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Procurement Drives Bottom Line

IBM chose its annual Smarter Commerce Global Summit in Nashville this week to unveil the results of a study that says companies with high-performing procurement organizations drive better bottom-line results.

The 2013 Chief Procurement Officer Study, conducted by the IBM Institute of Business Value (IBV), highlights the business impact that Chief Procurement Officers (CPOs) can have on a company’s competitive advantage and profitability. It explores how top-performing CPOs can increase their influence over strategic business imperatives by driving efficiency and performance, introducing innovative new processes and uncovering new insight into supplier networks that have a measurable effect on the bottom line.

According to the study, organizations with high-performing procurement departments reported profit margins of 7.12 percent, compared to 5.83 percent for companies with low-performing procurement organizations. Also, companies with top-performing procurement organizations reported profit margins 15 percent higher than the average company; and 22 percent higher than companies with low-performing procurement teams.

“Procurement goes straight to the bottom line,” said Terrence Curley, Director of Product Management in the IBM Software Group and B2B Commerce at the conference, which drew 3,000 attendees. “That’s a lever. You overpay and it’s an instant connection to the bottom line. You make the correct decision and you have a direct advantage. It’s a complex issue. There isn’t a procurement application out there like ERP is for manufacturing.”

The study surveyed 1,128 procurement executives at companies with revenues of $1 billion or more in 22 countries across North America, Europe and Asia. And 15 percent were found to be top performers defined by their ability to exert influence and drive innovation across their companies while also excelling at procurement fundamentals.

As companies realign their organizations to take a more customer-centric approach, the role of procurement professionals is changing from a traditional back-office, transaction-oriented role to one with more visibility and influence among C-suite executives, who are keen to manage risk that can undermine profitability. CPOs are positioned to help identify and mitigate supply-related vulnerabilities because they serve as the bridge between suppliers and internal consumers. Similarly, procurement teams can use data analytics to help improve demand forecasts and identify additional savings opportunities within spend categories.

There is a strong correlation between being a top-performing procurement organization and effectively using procurement technologies. For example, in regards to Supplier Relationship Management (SRM), the study found that 94 percent of top-performing companies are highly effective in their use of procurement technologies, compared to 44 percent of all surveyed companies that are average or below average in their technology effectiveness. The study also found that CPOs think that supplier intelligence solutions, including 360-degree global view of supplier relationships and procurement performance dashboards, will be the most important area of investment over the next three years.

Top performing organizations also are turning to social business for innovative ways to manage their global teams and collaborate with their suppliers. The study found that high performers are more likely to use social tactics such as crowd sourcing (81 percent) and collaborating on product development with suppliers (88 percent), versus their low-performing counterparts (38 and 47 percent respectively).

The study identified several common actions that enable top performing procurement organizations to achieve such impressive results. They include:

Gain insight through Big Data analytics—By using analytics to tackle Big Data challenges, CPOs can gain new insights into internal business operations and their supplier networks to identify vulnerabilities. 83 percent of high performing CPOs excel at leveraging analytics compared to just 63 percent of the low performers.

Collaborate well within and beyond the enterprise—Social business technology helps global procurement organizations connect with internal and external partners. According to the study, 80 percent of high-performing companies report that collaboration across departments, such as IT, marketing and sales, is both a key strength and an investment priority, compared to only approximately 45 percent of low performers. High performing procurement organizations see the benefit of close partner collaboration and therefore are more likely to create strategic alliances. For example, top performers direct 38 percent more of their annual spend through strategic alliances than low-performing organizations.

Adapt to changing market conditions—By using big data insights and collaboration, high-performing CPOs are in a better position to quickly respond to changing internal and external conditions, from demand changes to supply disruptions and product redesigns. The study showed that 73 percent of top performing procurement organizations are effective at gathering insights from the supplier community, compared to only 16 percent of lower performing counterparts.  

“There are tens of millions of dollars at stake, and this study reveals how and why high performing procurement leaders have significant impact on their organization,” said Craig Hayman, General Manager, IBM Industry Solutions. “As CPOs take a broader view of their role and embrace technology, they have an unprecedented opportunity to become even more instrumental in transforming their organizations by modeling themselves against the world's most innovative and effective procurement organizations.”

Charles Chu, Vice President of Product & Strategy for IBM, added that a level of sophistication is necessary for a successful procurement organization. “The days are gone where people look at it in an overly simplistic way,” he said. “People want the lowest cost possible, not the absolute lowest cost.”

An effective CPO will recognize that it’s not a good idea to have all of his suppliers be the lowest cost. How do you score a company that costs five percent more but has 100 percent on-time delivery against one that is five percent lower cost but only comes through on 80 percent delivery? What about quality? The high-performing procurement organizations know the answer.

To download the report, visit www.ibm.com/business/value/chief-procurement-officer.

Marketing the brand

Another IBM survey, this one of Chief Marketing Officers, finds that CMOs are differentiating their brands by crunching big data in real-time and automating personalized marketing campaigns. The price tag for failing to meet the needs of omni-channel shoppers—those who frequent both online and in-store channels—is $83 billion in lost sales in the U.S. each year due to poor or inconsistent customer experiences.

Other top findings from the survey point to leading marketers taking greater responsibility over customer service interactions as they become the official brand stewards company-wide. At the same time, leading marketers are capitalizing on big data to better personalize their marketing communications. They are looking beyond segments and demographics to provide the right offers, services and information at exactly the right moment in the customer relationship. Further, marketers are looking to use location-based services to target more digitally-savvy, on-the-move customers and deliver seamless, intuitive customer interactions.

The survey, which identified leading marketers based on their level of adoption of cross-channel technologies and their ability to proactively influence the customer experience, found that 39 percent of leading marketers are adjusting real-time offers based on customer wants, needs and preferences. In comparison, only 15 percent of remaining marketers surveyed do so. 71 percent of leading marketers are delivering personalized messages in real-time through social media channels, including Facebook, Twitter, blogs and review sites; while 62 percent of leading marketers are delivering those same personalized messages through the mobile channel.  

While marketers are embracing these new channels, the study finds that cross-channel integration is still lacking. Only 35 percent of leading marketers currently integrate their campaigns across all channels, with eight percent indicating they are not currently integrated at all. In comparison, only 12 percent of remaining marketers surveyed currently integrate their campaigns across all channels, with 39 percent indicating they are not currently integrated at all.

This lack of integration directly affects the coordination of marketing campaigns and marketers’ ability to deliver relevant, personalized messages. For instance, a telecommunications company wants to send their customer information about their mobile, satellite and cable television services. However, the customer contacts the call center indicating they are not interested in learning more about the satellite or cable services, yet the company continues to send information on all three business units. This lack of integration between the customer service department and the marketing department not only frustrates the customer, but also wastes company resources and dollars.

Ask Watson

Two years after its triumph on Jeopardy! the IBM Watson Engagement Advisor now has cognitive computing. With one click, the solution’s Ask Watson feature will address consumers’ questions, offer advance to guide their purchase decisions and troubleshoot their problems. The system will continually learn from those interactions via cognitive computing intellect, enabling it to provide fast, personalized customer service.

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