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Procurement Expert Tells How to Avoid Bad IT Investments
World-class procurement organizations spend about 23 percent less on labor, outsourcing, and related costs than their poorer-performing counterparts and use part of that savings to invest 9 percent more than peers on technology, according to a new report by The Hackett Group, a global benchmarking and strategic advisory firm (and Certified Oracle Implementation Partner).
“There is a strong correlation between effective IT and effective and efficient procurement operations,” says Pierre Mitchell, senior business adviser, in “2020 Vision: Delivering on the Evolving Value Proposition of Procurement.” Issues often arise as IT departments work to optimize their own efficiency to the detriment of business effectiveness. This is most pronounced in circumstances in which IT overexerts itself in technology decision-making and selects solutions considered inadequate by business users.
On the good side, improved use of technology “lowers transactional operating costs and frees up funds to invest in value-adding activities, such as strategic sourcing. This is the next frontier for Procurement technology which transcends P2P automation and provides more predictive sense-and-respond type analytics for spend analysis and supply market intelligence,” he adds.
Unfortunately, just spending more on procurement technology doesn’t guarantee success. In fact, “it is very easy to invest badly in technology,” Mitchell warns. “This certainly means that it’s critical to pick the right technology approach and implement it properly. We see clearly in our Procurement benchmark data that investing in technology by itself does not measurably improve performance without similar capability upgrades in people, process, and organizational alignment. The best data in the world means nothing if people are not driving change with it.”
Another trouble spot is the lack of standardized master data for suppliers, items, contracts, and spend categories—which Mitchell calls “a critical factor in determining the success of many automation projects.” Nearly 100 percent of world-class organizations have an enterprisewide database for the supplier master file, and 86 percent have an enterprisewide database for their item master file, he says.
Mitchell also advises procurement organizations to directly attack procurement effectiveness with more leading-edge technology building blocks such as artificial intelligence, “guided buying” (to direct end users to preferred supply channels), knowledge management, supply forecasting, and even customer relationship management (CRM)-like functionality to support “the business of providing Procurement services to internal stakeholders.”
But forward-looking procurement organizations also shouldn’t ignore pragmatic, here-and-now strategies for avoiding wasted investments of time and money, he says. These include:
- Using e-sourcing processes and technologies (such as eRFX and reverse auction) to self-fund spend analytics, using early pay discounts to help fund e-invoicing, and opportunistically using corporate initiatives in risk management or recessionary responses to fund areas like contract management or compliance reporting.
- Prioritizing investments by working backward from business goals to the required information and required re-engineering, and then finally to the right technology approach.
- Using baselines and benchmarking to help justify project funding and to monitor ongoing project progress. Technology ROI should be built on business effectiveness and business metrics, not on technology efficiency and IT efficiency metrics.
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