, including the threat of disruptive innovation, intensifying competition, andpressures to transform their business models to compete in the digital age (Fig. 1).FIG. 1 Rate of change in business environment Percentage of companiesStable 17% Highly HIGHLY DYNAMIC: Shrinking product dynamic lifecycles, high risk of disruptive innovation, intense competition 33% MODERATELY DYNAMIC: Stable productModerately 50% lifecycles, moderate risk of disruptivedynamic innovation, new competition STABLE: Long product lifecycles, low threat of disruptive innovation, well-known and understood competitorsSource: Procurement Agility Poll,The Hackett Group, 2016© 2016 The Hackett Group, Inc.; All Rights Reserved. | 6000181 Procurement Executive Insight I The Hackett Group I 1

Process digitalization, real-time information capability, knowledge-worker productivity, and inter-enterprise integration are the cornerstones of an agile operating model. All of these are dependent on technology. Today, digital business transformation is a truly enterprise-level business issue whose impact stretches far beyond the procurement organization. Against this backdrop, procurement must become more agile in the way it delivers services. This is not news to procurement organizations: 74% of respondents to our annual Procurement Key Issues Study ranked “improving agility” as a critical or major objective in 2016. However, only 36% said they have a high ability to do so today. To adapt, organizations must weave agility into every aspect of their service delivery model (SDM). This report explores what agility means in the context of the SDM’s architecture, organization and human capital components. Developing Procurement’s Culture and Talent Is Critical to Fostering Agility Culture is perhaps the most important enabler of enterprise agility. Adaptive organizations embrace change and recognize that it is a constant in business. A company’s culture and ability to respond to change often have deep historical roots. Those founded in the stable, predictable business environment of the industrial era are apt to have difficulty creating a culture that accepts change as a way of life. On the other hand, companies that came of age in the digital era tend to thrive in a fast-changing business environment. Leadership is inextricably linked with culture. Changes to culture must be initiated at the top, with modifications to executive behavior and beliefs. Examples abound of companies that struggled to institute a change-oriented culture until senior leaders visibly and thor- oughly committed their support. But change leadership is not confined to the executive suite; in an adaptive organization, leadership is required at all levels of the hierarchy. For this model to be successful, empowerment and decentralization of decision-making authority are required. Empowerment eliminates delays caused by the need to obtain approval from management layers higher in the company. Decentralization of decision- making power to those closest to the customer, who have the best understanding of current business conditions, accelerates the process and improves enterprise agility. Leadership, culture and adaptability are embodied in an organization’s talent, making enterprise agility ultimately dependent on the caliber of that organization’s people (Fig. 2). FIG. 2 Characteristics of an agile procurement culture AGILE PROCUREMENT ORGANIZATION Low agility Agility enabler High agility Change-averse culture; desire to Culture Embraces change; views change as preserve status quo; focus is on an opportunity; focus is on business resource utilization outcomes Talent tied to specific roles; common Talent Flexible talent placement; talent talent management strategies for all management tailored to needs of roles; roles; limited learning and development continuous learning and development Bureaucratic decision-making; lacks Leadership Delegated decision-making authority; empowerment; fosters inappropriate change-oriented leadership; calculated risk taking risk taking Source:The Hackett Group The caliber of a company’s workforce is a reflection of the maturity of its talent manage- ment capability. Different kinds of talent are related in different ways to enterprise agility and organizational adaptability. For example, the impact on agility of widely available “commodity” skills is largely a function of the scalability of capacity and variabilization of cost. Companies that are unable to expand their labor capacity may have trouble re-© 2016 The Hackett Group, Inc.; All Rights Reserved. | 6000181 Procurement Executive Insight I The Hackett Group I 2

sponding to market opportunities, while an inability to quickly reduce staff size may com- promise cost competitiveness. At the same time, specialized knowledge-centric skills in business services will be in high demand and may even be competitive differentiators. Hackett Group research has identified the key characteristics of agile culture, leadership and talent, as described below. • Training is conducted in the field, not in a classroom. Learning is creative, engag- ing, challenging and specific, based on real-life scenarios. Training focuses not only on the traditional discipline of sourcing or procurement but also addresses cultural aware- ness and sensitivity. This helps global teams work effectively together and has the added benefit of building global supplier relationship management skills. • Staff are rotated within and between business units and geographies. This ensures that potential future leaders have a broad understanding of the entire value chain. • Job candidates are recruited from outside the typical pool of procurement and sourcing specialists. Softer skills like relationship management, intellectual curiosity and business acumen are highly valued. Rather than hiring solely for experience, man- agers look for a combination of skills, experience and entrepreneurial spirit. They value quick learners and logical thinkers who can also build relationships. Staff can always be trained in the sourcing process, but softer skills are more difficult to teach. • Procurement’s culture is defined by successfully challenging the status quo, influencing leadership to try something different. It is a “constructive disrupter,” displacing less-efficient traditional processes with new, creative solutions that are able to scale with the future strategy. Building an Agile Information and Technology Architecture Without advanced information management capability, procurement agility is impossible. Agile operations require a “sensory” system that monitors external conditions and analytical capabilities that comprehend this data within the business context. This flow of feedback information is the basis for business decision making in agile enterprises. Information-centric organizations have discarded strategic planning based on rigid models and lengthy time horizons. In agile enterprises, strategic planning is dynamic, information-driven and adaptable to changes in business conditions. These may take the form of one-off events such as supply chain disruptions, or more gradual evolutions, as in shifting customer preferences. In fact, our 2016 Procurement Key Issues research shows that, of all the emerging trends that will shape the future of procurement, predictive analytics and forecasting tools will experience the greatest level of transformation in the next decade (Fig. 3). FIG. 3 Trends with the greatest transformational impact on procurement over next decade Predictive analytics and forecasting tools 65% Cloud computing 48% Millennial workforce 47% Mobility 43% Cognitive computing infused into 30% 27% procurement software tools Robotic process automation Enterprise social networking 19% 3-D printing 7% Source: Key Issues Study,The Hackett Group, 2016© 2016 The Hackett Group, Inc.; All Rights Reserved. | 6000181 Procurement Executive Insight I The Hackett Group I 3

Procurement agility defined Information is the lifeblood of business. Without leading-edge information managementA confluence of high volatility, technol- capability, enterprise agility is impossible. Today’s most agile companies createdogy-led innovation and hypercompeti- competitive advantage over others in their industry by developing a core competency intive market conditions has accelerated information management and analytics (Fig. 4).the rate of change in business tounprecedented levels. Agility is the FIG. 4 Information and technology enabled agilitykey to success in this environment. Ina procurement context, agility refers INFORMATION AND TECHNOLOGYto streamlining the buying experienceand creating an organizational model Low agility Agility enabler High agilitythat permits quick reaction to chang-ing requirements. Calendar-driven planning; single set of Risk forecasting Adaptive, dynamic planning process, planning assumptions and planning multiple scenarios and dimensions toAgile procurement organizations have planning modelsfour distinct attributes: Ad hoc response to variances; disjointed Performance KPIs aligned with business strategy,• Information-driven, proactive KPIs; manages reactively based on management proactive performance management decision-making, leveraging infor- lagging indicators based on leading indicators mation and predictive analytics to improve the quality and timeliness Fragmented systems and data models; Information Mature systems, data models and of decision-making. poor data governance; limited analytical governance governance, broad adoption of analytics tools• Industry leadership in digitizing their value chain, including supply Limited adoption and understanding I-SMACC Actively researching and adopting and demand chains as well as inter- of what I-SMACC (Internet, Social, adoption I-SMACC solutions. Procurement has nal operations. Mobile, Analytics, Cloud) means for Business a clear understanding of the sourcing procurement network implications• Customer-centric planning pro- collaboration cesses and day-to-day business Fragmented, disjointed, single-purpose Business networks extend from source decisions. (e.g., invoicing only) networks to pay and include broader trading partner collaboration• Operational responsiveness per- mitting swift response to changes Source:The Hackett Group in the supply chain, customer pref- erences, the competitive landscape As the role of procurement evolves from transactional facilitator to trusted business and business strategy. advisor, mastery of the next generation of analytics – a.k.a. big data – will be a key enabler. Big data has been a game changer for customer analytics, offering an unprecedented ability to quickly model massive volumes of structured and unstructured data from multiple sources. For procurement organizations, taking advantage of the value of advanced analytics necessitates creating new technology roles, aligning agendas and elevating the overall level of institutionalized technology knowledge. The following represent the principal characteristics of agile procurement organizations: • Their ability to react quickly to change is due to continuous risk forecasting and planning. For most typical companies, finding the right balance between work on supply risk mitigation initiatives versus other strategic areas remains a challenge. To date, their attention has mainly been on scanning supplier market intelligence for signs of financial distress (which may hint at supply volatility); evaluating alternative sourcing arrangements; and running what-if network design scenarios to identify risks and build resiliency into the supply network. Increasingly, however, the scope of procurement’s role in risk management is expand- ing (Fig. 5). For example, protecting the privacy of sensitive and personal data has taken on a burning importance, as the amount of data stored and used by suppliers proliferates. What is procurement's role in the supplier pre-qualification process when suppliers will be handling sensitive data? How should procurement work with the IT organization to understand and track compliance with data-security policies and regulations? For these and other risk-related topics on procurement’s plate, the key to success is having the right governance, people, processes and technology in place to actively mitigate and manage supply risks.© 2016 The Hackett Group, Inc.; All Rights Reserved. | 6000181 Procurement Executive Insight I The Hackett Group I 4

FIG. 5 An integrated view of risk Internal ecosystem RegulatorDy ocodmd pfrliaannkc,eFFFIDECA, FCPA, anti-bribery ILS, EHS Product linesBusiness units Geographies SUPPLIER RISK EVENTS Suppliers and sub-suppliers Vendors An integrated EXTERNAL MARKET EVENTS Partners view of risk INTERNAL ORGANIZATIONAL Service providers Contractors EVENTS Third parties TECHNOLOGY-RELATED EVENTS Extended ecosystem Source:The Hackett Group • They already have plans for taking advantage of future developments in social, mobile, analytics, cloud and cognitive computing. They consider the following when building out their plan: – Internet of everything: How can sensors, location-based services, RFID, etc., help make our supply chains more agile? – Social media: Can social media be used as a tool to detect supplier risk patterns? Can we use it to collaborate inside and outside of the procurement organization? – Mobility: Can we conduct the business of procurement on the move? – Analytics: What predictive modeling capabilities should we invest in? – Cloud: What do we need to know about the risks of sourcing cloud technology? – Cognitive computing: How will this revolutionize spend analysis? Risk forecasting? • Agile supply chains are built on a network of real-time visibility. Information-driven decision making, customer-centricity and operational responsiveness are all byproducts of end-to-end, real-time network visibility. Today, supplier networks are at the epicenter of business-to-business transactions. They provide a platform for buyers and sellers to exchange digital documents like orders, invoices and shipment notices. However, the true potential of these networks remains untapped. We believe that B2B networks hold the key to unlock procurement’s digital transformation, bridging the gap between trading partners operating with different levels of technology sophistication. Ultimately, they make up the basis of an ecosystem of source-to-pay applications sup- porting not only order and invoice automation, but also regulatory compliance, risk and corporate social responsibility, serving as a hub of knowledge, insights and analytics for the entire direct and indirect supply chain. • An agile procurement technology footprint is characterized by a comprehensive network of software solutions. These include mature purchase-to-pay solutions as well as emerging vendors in areas like risk, mobile spend analysis and spot-buying.© 2016 The Hackett Group, Inc.; All Rights Reserved. | 6000181 Procurement Executive Insight I The Hackett Group I 5

“A lot of procurement Enabling an Agile Service Delivery Model executives have been Agile service execution is concerned with procurement’s delivery engine – specifically,molded and developed in the ability of this engine to be reconfigured, accelerated or slowed down, and scaled up their careers to become or down in response to changing business demands, while continuously improving unit cost and quality of services. optimizers, but we need innovators. In the Agile service delivery requires that process automation, enabling technology, service placement and sourcing models be optimized for speed and flexibility. Services must past, managers often be scalable and customer-driven (Fig. 6). They must also be responsive to changes took comfort in hiring in business demands. This is a radical departure from a service delivery model that is designed to maximize cost effectiveness. like-minded people, which yielded a kind of FIG. 6 Automation, COE and outsourcing-enabled agility groupthink that is not AGILE SERVICE DELIVERYsustainable. You may geta temporary lift for a few Low agility Agility enabler High agility years when someone Labor-intensive; fragmented systems; Automation Technology-intensive, integrated comes in and optimizes ‘swivel chair’ processing transactional systems; high levels of “touchless” orders (automation) something, but when you are challenged Limited adoption of COEs; the scope Centers of COEs are used for more advanced work of work includes only the most excellence like spend analysis, market intelligence, to change the model transactional tasks tactical sourcing and risk forecasting altogether, it is very difficult. Transformation Large, all-encompassing projects Outsourcing “As-a-service” outsourcing of select requires people who spanning multiple functions (finance, areas in bite-sized, consumablebring individual creativity procurement, HR); business cases are parts; business case is tied closely to and thinking to the table based solely on labor arbitrage performance and are willing to raise controversial issues Source:The Hackett Group and consider alternative The key initiatives that agile procurement organizations are undergoing include: ideas.” • Agility leaders are piloting robotics process automation (RPA) in purchase-to-pay. – CPO of a Fortune 500 Large outsourcing providers have begun to reap the benefits of RPA as a way to lower their own operating costs. GBS and procurement shared service centers are starting global mining company to explore the potential as well, and expect positive results (Fig. 7). RPA makes most sense in stable, relatively static applications with a need to access multiple systems, limited requirements for human intervention and exceptions handling, and high trans- action volumes. Companies should also know the current cost of manually completing the work before making any decisions about the applicability of RPA. FIG. 7 RPA: Expected benefits Operational efficiency/productivity 65% Process cost reduction 52% Increased quality and accuracy 48% Increased productivity from 43% increased focus on value-added activity Improved data analytics/ 22% management information Increased regulatory compliance, 9% (e.g., from traceability of data/information) Source: Purchase-to-Pay Key Issues Poll,The Hackett Group, 2016© 2016 The Hackett Group, Inc.; All Rights Reserved. | 6000181 Procurement Executive Insight I The Hackett Group I 6

• Centers of Excellence are hubs of more advanced analytics, including spend analysis, market intelligence and risk forecasting. Nearly all advanced procurement groups use some type of COE to ensure that staff and internal customers receive consistent, best-practice-based support for knowledge activities such as analytics, benchmarking, reporting and transformation support. The most common responsibility is supporting strategic sourcing, including methodology, templates and market intel- ligence (MI). In many cases, the COE’s role is to program-manage and promote the adoption of MI within the organization, gathering pre-packaged, completed MI reports from external sources and disseminating them across the organization. • Outsourcing is helping procurement organizations address tail spend and increase their influence by staffing tactical sourcing desks and maintaining catalogs. World-class procurement organizations have streamlined their internal processes, capitalized on existing savings opportunities, developed advanced strategic sourcing programs, and consolidated at least 80% of spend down to 20% (or less) of their suppliers. Despite these successes, pressure to unearth new sources of savings remains. To do so, procurement must expand the scope of its influence and take a hard look at the roughly 20% of spend spread thinly across the remaining 80% of suppliers – i.e., the tail spend. Tackling tail spend requires a multifaceted approach that includes the use of e-catalogs, tactical sourcing desks, spot buying technology and outsourcing providers (Fig. 8). FIG. 8 Example of tail spend at a company with a non-mature procurement organization with 55% spend influence 80% of 40% of indirect 10% maverick spend spend spend sourced that should have been by procurement strategically sourced Total spend per supplier 15% candidates for tacƟcal buying desk 10% not influenced 15% transacƟonal purchases covered by e-catalogs 40% 5% not 15% candidates for spot buys influenced by influenced strategic sourcing 10% 10% not 5% unknown 5in%fluenced influenced by 15% not buying desk infl. by e-catalogs influenced Suppliers 20% 100% Savings 5-7% 3-4% 0-2% Source:The Hackett Group Conclusion Attempts to increase agility through process redesign, reorganization, strategic reorientation and digital business transformation are bound to deliver unsatisfactory results or fail outright if organizations are unable to change. If the desire for change is there, the following steps are recommended to get started: • Assess the agility of the company service delivery model. Identify areas of weakness and what must be changed if the company is to support procurement’s evolving role. • Take an honest inventory of procurement’s identity and culture. Is it an optimizer or an innovator? Does it operate seamlessly across cultural and geographical bound- aries? Embed the concept that ability to work in a dynamic, even chaotic business environment is a necessity in all recruiting, hiring and training activities. • Even in nonregulated businesses, risk forecasting and planning is a hallmark of agility. Evaluate the current risk management program both for depth and agility. Benchmark cycle times to strike the right balance between the two.© 2016 The Hackett Group, Inc.; All Rights Reserved. | 6000181 Procurement Executive Insight I The Hackett Group I 7

• Invest in predictive capabilities and pilot emerging technology. Work toward ex- The Hackett Group (NASDAQ: HCKT) is panding single-function supplier networks into interconnected business communities. an intellectual property-based strategic consultancy and leading enterprise• Consider outsourcing to help manage tail spend. Model the ROI on efficiency gains benchmarking and best practices and compliance versus savings. implementation firm to global companies. Services include business transformation,Related Hackett Research enterprise performance management,“Procurement’s Role in Enabling Enterprise Agility,” July 2016 working capital management, and global business services. The Hackett Group also“Spot-Buy Software: A Modern Approach to Managing Tail Spend,” February 2016 provides dedicated expertise in business strategy, operations, finance, human“Procurement’s Key Priorities in 2016: Reducing Tail Spend, Increasing Influence, capital management, strategic sourcing,Embracing Predictive Analytics,” January 2016 procurement and information technology, including its award-winning Oracle EPM andAbout the Advisors SAP practices.Patrick Connaughton The Hackett Group has completed more thanSenior Research Director 11,000 benchmarking studies with major corporations and government agencies, Mr. Connaughton leads the development of The Hackett Group’s including 93% of the Dow Jones Industrials, intellectual property in the areas of strategic sourcing and procurement. 86% of the Fortune 100, 87% of the DAX 30 He has over 15 years of experience in supply chain and procurement and 51% of the FTSE 100. These studies research and advisory roles. He has published groundbreaking research drive its Best Practice Intelligence Center™, in areas like spend analysis, contract life cycle management, supplier risk which includes the firm’s benchmarking assessments and services procurement. Prior to joining Hackett, he was metrics, best practices repository, and bestprincipal analyst at Forrester Research, where he focused primarily on helping executives practice configuration guides and processmitigate risk through more effective supplier relationship management. Previously, Mr. flows. It is this intellectual capital that enablesConnaughton was a consulting manager at Manhattan Associates and Accenture. The Hackett Group’s clients and partners to achieve world-class performance.Christopher S. SawchukPrincipal & Global Procurement Advisory Practice Leader Email: [email protected] www.thehackettgroup.com Mr. Sawchuk has nearly 20 years of experience in supply management, working directly with Fortune 500 and midsized companies around Atlanta +1 770 225 3600 the globe and in a variety of industries to improve all aspects of London +44 20 7398 9100 procurement, including process redesign, technology enablement, Sydney +61 2 9299 8830 operations strategy planning, organizational change and strategic sourcing. Mr. Sawchuk is a regular contributor to business publications, Atlanta, Chicago, Frankfurt, Hyderabad,a frequent presenter at industry events and co-author of ePurchasingPlus. He has London, Miami, Montevideo, New York,been recognized by Supply & Demand Chain Executive magazine as one of its “Pros to Paris, Philadelphia, San Francisco, Sydney,Know.” Mr. Sawchuk’s background includes engineering and operation roles with both VancouverUnited Technologies and IBM.This publication has been prepared for general guidance on the matters addressed herein. It does not constitute professional advice.You should not act upon the information contained in this publication without obtaining specific professional advice.© 2016 The Hackett Group, Inc.; All Rights Reserved. | 6000181