Procurement: Trends that Matter

Trends, like horses, are easier to ride in the direction they are going. - John Naisbitt

If an organization was to be seen as a human body, the recession was equivalent to a lethal viral attack
to which the body reacted vigorously. Organizations redesigned their strategy, altered their operating
models, revisited structures and realigned their focus.

The procurement function was also deeply impacted and focused itself on cutting costs and managing
risks. The function provided ample leverage to the organization during the recession and, as a result,
gained prominence in the eyes of the CEO. In order to maintain its recently acquired prominence
procurement needs to ensure that it continues to deliver and enhance its value proposition.

Delivering on its promise will require the procurement function to evolve in response to the emerging
trends in the environment. While some of these trends would require the function to change its
processes others would require it to develop new skills and take on additional responsibilities.

 A New Normal for Risks —

Risk has been one of the areas that procurement function has been focusing on since the past 4-
5 years. However there is a new normal for risks faced by the function, which has resulted from
increased awareness of risks, higher volatility in the market, and (potentially) higher velocity of
impact resulting from risks.
o Increased Awareness - The recession has increased the awareness of risks that can arise
from suppliers and availability. This would force procurement to redesign their risk
evaluation criteria.
o Higher Velocity of Impact - As companies focus on entering new markets and
developing leaner supply chains, the velocity of risks faced by procurement is also
expected to increase. This will impact the mitigation processes that procurement
develops.
o Higher Volatility - The continuing volatility on the supply side and demand fluctuations
would expose procurement to new risks which need to be considered.

 Increasing Criticality of Flexibility —

Procurement will need to focus on developing flexibility in their supply chain without impacting
costs due to demand fluctuations resulting from a more complex customer base (as companies
enter into new markets), shorter product lifecycles, need for leaner supply chains (leading to
reduced inventory to manage demand spikes) and evolving business models. This would require
deployment of strategies such as dual-sourcing, local sourcing, and flexible contract
mechanisms.

 Demand for Different Outcomes —

Companies focused on growth in addition to cost reduction soundly beat the competition. So
while costs will continue remain a key factor, business partners will shift focus back to growth.
This would require procurement function to perform on a broader set of metrics including profit
maximization, innovation, and service support.
  The budget may not come back —
The recession did see procurement budgets stagnate which in some cases resulted in cuts to
department size and resources. The next few years will see an increased expectation from
procurement, however, the budgets are expected to remain flat or grow marginally. This would
mean that procurement will need to get by with a fewer resources while at the same time
expanding its impact into areas beyond cost and risks.

 Redefinition of Core —
Categorizing any activity as a part of traditional procurement function is a challenge, given the
rapid pace of changes in the function. The function has over time shifted its focus from
transactional activities to strategic aspects. The shift is expected to continue wherein what was
considered to be core to the procurement function may now be shifted out of procurement
altogether. This is not necessarily a bad thing, as it will provide procurement executives with the
bandwidth to focus on strategic elements and deliver on a boarder set of expectations. The
redefinition in turn has been enabled by three underlying trends.
o The Rise of Procurement Outsourcing—With service providers gaining expertise and
expanding offerings to cover an increasing number of both transactional and strategic
procurement activities, organizations are able to hand-off a larger number of
responsibilities and shift focus to higher-priority activities including innovation and
revenue support.
o The Rise of Multi-Functional Shared Services— As companies continue to advance the
development of shared services, parts of procurement may transfer themselves into the
share service center while procurement could be redefined as a smaller function
focused on planning and other strategic activities.
o The Evolution of Technology – Technology has enabled the deployment of procurement
tools to the front line. This could result in business partners directly taking care of
transactional activities related to procurement. Technology has also led to the
emergence of procurement-as-a-service model where the procurement function is
completely replaced by a service provider or its parts are sourced as a service from an
external vendor.

The above changes may impact individual procurement functions in a differing manner depending on
the industry and the maturity of the function. However, it is clear that procurement will be expected to
perform against multiple objectives and will need to decide its areas of focus as well as areas of reduced
focus. The effectiveness of the function will depend on the trade-offs it makes, which will redefine its
value proposition.