Procurement myopia – digital buyers must focus on business need, not cost

SUMMARY:

Traditional procurement focus needs to shift away from cost-cutting to business value, according to a new report from the Economist Intelligence Unit.

Enterprise IT procurement focuses too much on cutting business costs and not enough on using technology to make customers’ or employees’ lives better. That’s the key finding in The State of IT Procurement, a new report from the Economist Intelligence Unit (EIU).

The EIU spoke to over 300 senior procurement professionals in large enterprises in the US and UK, and found that 61%  of them believe that a chief priority of their IT procurement should be controlling business expenditure.
By contrast, only 43% saw supporting IT’s role in business innovation as the priority. Thirty-seven percent identified digital transformation as being the most common factor in how IT procurement functions should operate today.

But the good news is that nearly all respondents (98%) believe that IT procurement needs to change and better support the IT department in its drive towards digital transformation.

The EIU suggests that IT is slowly becoming a more agile and flexible department, supporting business needs:

Digital technologies are increasingly the primary channel through which companies interact with their customers. Investing in technology innovation is now seen as essential for survival. Indeed, technology often defines what business initiatives are possible.

The IT departments of large corporations are gradually moving to this digital-first view and adopting practices that allow them to work closely with the business to develop digital solutions that improve customer value.

Challenges

The challenge for IT procurement, then, is to be in the vanguard of this change, rather than continuing to adopt the more conservative, inward-facing objectives of the client/server age.

Cited in the study, Anthony Porter, head of global corporate procurement at US marketing tech provider Acxiom, explains the new mindset:

Doing online banking through a secure and predictable interface, as you have with online shopping, are [sic] personal experiences. They don’t stay at the door when you go into your business setting. So, business leaders are starting to expect those types of capabilities [from] their business systems and solutions.

But despite this, the EIU warns that many technology buyers still suffer from what it calls “procurement myopia”. Business innovation (identified by 43% of respondents) lags behind controlling IT expenditure (61%) and maximising return on IT investments (46%) as the priority.

This primary focus on finance needs to change, says the EIU, not just in terms of the organisation’s customer focus, but also in terms of its employees’ needs. Asked to identify the factors that most influence IT procurement policies internally, more respondents chose the requirements of the IT department (48%) than the long-term needs of business users (41%).

This primacy of financial metrics in both IT procurement’s goals and the means by which its own performance is judged suggests that business enablement is being sidelined, says the report, adding:

It is therefore a significant concern that, according to 39% of respondents, the IT procurement function controls every aspect of a major IT investment at their organisation (the most common response).

However, despite the overwhelming majority of procurement professionals admitting that the function needs to change, many are still prioritising financial metrics in their plans to evolve, warns the EIU:

The most common change planned for the next two years is ‘improving identification and prioritisation of cost-reduction opportunities’. And when asked to predict how their IT procurement function will have changed in two years, respondents most often selected, “We will be more focused on return on investment” (35%).”

Evolution

So how should IT procurement functions be evolving? The report shows that more respondents who list business innovation as a priority for their IT procurement plan to reduce transaction completion time over the next two years (23%) than those who do not (15%), and to improve the productivity of IT procurement staff than those who do not (25% vs. 17%).
Both are efforts that are likely to help the business move more quickly on technology purchases, says the report. But it adds the caveat:

Of course, the direction of evolution may be another reflection of how their performance is assessed. Respondents who prioritise innovation more often say that their performance is measured by “quality of technology provided to business users” (66%) rather than by ROI (57%). For respondents with other priorities, the opposite is true.

Generally, the survey shows that respondents who rate their IT procurement function as mostly “excellent” in creating business value are more focused on the long-term interests of business users than those who rate it as mostly “good to poor”.

In short, an excellent, efficient IT department is one that’s focused on business need.

Source – EIU

So what’s the solution for those procurement professionals who are lagging behind or are too focused on finance? A clearer structure of authority and accountability, says the EIU – especially one that includes the business user. This would “doubtless improve” IT procurement functions’ ability to deliver value to customers, it says.

The report quotes Adam Stanley, CIO of commercial real estate company Cushman & Wakefield. He says that the strength of his company’s IT procurement function reflects its tight integration with the IT department:

The reason our model works is because the IT procurement team feels 100 per cent part of the IT organisation and they feel accountable to us. […] It’s really a symbiotic relationship and that is definitely a reason for the success of the relationship.

And then there’s the driver of digital transformation, which piles pressure on IT departments to adopt the processes and working practices that have been pioneered in the digital sector in order to stay relevant, and to respond to the groundswell of demand from internal business users (and customers).
A similar response from the IT procurement function is long overdue, says the report.

So for IT procurement leaders who wish to help, not hinder, their organisation’s digital transformation, the EIU suggests that the following must be high on the agenda:

  • Reducing transaction times to allow rapid response to opportunities.
  • Helping both the IT department and line-of-business leaders focus on longer-term business outcomes, not short-term costs.
  • Reducing cultural distance and establishing a collaborative approach between the ITP function and its internal customers.
  • Building their own understanding of business and technology trends in order to anticipate user demands.

My take

It’s clear that tight integration is the key: the IT department needs to be in lock step with the organisation’s business needs, and its ability to transform internally and deliver more agile services more quickly to customers. In turn, the procurement function needs to be core to that dialogue, not serving the needs of a different time and a more conservative technology agenda.

This will be doubly relevant in the coming wave of automation, AI, robotics, and machine learning. Developers, vendors, and academics all focus on these technologies’ ability to augment human needs, skills, and experience.

However, many businesses – and analysts – focus almost exclusively on their ability to slash cost and headcounts.
This is where real problems will emerge: at the procurement stage, not in the technologies themselves.

Image credit - LinkedIn/EIU

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