2020 — when you say it out loud, “twenty-twenty,” it’s not just the new year; it’s also the shorthand for perfect vision. From a business standpoint, wouldn’t it be nice to have 20/20 in 2020 — a sharp, clear view of trends and best practices that will help enterprises thrive and compete in the new decade?

GEP helps to provide this clarity with the eighth edition of its annual business trend report, GEP Outlook 2020: Essential Trends and Impacts in Business and Technology. With a focus on value creation and cost impacts, this thorough, wide-ranging report provides valuable guidance for C-suite leaders seeking to steer their enterprises through choppy waters to new levels of growth and innovation.

Why Read It:

  • Pivotal global business and macroeconomic trends
  • The state of digital transformation and new value-driving technologies
  • Seven key areas where leaders need to focus their awareness

A must-have resource for executives who want to make the right decisions and achieve success in the 2020s and beyond.

 

INTRODUCTION

On the brink of a new decade, we present the eighth edition of our annual GEP Outlook report, representing our 20 years of experience managing over $160 billion in spend for leading Fortune 500 and similar businesses. Our aim is to share unique perspectives and thoughtful analysis of emerging best practices, and perhaps more importantly, to provide a collection of viewpoints that put these trends into a broader, more strategic context.

In many ways, the world seems poised for major change. Global markets, though broadly coasting on a bull run, are facing more concerns, and changes in the business cycle are increasingly predicted. Trade wars, political turmoil and other conflicts are dominating headlines and spreading uncertainty. Emerging technology threatens to upend major sectors, such as financial services and consumer industries. Business leaders have the unenviable task of navigating a complex political landscape, consumer pressure to act on environmental concerns, and ever-evolving digital technology innovation and disruption.

Amid these challenges, procurement is emerging as a potential white knight. As an objective business partner, with a focus on both value and cost, procurement is best positioned to both champion the needed investments to win the future and protect against a runaway increase in costs. While most Fortune 500 companies have stood up strong procurement functions in the past 20 years, the next 10 will require real leadership and a strategic repositioning of the impact of the function.

 

EXECUTIVE SUMMARY

Most businesses enter 2020 with some performance tailwinds. Global GDP growth remains high, and China’s growth, though cooling, continues to be an engine of global performance. Energy costs remain relatively low. Some major markets, including the United States, may begin to make long-promised investments in infrastructure.

However, the trade dispute between China and the United States remains a distraction for business leaders and is prompting many to slow down investment decisions. Similarly, the protracted separation of the United Kingdom from mainland Europe drags on, complicating the long-term business outlook. Environmental costs from climate change, such as increased frequency or intensity of hurricanes or forest fires, loom ominously.

The world, from the procurement lens, seems therefore bright but also somewhat uncertain. The outlook for disruptive technology, however, is crystal clear. Technology will be changing both the broader dynamics of business and industry and the way procurement operates in the future.

 

New Technologies

Automation of procurement activities will free up capacity and eliminate inefficiencies for routine, procedural work. Through a combination of secure, cloud-powered technology solutions and the introduction of artificial intelligence and automation, manual and time-consuming activities can be streamlined and improved. Leaders who implement these new technologies will be positioned for growth and agility.

New technologies will allow procurement to give a digital life to old ideas. Should-cost models, an old concept in procurement, are now being integrated into technology systems. This can unlock new end-to-end value and substantially upgrade conversations with suppliers.

 

The New Horizon for Procurement

Through a combination of cloud-powered technology solutions and the introduction of artificial intelligence and automation, manual and time-consuming activities can be streamlined and improved.

A thorough focus on the source-to-pay cycle has enabled many procurement leaders to efficiently manage SG&A costs at scale. Leaders are extending their reach and creating a new “budget-to-pay” paradigm. Instead of merely tracking cost reduction performance with finance, procurement will soon create a total awareness and tracking of P&L. As budgets are created, procurement will connect directly into a company’s financial planning and analysis processes.

A new procurement ecosystem will emerge as companies increasingly depend upon suppliers for data risk management, innovation to drive revenue and broader industry alliances. This will require companies to modernize the way they do supplier segmentation, among other things.

After years of outsourcing non-critical functional activities to low-cost country providers and other third-party solutions, companies are finding that risk management is an increasingly dispersed and problematic area. Procurement can play a major role in introducing technology and governance to bring this under control.

Analytics has been a buzzword of the 2010s, with many companies investing in data systems and analysis teams but few receiving real insights. Predictive analytics will change this situation, as leaders begin to meaningfully apply this capability. Strategic sourcing is transformed as market intelligence and benchmarks unlock fact-based insights about cost drivers, instead of traditional approaches that target historical spend and past relationships.

In aggregate, in this increasingly tumultuous world, more will be asked from procurement. The longstanding focal areas of cost and efficiency won’t disappear, but will become secondary to a digital and leadership platform that will be a vector for driving change. The next decade will likely be a dynamic and surprising one, led by the “New CPO” and the beginning of the strategic procurement function.

GLOBAL BUSINESS AND MACROECONOMIC TRENDS

Introduction

The global economy slowed somewhat in 2019 to 3% growth in GDP, down from 3.6% in 2018.1 This deceleration is the outcome of various factors, such as the prospect of a “no-deal” Brexit in the U.K., weak manufacturing output in Germany, impacts on tourism in Hong Kong from the long-running political turmoil, and political unrest in major economies. However, the world economy is projected to expand by 3.4% in 2020, driven by robust labor market and low inflation rates.2

 

The Macro Indicators

GDP Growth

According to the IMF, 2020 growth will predominantly be driven by emerging markets and an improving outlook in Europe. Emerging markets are expected to benefit from an industrial recovery, rising commodity and energy prices, and stable currencies spurring the growth rate further in the future.3 The U.S. economy is expected to be stable, but the pace of growth might slow.

TABLE 1

Real GDP Growth (Annual Percent Change — Historic and Forecast)

Source: IMF DataMapper

 

FIGURE 1

Growth of Gross Domestic Product, 2019–2029

Source: Conference Board Global Economic Outlook 20204

 

Energy Costs

Global energy is growing at an average rate of 1.2% per annum, down from over 2% per annum in the previous two decades.5 This weaker growth reflects both slower population growth and faster improvements in energy intensity. A global energy transformation is happening, driven by the dual imperatives of limiting climate change and fostering sustainable growth. An unprecedented decline in renewable energy costs, new opportunities in energy efficiency, digitalization, smart technologies, and electrification solutions are some of the key enablers of this trend.

To meet climate targets from accords such as the Paris Agreement, the world must rapidly reduce emissions. In the low emissions scenario, the cost of solar photovoltaic technology will fall by 50% and wind power by 40% by 2050.6 A renewable power sector will make electricity increasingly attractive as a source of energy in transport, buildings and industry. The share of electricity in total energy use is expected to increase to almost 50% by 2050, up from 20% today.7

Crude oil prices averaged $64/barrel in the second half of 2019.8 As oil contracts are priced in dollars, a strong dollar depressed oil prices. Lower oil prices also lowered the cost of transportation, food, and raw materials for business. The U.S. Energy Information Administration’s energy outlook through 2050 predicts rising oil prices. By 2025, the average Brent oil price will increase by 25%.9 Governments are expected to increase renewable energy production to stop global warming, which would likely reduce the price of oil significantly.

 

Interest Rates

We are living in the era of low interest rates, which have been in decline for the past decade. Decline has been common among advanced economies, as trends in real interest rates across countries have converged over this period. This is driven primarily by an increase in the premium that international investors are willing to pay to hold safe and liquid assets, as well as by lower economic growth around the world. With interest rates expected to be “low for long,” there is a significant risk that financial vulnerabilities will grow, which makes effective macroprudential regulation imperative.

In the United States, the Federal Reserve held interest rates steady in a target range of 1.5% to 1.75% and indicated that no action is likely in 2020, amid persistent low inflation.10 The European Central Bank (ECB) recently cut interest rates to negative in several countries including Germany, Denmark, and Switzerland.11 China also recently reduced its short-term interest rates from 4.25% to 4.2% to offset the impact of the trade war with the United States.12

FIGURE 2

Short-Term Interest Rates

Source: IMF13

 

Labor Rates

AI-based assisted hiring reduces costs and supports business growth by allowing hiring teams more time to focus on important work, like retention activities.

The world unemployment rate is trending downward and has dropped to 5%, the lowest since the global financial slowdown of 2008.14 The world’s largest economy, the United States, is seeing the unemployment rate drop to 3.5%, a 49-year low mark.15 Consequently, in advanced economies, the labor market is now an opportunistic one for workers, with companies being challenged to hire a skilled workforce and retain quality talent. Upward pressure on hiring costs and wages will continue along with the shortage of available-to-hire talent. On the other hand, emerging economies — although witnessing an increase in average wages — are still cheaper than advanced economies and continue to produce high-skilled workers.

Companies are increasingly being pushed to implement efficient HR processes for recruitment and retention. As a result, companies are moving toward using artificial intelligence (AI) to select résumés, conduct candidate screening, access a wider pool of talent, and automate repetitive yet essential processes. AI-based assisted hiring reduces costs and supports business growth by allowing hiring teams more time to focus on important work, like retention activities. Companies are also looking at Total Talent Management as the future of staffing; this refers to the management of both permanent and temporary employees under a single umbrella, with assistance from a single service provider.

FIGURE 3

Unemployment — Historic and Forecast

Source: IMF16

 

Geopolitics

Two events that had arguably the strongest impact on the world economy in 2019 were the U.S.-China trade war and the looming uncertainty of “Brexit.” The International Monetary Fund stated that the effect of tariffs alone would shrink global GDP by 0.8% by 2020.17 Similarly, according to the Bank of England, a “worst-case, no-deal, no-transition” Brexit scenario would produce a drop of 5.5% in GDP.18 Such uncertainty and unpredictability in the market has dented confidence and contributed to market volatility. Emerging markets will feel the increased stress because of amplified debt levels and the spillover effect from a slowdown in major economies.

While some might see short-term benefits or individual winners from the trade war, the overall effect is believed to be negative due to weakening global growth. Companies would need to develop the ability to estimate the direct and indirect impact of the various trade tariffs and accordingly re-evaluate their supply chain. The tariff impact on U.S. imports of automobiles and parts, for example, has already started disrupting global value chains.

A no-deal Brexit would also have significant repercussions for the European supply chain, as many companies with U.K.-based operations could see their costs go up because of tariffs, increased labor costs, and potential capital cost for plant relocation.

A further surge in these uncertainties — re-escalation in trade tensions between the U.S. and its trading partners, a disorganized exit of the U.K. from the EU, or a chaotic political landscape after elections in major economies — could lead to continued depreciation in global activity and have significant impact on trade and investment.

THE 2020 LANDSCAPE: SEVEN AREAS OF SIGNIFICANT CHANGE AND IMPACT

1. Regulatory, Environmental and Consumer Pressures

Over the past few years, sustainable supply chains and procurement practices have emerged as a mega trend that can give businesses a competitive advantage. This advantage will not be easy to maintain, as sustainability programs face multiple challenges. For example, the World Economic Forum’s 2019 list of top 10 risks to the global economy includes six pertaining to sustainability:

  • Failure of climate-change mitigation and adaptation
  • Extreme weather events
  • Water crises
  • Natural disasters
  • Biodiversity loss and ecosystem collapse
  • Manmade environmental disasters19

A growing number of prominent C-suite executives and thought leaders consider regulatory and environmental impact a key — if not a central — element of their business strategy for performance improvement. For example, Unilever, which set up the Business & Sustainable Development Commission, concluded that the successful delivery of Sustainable Development Goals (SDGs) will create market opportunities of at least $12 trillion a year.20

Looking forward, we believe there will be significant pressure from consumers, especially the millennial and Gen Z contingents, for more sustainable products.

Last year witnessed the introduction and tightening of multiple regulatory environmental requirements across geographies, accompanied by improved compliance. For instance, China, the world’s biggest steel producer, ordered mills in key regions to meet ultra-low emission standards by 2020, affecting 60% of the steel capacity in the country.21 In the United States, dozens of environmental laws and guidelines were issued by the U.S. Environmental Protection Agency. Meanwhile, the International Maritime Organization’s low-sulfur fuel regulation for shipping (IMO 2020), which came into effect on January 1, 2020, has already started creating a ripple effect in the global economy. The overall impact of IMO 2020 on consumers could be as much as $240 billion, as the added costs cascade down the supply chain, adding approximately $40 billion in increased transportation costs.22

Looking forward, we believe that apart from tightening government regulations, there will be significant pressure from consumers, especially the millennial and Gen Z contingents, for more sustainable products.

This means that enterprises must be agile and proactive in their supply chain execution and risk planning to manage environmental, regulatory and social expectations from multiple parties — including the company board, shareholders, government, auditors, activists, and the general public. Leaders will expect supply chain and procurement to focus on the following priorities to align with their company’s sustainability vision:

  • Consider total cost over product life cycle, including design, manufacturing, operations and maintenance, logistics, product recycling/disposal, etc.;
  • Assess the risk of catastrophic events on supply chain using weather patterns, heat maps and climate trend data to identify vulnerabilities and locate alternate supply/distribution footprints;
  • Formulate and communicate policies that help curb overall emissions and mitigate the risks and costs of weather-related disruptions; and
  • Deploy tools and methods to help business functions better integrate sustainability costs and benefits into decision-making. For example, incorporate environmental cost considerations in supplier selection and contracts alongside the conventional procurement criteria of price and quality.

Factors related to sustainability will change the economic and environmental structures that businesses currently operate within. Top leaders across industries will look to integrate environmental and sustainability elements in their leadership initiatives, not only to reduce cost and business risks, but also to create unique value propositions, increase brand value and propel top-line growth.

 

2. Digital Technology and Transformation

Procurement leaders have been prompted to make investments in digital technologies, and like other business functions, embark on their own digital transformations. The growth and agility offered by digital technologies is enticing; and entering 2020, momentum is growing. A recent survey of 25 large enterprises found that 88% had pilots, plans or progress in rolling out digital technologies in 2018–2019:

FIGURE 4

Digital Technology Rollout Progress

Source: GEP

Five priority digital technologies loom large in 2020:

1. Cloud — Despite an abundance of cloud solutions, many firms still don’t have a collaborative IT-procurement strategy. Adopting a cloud solution that offers flexible capacity while keeping organizational data safe should be a first-line strategy.

2. Big Data Access and Availability — Organizations must approach data collection more strategically, given the increased availability of data sources and data types. There is incredible potential to better understand the procurement and supply chain ecosystem and introduce new capabilities such as predictive modeling. Building a data lake infrastructure is a must, coupled with third-party specialist providers, external cloud server management or other methods of network optimization.

3. Data Security — The explosion of data availability and data sources presents some unique opportunities for businesses. To manage and utilize the growing volume of data available from many sources, early adopters, even in high-compliance environments, will need to invest in data protection or blockchain technologies.

4. Automation — Tactical operations still typically consume the working capacity of procurement professionals. Routine procedural work that is both mundane and vulnerable to human error is expected to undergo the fastest shift to automation.

5. Intelligence and Reporting — Today’s reports are often static and manual. Future capabilities will use pattern recognition and modeling to develop stronger visual reporting and new dashboards to improve decision-making.

There are several key ways that enterprises are realizing the value of digital transformation today. Here are three notable examples.

 

Value Creation via Automation

Organizations must approach data collection more strategically, given the increased availability of data sources and data types.

Smart workflows have brought automation opportunities to both upstream and downstream procurement processes.

In a recent report, Gartner presented the case of a large financial services institution that had restructured its contract repository, using robotic process automation (RPA) and optical character recognition (OCR) to digitize 8,000 contracts. Contract compliance continues to be a pain point for procurement teams and managing large numbers of contracts through automation represents real progress. Much of data entry can be managed with OCR, which enables auto-fill form capabilities. Configurable business rules and document routing can eliminate tasks that consume large amounts of working memory.

Enterprises are at various stages of RPA implementation within each function. Procurement may be lagging behind other functions, such as shared services centers and accounting departments, as Gartner found.23 Only 8% of the procurement departments surveyed have begun RPA implementation.

FIGURE 5

Departments with Highest Automation Investment

Source: Gartner

In downstream procurement, up to 85% of use cases can be automated, as attested by academic research and expert opinion.24 An example of this is three-way invoice matching, where an invoice is approved only if its details match the associated purchase order and goods receipt.25 Tasks as simple as automating payment approval routes and sending automated emails for outstanding payments can meaningfully reduce bottlenecks and create efficiencies.

 

Value by Transforming Procurement with Artificial Intelligence

AI is expected to significantly boost the strategic importance of the procurement function. The three main areas where AI can create value are spend classification, spend and contract analytics, and predictive modeling. While the first two will help identify savings, the third is a lever that will achieve the identified savings. The bottom-line benefits are estimated to be as high as 15-25% of addressable spend.26

Spend classification, powered by machine learning (ML), can keep the spend database updated and reliable. Predictive modeling and digital should-cost analysis can help pull the right negotiation levers by identifying cost drivers across the value chain. ML algorithms can be used to detect anomalies in a data set — such as any unexpected change in the price of a commodity — with a much tighter partnership between internal and external market data sources, including social media channels.

Future supply chain solutions, powered by cloud API (application programming interface) libraries and AI-enabled analysis engines, will be built on data lakes from transportation management systems (TMS), warehouse management systems (WMS) and e-procurement solutions. Their workflows will be defined by agility and by connectedness of teams from purchasing, logistics, inventory and warehouse management.

 

Value from a Collaborative Innovation Model

AI supports human inquiry and interaction through chatbots and cognitive procurement assistants (CPAs). Conversational reporting — used to analyze spend, project and sourcing data sets — is one of the better- known applications of natural language processing (NLP), a subset of AI.

Market leaders have also started experimenting with multimedia catalog searches to guide users through corporate purchases. Allowing spoken inquiries or uploading of images to find the right products in a catalog of 10,000-plus items alleviates one of today’s chronic customer demands: “I want it, and I want it now!”

For mid-sized to large corporations, choosing partners with user-friendly, easily deployable and functional procurement software is more important than ever. Software providers pursuing ways to gamify the source- to-pay process with technology will continue to deliver business and end-user value.

 

3. Should-Cost Modeling

Should-cost modeling helps determine fair prices for the goods and services you purchase. It identifies key cost drivers, enabling you to know the true cost of goods, take greater advantage of price variations, negotiate more effectively, and choose suppliers strategically.

FIGURE 6

Source: GEP

The problem for many organizations is that they don’t have a consistent methodology for performing accurate should-cost modeling.

 

Drawbacks of Unstructured Should-Cost Models

  • Incomplete one-off analysis: Some cost components are missed
  • Lack of cross-functional involvement: Supply chain, engineering overlooked
  • Static data sources: Markets overlooked, data points outdated
  • Expertise lost in user transition: Knowledge transfer is neglected
  • Limited scope: Areas outside users’ control are ignored

Siloed solutions cannot provide the insights needed to make accurate cost assessments. A centralized, digital solution is the better way.

A digital should-cost modeling solution, enabled by AI analysis of data from multiple sources, provides deep insight into the origins of specific costs. It can accommodate large volumes of data from disparate sources, integrating fully with resources throughout the enterprise. This data underpins dynamic, automated cost reporting, yielding insights into areas as diverse as geography, labor rates, material rates, market fluctuations, and more.

After the initial one-time setup, a digital cost modeling solution only requires ongoing management. Real-time evaluation can be performed across key categories, with automated updates on the input price data.

 

The Real Benefits of Should-Cost Analysis

Most implementations of digital should-cost modeling can achieve 3-10% incremental savings within the first year. The reasons are multifold:

  • It provides a fact-based negotiation platform with suppliers, aided by a complete view of the cost structure
  • Should-costing can advance relationship maturity with suppliers. It can help identify improvement areas and enable the businesses to partner strategically with suppliers to jointly reduce waste through insights into cost drivers
  • Traditionally a tool used for direct categories, it is now increasingly being used for indirect categories

FIGURE 7

Source: GEP

In the past, it took significant effort to build a should-cost model, so companies would limit it to individual projects. With digitization, data availability, and the computational power available today, your procurement software should feature advanced should-cost modeling and price forecasting as part of comprehensive cost management solutions for direct and indirect categories.

 

4. Source-to-Pay and Budget-to-Pay

We believe that the source-to-pay (S2P) process framework is ready to extend its reach to budget-to-pay (B2P). We also believe that B2P will help procurement and finance jointly develop cost-control measures as opposed to just collaborating on P&L cost reduction impact. Industries such as manufacturing, automotive, CPG and retail, which have aggressive cost-reduction targets, will benefit significantly from B2P. By checking every request/requisition for budget availability prior to committing spend to external suppliers (imagine this for hundreds of thousands of requests), CFOs and CPOs can drive financial discipline and more aggressively and surgically separate good costs from bad costs.

FIGURE 8

Source: GEP

 

How B2P and S2P Fit Together

  • Initial streamlining of allocation and control of primary costs rests with Financial Planning and Analysis (FP&A) team
  • All decisions in the S2P value chain will be driven by budget availability. No budget, no pay
  • All requisitions in all buying channels will be checked for budgets prior to cost commitment to suppliers
  • Procurement savings will be tied directly to P&L, eliminating the need for monthly reconciliations with finance
  • Metadata required for budget tracking and reporting and automation of approval workflows across finance and procurement will be digitized on a single system of record (SOR) outside of standard ERP systems (which provide limited flexibility to adjust for nuances in control directives)

 

Disruptions in Source-to-Contract

While B2P will close the loop — with FP&A setting budgets as well as entering invoices — there are still disruptors in the traditional source-to-contract (S2C) space:

  • New Technologies: As with the rest of the business world, digitization is dominating the S2C space. Digital trends and disruptive technologies — AI, ML, RPA, blockchain, etc. — are beginning to have a significant impact on S2C. In conjunction with adopting these technologies, many enterprises are also re-evaluating S2C and S2P processes and challenging the standard approaches that have been followed for decades.
  • Measuring ROI: Enterprises continue to strive to build strategic partnerships in order to drive innovation and reap benefits. One of the major trends in S2C is the shift from savings and value capture to measuring ROI. An organization’s supply base is continually being re-evaluated to identify the ROI of doing business with that set of vendors. This shift will cause companies to re-examine their category strategies and perhaps challenge existing ones, such as launching competitive RFPs. The evaluation process will also have to adapt to ensure that the right level of focus and credit is provided to innovative suppliers, so that analysis and supplier recommendations don’t get skewed.
  • Category Workbench Tool: A significant change in S2C processes and technology is the category workbench tool. Empowering category managers with a tool that enables quick and holistic assessment helps them address immediate priorities for the category, while freeing up their time to focus on longer-term strategies. A category workbench reports on what contracts are expiring within a specified period, what projects are active, projects that are underdelivering, savings progress for the year, cost drivers and their impacts on the category, etc. With all this information at their fingertips, category managers save several hours a day that they would have otherwise spent searching for and analyzing this data.

Most enterprises have moved or are moving to S2P platforms and are pushing for automation and digitization across their supply chain. Although S2C has lagged behind procure-to-pay (P2P), or “downstream” procurement, significant strides will be made in automating and digitizing the S2C process in 2020. ML can now, for instance, track and monitor the success of various negotiation strategies. Based on success rates, it can recommend negotiation strategies likely to be most successful in a specific situation. ML can also significantly improve the contract management process — based on historical contracts with suppliers and data on the goods and services being purchased, ML can recommend contract clauses that will expedite the contracting process and prove beneficial for the company.

 

5. Predictive Analytics

In today’s world of big, complex data, advanced analytics (including predictive analytics) has become a key strategic tool producing insights and guiding outcomes.

In today’s world of big, complex data, advanced analytics (including predictive analytics) has become a key strategic tool producing insights and guiding outcomes. Procurement organizations are in a unique position to exploit analytics as they possess oceans of data across spend, contracts, suppliers, operations, accounts payable/finance and market intelligence. Today, these organizations are focusing on extracting value from this data to drive superior business decisions that give the enterprise a competitive advantage.

Utilizing advanced analytics is one of the top priorities of CPOs over the next few years, according to a 2018 survey of CPOs by Ardent Partners.27 Fully 53% of the respondents believe that better data visibility and analytical capabilities are game-changers and will get their department to the next level of performance. Clearly, the best-in-class companies are focusing their investments in predictive and prescriptive modeling.

FIGURE 9

The Journey into Analytics

Source: GEP

Some of the emerging and most successful use cases for advanced analytics across direct and indirect spend categories include:

  • Cognitive Sourcing: This is based on leveraging market intelligence and benchmarks to drive fact-based insights around major cost drivers, suppliers’ past performance data, current and future risks, etc. These applications enable sourcing teams to adopt a data- and insights-driven approach toward awarding contracts instead of the archaic method of determining best fit based on the lowest prices or existing relationships.
  • Comprehensive View on Spend: Many procurement organizations continue to grapple with their own spend visibility, using existing taxonomies and transactional data. Using advanced and predictive analytics solutions makes it possible to benchmark internal data against external yardsticks from peer groups in real time to drive trends and actionable insights.
  • “Smart-Sensing” Value Finder: End-to-end value chain analysis yields value creation opportunities beyond sourcing and negotiations. External market drivers and internal supply data can be used to build a comprehensive, end-to-end predictive model that tracks changes in customer demand and adjusts supply accordingly to manage costs and drive efficiencies.
  • Risk Management: Internal and external threats can put physical, financial and intellectual assets in jeopardy. Comprehensive data analytics capabilities can thwart fraud and enhance overall enterprise security. Predictive fraud analytics models that use statistical tools and relevant category knowledge can reveal fraud trends and drive proactive alerts to form a key component of risk management strategies.

As procurement practitioners embark on the journey to embrace advanced and predictive analytics for sourcing and business strategies, it’s important to focus on models that drive actionable, dynamic insights across internal and external variables and provide end-to-end supply chain visibility. Advanced analytics will provide a great vantage point for decision-making, buttressing the effort to future-proof the enterprise and drive growth.

 

6. The Procurement Ecosystem

Over the past decade, the business environment that procurement supports has changed because of shorter product lifecycles, elevated customer expectations and digital disruptors. Businesses have changed the way they relate to their ecosystem of suppliers, partners and affiliates. Whether partnering with potential competitors, searching for the latest innovator or outsourcing non-core activities, today’s procurement organizations go far beyond their historical, traditional role. Procurement leaders need to consider:

  • Supplier Prioritization — Most procurement departments traditionally segment suppliers by their current spend and importance to business continuity. This method — although regarded as reliable in the past — deprioritizes suppliers that support strategic workstreams ranging from product development to branding, but do not fit well with traditional categories or metrics.28
  • Data Risk Management — Data has become more embedded in industries outside of the traditional technology space, as well as more scrutinized through regulations such as GDPR. This has added a new dimension to the role of procurement. Sectors such as financial services have made heavy investments in third-party risk management platforms, but often there are issues because procurement’s evaluation methodology has not been updated to consider the risks these platforms capture.29
  • Alliance Management — Industries with long supply chains are increasingly dependent on supplier relationships. In industries such as oil and gas, procurement has built alliances with suppliers that manage capital-intensive projects in an attempt to mitigate the risks that occur between an investment and its return.30 To meet the challenges of their expanded role, procurement leaders must invest renewed efforts in supplier engagement. Supplier management should not be based on a one-size-fits-all template and should incorporate:

Modern Supplier Segmentation: The traditional pyramid segmentation must be reformed to capture the value suppliers can provide in value-added processes such as R&D and marketing. Traditional and SME (small and medium-sized enterprise) suppliers have been able to drive top-line growth when procurement has prioritized solution design along with its standard metrics.31

Comprehensive Data Risk Management: There are differences in regulatory rigor for different industries, such as financial services and health care, as well as in the digital disruptors they leverage. Procurement must take the lead in balancing the benefits of sensitive data in business decisions with the risks associated with its acquisition.32

Supplier management should no longer be an exercise linked only to sourcing and contract timelines. With a new ecosystem of companies and new technologies to power interactions, procurement can continue to transform its role and purpose from transactional to strategic.

 

7. Third-Party Risk Management (TPRM)

Trends for 2020

As firms increasingly rely on outsourcing to reduce operating costs and focus on core competencies, enterprises are being exposed to regulatory, operational and reputational risks as never before. Staying up to date in this sensitive domain is crucial, and procurement and compliance professionals need to be aware of the key trends:

  • TPRM is becoming a board-level issue

Third parties have significant control over the success and reputation of enterprises. Coupled with increasing scrutiny from regulators, firms are at great financial and reputational risk today. Executives are cognizant of the severity of the situation, and as a result, TPRM is getting more visibility in the board room. Lack of investment in TPRM has been observed to cost firms millions of dollars in fines and shareholder value, thus making this trend evident and imperative.

 

  • TPRM is transforming into a global phenomenon

Geographically, U.S. firms have the highest population of critical dependencies on third parties and correspondingly the most regulations enforcing scrutiny of third parties for risk exposure. However, in the past decade, risk regulations have become a global trend, and mandates have come into law in EMEA and APAC as well. Firms across the world are introducing measures that evaluate the risk ratings of their third parties on a continuous basis.

FIGURE 10

Regulatory Bodies Responsible for Enforcing TPRM Across the Globe

Source: GEP

  • TPRM affects all industries

Because of its strict regulatory environment, the financial services industry has had the most intensive third-party management needs in the past decade. However, TPRM is now becoming a concern across industries. While other industries are not required by law to have third-party management systems in place, most non-financial companies are bound by anti-bribery/anti-corruption (ABAC) and other regulations. In 2020, we will see the continued growth of TPRM functions in health care, pharmaceuticals and other industries.

 

Cases in Point

Health Care: The U.S. health care sector has growing regulatory requirements that mandate third-party management. The Health Insurance Portability and Accountability Act (HIPAA) sets the standard for protecting private patient data, which is perceived to be even more valuable than credit card information.33 Retail: A major American multinational had to pay $282 million for failing to maintain an adequate anti-corruption compliance program. According to the Department of Justice and the SEC, the company’s subsidiaries in Brazil, China, India and Mexico had employed third- party intermediaries that made payments to foreign government officials to obtain or accelerate the issuance of building permits and other licenses.34
  • Leading firms are relying on technology to drive automation

Today, though firms are aware of third-party risk and have a process in place to address it, the process is largely manual and driven by primitive tools such as spreadsheets and SharePoint folders, which are cumbersome and unscalable. The lack of a single platform to aggregate all the available information on suppliers limits the potential of TPRM assessments and their ability to improve decision-making. In the past five years, multiple TPRM tools have come up in the vendor landscape to address this issue and are becoming increasingly popular.

Firms are moving toward independent/customized TPRM platforms. While these platforms support process workflow automation and enable the collection and validation of assessment data with inputs from various risk intelligence sources such as D&B, Dow Jones, and BitSight, they are not technically integrated with the S2C framework.

Because of the close connection between TPRM and the sourcing process, some firms have been quick to identify S2P platforms as the natural home for the TPRM tool. Responding to this trend, leading S2P providers are actively acquiring independent TPRM solutions and integrating them with their procurement platforms to provide advanced risk-monitoring capabilities.

FIGURE 11

TPRM Technology Maturity Trend

Source: GEP

The final and most crucial step for effective TPRM is making the key risk insights visible to the senior leadership and board-level executives. Large companies have started working toward establishing a highly interconnected digital ecosystem that will feed the TPRM output into the governance and compliance functions. The end goal is to use risk intelligence to drive operational change and enable agile decision- making. Market solutions available in this space include generic governance, risk management and compliance (GRC) software and specific risk management solutions (independent or part of S2C suites) that are integrated with the GRC software.

The vendor landscape is evolving constantly to capture the market pulse for advanced solutions such as cloud-based technologies, RPA for routine tasks, AI for advanced reporting and interpretive tasks and blockchain to validate third-party transactions.

 

Endnotes

  • 19Aengus Collins, “The Global Risks Report 2019, 14th Edition,” World Economic Forum, 2019. Retrieved 6 December 2019 from http://www3.weforum.org/docs/WEF_Global_Risks_Report_2019.pdf
  • 20“Our Strategy for Sustainable Growth,” Unilever. Retrieved 6 December 2019 from https://www.unilever.com/sustainable-living/ our-strategy/
  • 21Muyu Xu, Norihiko Shirouzu and Jacqueline Wong, “China Plans to Toughen Emission Checks on Steel Mills,” Reuters, 13 July 2019. Retrieved 6 December 2019 from https://www.reuters.com/article/us-china-steel-pollution-idUSKCN1U8048
  • 22“A Sea Change for the Global Shipping Industry,” Goldman Sachs, 18 June 2018. Retrieved 6 December 2019 from https:// www.goldmansachs.com/insights/pages/sea-change-for-the-global- shipping-industry.html
  • 23Jackie Wiles, “Get Started on Robotics in Procurement,” Gartner, 26 April 2019. Retrieved 6 December 2019 from https://www.gartner. com/smarterwithgartner/get-started-on-robotics-in-procurement/
  • 24Jacob Karmehog and Erik Löfnertz. “How Digital Technologies Will Impact the Procurement Process and Organization” (master’s thesis), Chalmers University of Technology, 2018. Retrieved 7 December 2019 from pdfs.semanticscholar.org/c9f2/ c5aac4a3376ca81e341110ca97933cf1cfb2.pdf
  • 25Barry O’Brien, “Automating 3-Way Matching in Accounts Payable,” SoftCo, 26 February 2018. Retrieved 7 December 2019 from https:// softco.com/blog/automating-three-way-matching-in-accounts- payable/
  • 26Shamli Prakash, “The Profound Benefits of AI Adoption in Procurement.” The Market Mogul, 30 May 2018. Retrieved 7 December 2019 from https://themarketmogul.com/profound-benefits- ai-adoption-procurement/
  • 27Andrew Bartolini, “CPO Rising 2018: The Intelligent CPO,” CPO Rising, 10 July 2018. Retrieved 29 November 2019 from https:// cporising.com/2018/07/10/cpo-rising-2018-the-intelligent-cpo/
  • 28Charlotte Rogers, “How to Break Down the Barriers Between Marketing and Procurement,” Marketing Week, 1 December 2017. Retrieved 9 December 2019 from https://www.marketingweek.com/ marketers-best-friend-procurement/
  • 29GEP Analysis
  • 30Ibid.
  • 31Duncan Jefferies, “Supplier-Enabled Innovation: What Is It and How Could It Help You?” Raconteur Media Ltd., 3 June 2019. Retrieved 9 December 2019 from www.raconteur.net/business-innovation/ supplier-enabled-innovation
  • 32GEP Analysis
  • 33“The HIPAA Privacy Rule,” U.S. Department of Health and Human Services, Office for Civil Rights. Retrieved 6 December 2019 from https://www.hhs.gov/hipaa/for-professionals/privacy/index.html
  • 34“SEC Enforcement Actions: FCPA Cases.” Retrieved 6 December 2019 from https://www.sec.gov/spotlight/fcpa/fcpa-cases.shtml

 

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