Rising Procurement Costs: "Digital World Class Organizations" Face Challenges and Opportunities

Procurement costs have been on the rise in 2023, posing significant challenges for organizations as they grapple with inflation, supply disruptions, and other unprecedented factors. The Hackett Group's latest research report, "Resilience: The Digital World Class Procurement Advantage," sheds light on the increasing financial burden faced by procurement functions. According to the report, procurement costs now comprise 74% of total spend for Digital World Class organizations, up from 69% the previous year. Peer organizations have also witnessed a similar trend, with procurement costs accounting for 93% of total spend in 2023, up from 89% in 2022.

The Hackett Group defines Digital World Class organizations as those achieving top-quartile performance in business value and operational excellence in their procurement benchmark. These organizations have demonstrated superior performance in stakeholder experience, digital enablement, traditional effectiveness metrics, efficiency, and business process automation.

Amy Hillcox, Senior Research Director at The Hackett Group, highlights the challenges faced by organizations in maintaining procurement costs amid the volatile market conditions. However, she emphasizes that Digital World Class organizations have managed to maintain their performance advantage despite these challenges. Their ability to navigate uncertainty, risk, and complexity more effectively is attributed to their strategic focus and adaptability to rapidly changing circumstances. The key to their success lies in harnessing actionable data more effectively, enabling faster and better insights and decisions.

The research reveals several benefits enjoyed by Digital World Class organizations compared to their peers. These organizations achieve nearly 2X more savings due to spend cost reduction, leading to a 2.4X higher return on investment (ROI). They are also 86% more likely to be viewed as valued partners and experience 76% lower process costs per order.

In addition to the financial advantages, Digital World Class organizations exhibit higher resiliency and business excellence across various key metrics. Notably, they enjoy a $6 million annual cost advantage over their peers in a $10 billion enterprise.

Moreover, companies that have at least one business services function operating at Digital World Class levels witness significant performance premiums over industry medians. This includes 80% higher net margins, 24% higher earnings before interest, taxes, depreciation, and amortization margin, 89% greater return on equity, and 44% higher total shareholder return.

Chris Sawchuk, Principal at The Hackett Group, underscores the importance of technology enablement in procurement strategy for achieving impressive performance improvements. However, to fully unlock technology's potential, organizations must also invest in data and advanced analytics, modern cloud architecture, evolving operating models, effective business partnering, and improved talent management.

Implications for Vendor and Third-Party Risk Professionals

1. Heightened Scrutiny: With procurement costs on the rise and supply chain disruptions becoming more prevalent, vendor and third-party risk professionals will face increased scrutiny from senior management and regulators to ensure the resilience and stability of critical supply chains.
2. Focus on Human Rights Due Diligence: As human rights issues emerge as a key concern for CEOs, vendor and third-party risk professionals will be tasked with conducting thorough due diligence on suppliers and partners to identify and mitigate potential human rights violations within the supply chain.
3. Need for Agile Risk Management: The evolving landscape of supply chain challenges demands agile risk management strategies. Vendor and third-party risk professionals must be prepared to adapt their risk assessments and mitigation plans swiftly in response to changing market conditions.
4. Emphasis on Resilience: Digital World Class organizations have demonstrated higher resiliency in the face of disruptions. Vendor and third-party risk professionals will need to collaborate closely with procurement teams to build resilient supply chains, including exploring near-shoring and on-shoring options to minimize geopolitical risks.
5. Integrating Technology Enablement: To keep up with Digital World Class organizations, vendor and third-party risk professionals should integrate technology enablement in their risk management processes. Leveraging data and advanced analytics will provide valuable insights into supplier performance and potential risks.
6. Comprehensive Due Diligence: Vendor and third-party risk professionals must conduct comprehensive due diligence on potential suppliers, not only focusing on financial stability but also evaluating their sustainability efforts and commitment to decarbonization to align with environmental goals.
7. Collaboration with Internal Stakeholders: As cost pressures increase, vendor and third-party risk professionals need to collaborate closely with procurement, legal, and finance teams to strike a balance between cost optimization and risk mitigation while ensuring compliance with regulations.
8. Talent Management and Training: With evolving risks and complex supply chain challenges, talent management becomes crucial. Vendor and third-party risk professionals should invest in training and up-skilling to equip their teams with the knowledge and skills needed to address emerging risks effectively.
9. Continuous Monitoring: Given the dynamic nature of supply chain risks, continuous monitoring of vendors and third parties is essential. Regularly evaluating their performance and compliance with contractual obligations will enable early detection and proactive risk mitigation.
10. Aligning with Organizational Goals: Vendor and third-party risk professionals should align their risk management strategies with the organization's overall goals and objectives. Demonstrating the value of robust risk management in supporting business resilience will strengthen their position within the organization.

The rising procurement costs pose both challenges and opportunities for organizations. Digital World Class organizations are better equipped to navigate these challenges by leveraging actionable data and investing in technology enablement along with other key areas. As businesses strive to enhance their procurement functions, a comprehensive approach that includes technology adoption and holistic improvements is crucial for achieving sustained success in an evolving and competitive landscape.