Procurement Executive Insight Management Issue October 8, By Patrick Connaughton and Christopher Sawchuk

Transcription

1 Procurement Executive Insight Management Issue October 8, 2014 Procurement Analytics in the Era of Big Data: What CPOs Need to Know Businesses are demanding more sophisticated insights from procurement, but significant barriers exist By Patrick Connaughton and Christopher Sawchuk Executive Summary As the role of procurement evolves from transactional facilitator to trusted business advisor, mastery of the next generation of analytics a.k.a. big will be a key enabler. Big has been a game changer when it comes to customer analytics, offering an unprecedented ability to quickly model massive volumes of structured and unstructured from multiple sources. For procurement organizations, taking advantage of the value of advanced analytics requires creating new technology roles, aligning agendas and elevating the overall level of institutionalized technology knowledge. The volatility of business conditions and related business risk has continued to increase since the start of the 2008 recession. At the same time, product life cycles are shrinking and global competition is intensifying. And, as companies expand into new geographies, they are redesigning their supply chains and distribution channels, adding more complexity to their business operating model. All of these forces translate into a need for faster planning and decision-making cycle times and more timely operational performance reporting. For procurement organizations, this means elevating the value and sophistication of the analytics services they provide, including deeper insights to uncover hidden risks and rewards. Most companies have implemented basic reporting and -access capabilities such as scorecards and self-service. However, achievement of the next level of analytical and reporting capabilities, such as multidimensional analysis, remains limited. The most sophisticated techniques, including predictive modeling, risk analysis and mining, are used by only a small minority of organizations. According to research by The Hackett Group, top (i.e., companies that achieve top-quartile performance in a functionspecific set of metrics) invest in and use these techniques to a much greater extent than typical companies: 6.8x (580%) more top have adopted predictive modeling tools and processes, and 3.1x (207%) more use multidimensional analysis (Fig. 1). Procurement Executive Insight I The Hackett Group I 1

2 FIG. 1 Availability of analytical methods to support planning and analysis in business functions Percent of companies 22% 32% 19% 21% 22% 13% 29% 16% 15% 6% 50% 38% 50% 38% 46% 56% 32% 5% 33% 580% 35% 14% 207% 43% 21% 18% 89% 34% 20% 18% 138% 43% Self-service analytics and reporting Scorecards/ performance dashboards Predictive modeling Multidimensional analysis ("slice and dice") Risk analysis Data mining TODAY IN 2-3 YEARS TODAY IN 2-3 YEARS 13 Despite these investments, it is still a challenge to unlock the value in large volumes of structured and unstructured spread across many sources. Poor quality is just one of numerous barriers to conducting reliable analysis (Fig. 2). FIG. 2 The greatest barriers to effective planning and analysis Percent of companies citing factor as a constraint on the effectiveness of their planning and analysis capability Poor quality 85% 86% Lack of analytics skills/talent 50% 80% Lack of resources/funding 64% 74% Cultural resistance 21% 60% Lack of available mature technology 49% 64% PEER GROUP TOP PERFORMERS These challenges are hindering procurement s efficiency and effectiveness. In fact, while over half of procurement organizations report that their analytics improve the quality of decision making and ability to identify opportunities for business value, 84% consider their current analytics process to be inefficient (Fig. 3). This reflects the current difficulty of adequately engaging with the business using and analytics. Indeed, a 2014 Hackett Group study confirmed that most procurement organizations are deficient in analysis and modeling as well as strategic thinking and analysis skills. Procurement Executive Insight I The Hackett Group I 2

3 FIG. 3 Procurement analytics effectiveness and efficiency Percent of organizations ranking their level of agreement with statement at 4 or 5 on a 1-5 scale 50% 53% 16% Procurement analytics improves the quality of business decision making Procurement analytics effectively identifies opportunities for business value creation related to the function Procurement planning is highly efficient, consuming the minimum amount of resources needed to develop the plans Decision making Value creation Efficiency Big Data Has the Potential to Transform Procurement Analytics The good news is that, while still immature, the next generation of technology looks like it has the potential to meet procurement s growing need for predictive insights. While analytics has historically been associated with financial planning and analysis, its scope is rapidly expanding. Since every area of business operations generates and consumes, performance can be improved through analytics. Moreover, analytics can be applied transformatively, i.e., extending beyond performance management and improvement. For example, insights about customer preferences and behavior patterns may be used to shape sales and marketing strategies or product development agendas. For procurement, big represents a completely new approach. Whereas years ago procurement was only able to reactively satisfy the demand triggered by requisitions, big allows it to become proactive by forecasting demand based on identified patterns. This widens purchasing s traditional scope of action. A further benefit is a more detailed understanding of suppliers performance. The results can be used to weigh strengths and weaknesses in the allocation of certain suppliers to key products. This can be achieved by detailed root-cause analysis based, for example, on about ordering, delivery and quality. Analytic software can be used to provide faster access to relevant and trends in formats that are easier to interpret, allowing more informed and quicker inputs to executive-level strategic planning throughout the source-to-pay cycle. Many procurement organizations are already employing analytics in areas such as spend analysis, cost modeling and supplier performance tracking. In the view of leading-edge CPOs, using predictive analytics to evaluate commodity price volatility and model its potential impact on their cost structure and profitability is the next frontier for procurement s analytics capabilities. The price forecasting ability of predictive analytics also provides an edge during supplier negotiations. Investments in predictive analytics deliver greater assurance and ultimately help reduce costs thanks to better visibility and control. Analytics has been on CPOs radar since long before the emergence of big. The innovative element of big is the expansion of sources from predominantly internal structured to a much more disparate set of internal and external structured and unstructured that can be applied to analytics ranging from basic mining to predictive analytics (Fig. 4). Procurement Executive Insight I The Hackett Group I 3

4 FIG. 4 The evolution of analytics Value Record Understand Anticipate Data Information Intelligence Big Data Sensor Data Transactional Reporting Real-time analytics Social Transactional Operational Analytics Analytics Operational Partner Partner Machine-tomachine Latency Weeks/days Days/hours Hours/real-time Cloud services Applied to procurement, big can include information like supplier qualification and assessment details, performance (cost, quality, service, innovation), market intelligence, risk indicators, spend details and contracts (Fig. 5). This is often dispersed across multiple sources and in areas like supplier risk management, and may include a voluminous array of alerts, news feeds, financial indicators, market reports, etc. Quality control is just one of the many difficulties of managing this much. FIG. 5 Applying big to procurement Area General business definition Application in procurement organizations Self-service analytics and reporting Scorecards/performance dashboards Predictive modeling Multidimensional analysis ( slice and dice ) Risk analysis Data mining, 2014 An approach to analytics that enables business users to access and work with corporate information on a computing device without IT involvement. End users create personalized reports and analytical queries using technology tools, which may be Web-based, delivered through a portal, role-based, and/or support mobile devices. An easy-to-read, often single-page, real-time graphical snapshot of current status and historical trends of key performance indicators to enable instantaneous, informed decisions. A technique that models cause-and-effect relationships between variables based on statistical analysis of these variables. Predictive models are used to simulate different business scenarios (i.e., different sets of assumptions for the model variables) to support planning or to predict the most likely business outcomes based on actual conditions. An analytical technique that allows to be presented along different dimensions (e.g., sales by region, period, product, demographic) by the end user in a flexible manner within the analytical tool. A technique for identifying and assessing factors that may jeopardize the realization of a business goal. This technique also helps define preventive measures to reduce the probability that these factors will occur and identify countermeasures to successfully deal with these risk scenarios when they materialize. The practice of analyzing large amounts of digitally stored to find patterns or trends that offer meaningful business insight. Develop reports and perform analysis on spend, supply base, requisitioner compliance and other spend-related. Access may extend to end users, managers or suppliers. Illustrate performance outputs of the procurement function on a given set of effectiveness and efficiency metrics. Forecast spend or supply needs based on anticipated changes in the business and pricing based on external factors. Procurement may support supply chain on network design and optimization. May be applied to spend analysis in the form of a spend cube showing spend by supplier, geography and category. Identify business risks related to the supply base. May include geographic risk, price risk, disaster risk, brand risk, compliance risk or any other factor which the business deems significant. May be applied to spend analysis to better understand spending trends; to supplier management to understand supply performance trends; or to pricing to understand external pricing trends. Procurement Executive Insight I The Hackett Group I 4

5 Further, the time it takes to send, receive and access (i.e., latency) is being reduced from days or weeks to hours or even near-real-time, and increases in computing power and memory storage capacity now allow analysis of much larger volumes of than ever. All of these factors are combining to usher in a new era of analytics that will finally deliver on the promise of business intelligence. New Roles Within Procurement Will Be Required The full potential of sophisticated analytical tools and methods can only be achieved when put in the hands of staff who have the appropriate skills and training to use them. And, as organizations develop more sophisticated applications for analytics tools and methods, skills need to mature accordingly. To understand what capabilities are required, it is important to define the objectives and governance structure of the analytics program. Today, the companies that are most successful at creating competitive advantage are those that are the most effective at cultivating and mobilizing their technology talent, wherever it resides in the organization. As technology becomes more integral to core and supporting business processes, the line between technology roles and business roles is blurring. Thus, finding and cultivating workers with both the requisite technology skills and relevant business expertise will be one of the defining challenges for success in the age of big. Additionally, staff are working in increasingly global, virtual teams and dealing with constant change, and thus need to stay current on their rapidly evolving specialist professional skills. For this reason, companies must sharpen their talent management capability, which is itself becoming a competitive differentiator. The impact of all these developments on traditional procurement organizations is manifold. First, procurement needs to improve its own talent management capability by working with the HR organization, the traditional custodian of enterprise talent management. Second, it must create new technology roles that do not reside within the organization today, aligning agendas and elevating the overall level of institutionalized technology knowledge. When it comes to analytics, organizations often struggle to decide which resources to embed in procurement versus the IT organization. Hackett research shows that while IT plays an important role in designing the architecture and supporting the tools, advanced modeling skills increasingly reside within procurement. Moreover, demand for these skills is expected to increase significantly in the next several years. For CPOs, this means adding new roles to the organization, including: Analytics lead: Responsible for managing a team of senior analysts to design an analytics framework including the tools, training and processes that will be required. Successful analytics managers often have an advanced degree in areas like operations research, computer science or statistics. Business analyst: This is a client-facing role that works directly with key stakeholders to understand analytics requirements. It also requires managing the superset of requirements across all stakeholders to design solutions that will scale and meet the organization s future requirements. Technical manager: Acts as the liaison between procurement and IT, providing technical specifications to developers and architects to meet the needs of the business. This is a more technical role than the business analyst and requires experience and a degree in computer science or a related field. Procurement Executive Insight I The Hackett Group I 5

6 CPOs Must Take the Lead in Setting Procurement s Strategy for Big Data As demand for big analytics grows, it will require new IT infrastructure to support it. IT organizations need to make provisions for these demands in their operating plans as well as project the longer-term impact of analytics and big in their strategic plans. Nevertheless, when it comes to setting the strategy for how the analytics will be used and the level of investment required, procurement must take the lead. New roles will be needed within the function, which must be staffed with people who are capable of working with both IT and procurement s key stakeholders to drive these initiatives forward. To get started (and as shown in Fig. 6), The Hackett Group recommends that CPOs put in place workstreams designed to: Develop the procurement technology roadmap. Collaborate with IT to create new management processes and technology architectures. The future effectiveness of procurement organizations depends on their ability to conduct increasingly sophisticated planning and analysis. Master, technology architectures, business intelligence and analytics platforms are essential to establish a foundation for highquality analysis. Provide technology training and education to procurement staff. Evolving roles require more value-added analysis and insights about business performance improvement. Therefore, strengthen the analytical, communications, synthesis and interpretation skills of existing procurement staff. Create dedicated technology roles within procurement. Consider creating a dedicated analytics to fully leverage skills and tools across all areas of procurement. In small or midsized procurement organizations, this may be comprised of a few people, while in large, multi-business enterprises, it may take the form of a formal Center of Excellence. At this phase, bringing in a service provider with deep analytics expertise and tools is an option to consider to help the team get started. FIG. 6 Define the governance and resource capabilities required to support the big- strategy Key questions Outcomes Analytics Governance People What is the objective of the analytics organization? What will it oversee, manage and be responsible for? How will it be structured within the entire organization? How will analytics be managed? What processes will be required? What skills will be required to run effectively? How many people will be needed and where will they come from? Organizational mission statement Responsible, Accountable, Consulted, Informed (RACI) definitions New organizational design charts Future-state process maps for procurement s analytics services A mapping of stakeholders/decision makers to each of the main areas Key measurements of the program s value and cost are defined and agreed on Role/job descriptions, 2014 Procurement Executive Insight I The Hackett Group I 6

7 Related Hackett Research IT s Role in Enabling Enterprise Innovation, Part 2: How IT Organizations Should Respond, October Trends: How Procurement Is Enabling Enterprise Innovation, June 2014 About the Advisors Patrick Connaughton Senior Research Director The Hackett Group (NASDAQ: HCKT), a global strategic business advisory and operations improvement consulting firm, is a leader in best practice advisory, business benchmarking, and transformation consulting services including strategy and operations, working capital management, and globalization advice. Mr. Connaughton leads the development of The Hackett Group s intellectual property in the areas of strategic sourcing and procurement. He has over 15 years of experience in supply chain and procurement research and advisory roles. He has published groundbreaking research in areas like spend analysis, contract life cycle management, supplier risk assessments and services procurement. Prior to joining Hackett, he was principal analyst at Forrester Research, where he focused primarily on helping executives mitigate risk through more effective supplier relationship management. Previously, Mr. Connaughton was a consulting manager at Manhattan Associates and Accenture. Christopher S. Sawchuk Principal & Global Procurement Advisory Practice Leader Mr. Sawchuk has nearly 20 years of experience in supply management, working directly with Fortune 500 and midsized companies around the globe and in a variety of industries to improve all aspects of procurement, including process redesign, technology enablement, operations strategy planning, organizational change and strategic sourcing. Mr. Sawchuk is a regular contributor to business publications, a frequent presenter at industry events and co-author of epurchasingplus. He has been recognized by Supply & Demand Chain Executive magazine as one of its Pros to Know. Mr. Sawchuk s background includes engineering and operation roles with both United Technologies and IBM. Utilizing best practices and implementation insights from more than 10,000 benchmarking studies, executives use The Hackett Group s empirically-based approach to quickly define and implement initiatives that enable worldclass performance. Through its REL, The Hackett Group offers working capital solutions focused on delivering significant cash flow improvements. Through its Archstone Consulting, The Hackett Group offers Strategy & Operations consulting services in the Consumer and Industrial Products, Pharmaceutical, Manufacturing, and Financial Services industry sectors. Through its Hackett Technology Solutions, The Hackett Group offers business application consulting services that help maximize returns on IT investments. The Hackett Group has completed benchmark studies with over 3,500 major corporations and government agencies, including 93% of the Dow Jones Industrials, 83% of the Fortune 100, 87% of the DAX 30 and 48% of the FTSE 100. Partnered with GEP is a diverse, creative team of people passionate about procurement. We invest ourselves entirely in our client s success, creating strong collaborative relationships that deliver extraordinary value year after year. We deliver practical, effective procurement services and technology that enable procurement leaders to maximize their impact on business operations, strategy and financial performance. Named a Star Performer in Everest Group s Peak Matrix of Procurement Services Providers, Winner in the HfS Blueprint Report on Procurement Outsourcing Providers and to the Supply & Demand Chain Executive 100 for nearly a decade, GEP is also ranked a leader on Gartner s Magic Quadrant analysis of the world s top sourcing and procurement software providers. Clark, NJ-based GEP has 10 offices and operations centers in North and South America, Europe and Asia. To learn more, please visit Access our free knowledge resources at Walnut Avenue, Clark, NJ P info@gep.com 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. Founded in 1991, The Hackett Group was acquired by Answerthink, Inc. in Answerthink was renamed The Hackett Group, Inc. in The Hackett Group has global offices in the United States, Europe and Asia/Pacific and is publicly traded on the NASDAQ as HCKT. info@thehackett.com Atlanta London Sydney Amsterdam, Atlanta, Chicago, Frankfurt, Hyderabad, London, Montevideo, New York, Paris, Philadelphia, San Francisco, Sydney, Vancouver