June 7 by Steve Feyer
Procurement is a necessary and valuable part of a well-managed organization. But procurement doesn’t operate in isolation. Rather, it must collaborate with different parts of the business, including finance and the legal team. Yet without integrated, automated procurement and enterprise-wide visibility, procurement is often siloed in its role, working with its partner departments only in rigidly defined, one-directional ways.
When companies embrace a unified middle-office vision powered by automation and advanced analytics, they overcome silos. Moreover, they often find procurement can deliver even more value when it operates as more than an operational cog cut off from the strategic planning of its partner departments.
The middle office is where commerce happens in an enterprise, encompassing everything from initial engagement through collecting revenue and managing commercial relationships. Essentially, the middle office bridges the gap between an enterprise’s front-office supplier engagement systems and back-office ERP systems. By shifting processes and systems from the traditional back office to a cloud-based middle office, companies gain a common and modern interface to improve processes and interactions. More specifically, they bring transparency to the back office/front office exchange of information.
Procurement in the Middle Office
Let’s bring the middle office concept to life by exploring before-and-after scenarios comparing how procurement works in silos versus within a middle office structure.
As procurement departments occupy an increasingly strategic role within their organizations, risk mitigation becomes essential. But, according to a risk-focused benchmark survey of 88 procurement executives, more than a third of respondents experienced a “significant” supply chain risk event in the past 24 months. And, according to the survey, these events negatively affected their revenue, reputation and production time.
Before: When addressing supplier risk in a siloed environment, purchasing tends to manage risk with the goal of preventing business disruption by learning from experience. In other words, it takes a reactive approach as risks unfold around them. The best purchasing can do is “ratchet down” procurement-related risks within the department as it gains the knowledge to identify and respond to them.
After: With a Middle Office Platform™ encompassing procurement and other teams, purchasing gains a view into all supply-chain related data and issues across the company. In turn, procurement can use data-driven insights to focus on key risks and minimize negative outcomes before they occur.
According to Deloitte’s 2018 Global Chief Procurement Officer Survey, cost reduction is the top business goal for procurement leaders, just ahead of developing new products/markets and managing risks. In fact, consolidating spend is the top focus for delivering value in the next 12 months.
Before: When procurement-related data is fragmented, managers suffer from low visibility into spend, cost per unit, prices for alternative materials and services and more. Most resort to measuring cost savings against the prior year, prior contract, or list pricing. Essentially, because siloed data makes it hard to truly benchmark, they make do with the next best option. Traditional data warehouses may also result in delays of weeks or months to generate actionable data.
After: With accurate, end-to-end visibility into costs enabled by a Middle Office Platform™, purchasing can manage to the most effective outcomes for the business. In other words, it can minimize corporate costs and not just purchasing costs. Examples include using data to identify performance problems or fee-for-service metrics in near real-time, both to improve performance and capture contracted cost savings.
Improving operating efficiency
Efficient procurement operations have a trickle-down effect, leading to organization-wide benefits. After all, the procurement process touches every department. When procurement runs smoothly, all parts of the company run more smoothly.
Before: Siloed organizations often rely heavily on manual procurement processes. A slow, cumbersome workflow makes it hard to collaborate during negotiations. As a result, many participants find it too overwhelming and complex to negotiate on many items. Instead, they focus on negotiating price.
After: By standardizing and automating processes through a Middle Office Platform™, organizations eliminate the binding effects of manual processes while empowering procurement with essential company-wide data-driven insights. In turn, they transform procurement into a strategic decision-making function. In such environments, purchasing can more easily negotiate on factors other than price, aligning better to the needs of the whole business and improving the negotiated outcome. More efficient operations help meet targets and reduce errors and can also drive further cost savings, for example, by making it possible to better take advantage of end-of-quarter incentives.