The Cloud’s Effect on Procurement

Dave Bowen, CEO, MM4 and Managing Director, Procurement Services, Xchanging Americas

Cloud hosting has rapidly shifted from an expensive thing of the future to an affordable and increasingly attractive business solution. Price wars between giants like Google and Amazon, and the emergence of a growing number of smaller players have driven prices down, and the cloud has evolved from a buzzword to a source of real value for enterprises. The procurement industry has largely held back from the cloud movement, but professionals are now addressing the potential risks and change management issues as they take their first steps into the cloud.

So why the sudden change? Besides the shift in pricing, there are dozens of benefits to be had from moving away from traditional outsourcing or hosting arrangements in favor of cloud service arrangements. Reducing labor costs is a major driver, as procurement professionals are regularly tasked with managing and decreasing spend. The cloud also increases ability to adapt to organizational changes and provides a platform for standardization. Additionally, the potential to evolve technology ever faster improves a company’s ability to compete.

What’s Slowing the Adoption?       

Procurement as an industry has long been slow to adopt new technologies to improve performance. Recently however, technology applications like spend analytics, contract management and supplier relationship management, have become much easier to buy and implement and can provide strong ROI. The cloud is increasingly being seen as a viable, affordable option for procurement, yet despite the clear advantages, it also carries a number of risks: the main concern is how to overcome compliance and data risks where critical functions or sensitive data are involved.

Every procurement professional knows their data well enough to assess the level of sensitivity. This is often driven by the industry sector and the types of categories involved. What they may not be certain of is whether their data is safe. In the cloud, safety requirements can be controlled entirely and can sometimes be subject to negotiation and increases in pricing.

Nevertheless, the majority of businesses still use cloud for non-core functions, although its use for core functions is growing. Many organizations have delayed cloud projects due to a lack of clarity on the actual data in scope, so the key is first to understand the types of data involved and to be aware of any rules or regulations attached to it. Regardless of the data being handled, the main topics to address are data privacy and security, legal compliance requirements, business continuity, disruptive changes in services, adaptability to changing business needs, and integration.

As long as the type of data involved and its level of sensitivity are understood, expanding the use of cloud services is simply a question of internal review and organizational preparation.

A New Era in Procurement

As barriers fall, the benefits of the cloud are becoming more and more evident to procurement pros. Today, data—big, small or otherwise—is in abundance. Now the challenge is for procurement to manage the available data and turn it into insight.

Big data is fueling new needs in procurement technology, which is quickly moving beyond the core function of managing sourcing projects and transacting spend. The realization of the complete Source-to-Pay suite of technology is becoming ever more elusive, as companies discover new areas to automate and new data to analyze.

As well, more procurement organizations are now going to BPO providers for cloud-based solutions in niche services. This is because they are seeing the value of utilizing a one-stop-shop for their technology needs, as opposed to the often more costly option of building in-house capabilities.

A Winning Combination

Cloud technology, combined with services, is disrupting some of the most well established areas of procurement.  Two key examples of this are eSourcing and analytics.

eSourcing is a proven technology that is now used by most procurement organizations to varying degrees. The cloud and SaaS models have facilitated adoption, however on average, only 17% of procurement spends are transacted through eSourcing tools. Given that eSourcing can drive savings of 18%, many companies are missing out on a true advantage. The main cause of hold up in adoption appears to be a lack of support services to use the technology, which limits the number of people making full use of it. Some corporations alleviate this problem by investing in additional support services.

With or without additional support, cloud services are still disruptive. One reason for this is relatively obvious; the significant downward shift in pricing has put the cloud within reach for more companies than ever before. Less obvious is the fact that this same reduction in price makes cloud services much more affordable for current users as well, meaning they can spend less for the same services, or spend the same amount for a larger outcome.

Along with its other benefits, eSourcing also generates valuable market data. This is a huge plus, as procurement can use analytics to exploit this market data in real-time, bringing in data sets from multiple sources and converting it into insight. Analytics lends itself well to the cloud delivery model because it needs to be easy to store, access, and share.

Spend analytics is mainly used to identify procurement opportunities for supply consolidation, price advantages, and process optimization. However, the “real-time” features provided by the cloud enable insight into cost structures, allowing users to make informed adjustments to the strategy or to influence demand quickly. This is particularly relevant in supply risk management, where external data sources can alert the user to developing situations before they impact the business.

Better data management, both external and internal, is also opening up the possibility of operating vertical supply marketplaces. This speeds up the sourcing and transaction cycle and allows procurement to deliver further value back to the business.

The Big Shift

Procurement is, and will continue to, experience disruption and ripple effects for years to come thanks to the cloud. What is unique is that the biggest shift the cloud brings to procurement is actually a shift for procurement itself.

As a result of the new possibilities provided by cloud solutions, procurement’s focus is shifting from individual supplier negotiation towards becoming a function for the creation of markets and commoditization. The cloud has changed technology and the way we do many parts of business, and procurement should act in order to reap those benefits.

About the author:

Dave Bowen is CEO of MM4, an eSourcing technology company, and Managing Director, Procurement Services, Xchanging Americas. Xchanging is the third largest procurement outsourcing provider globally. To learn more, visit www.mm4.com or www.xchanging.com.