12 October 2021
Topics in this article
  • Cost Optimization
  • Strategy & Planning

“It’s tough to make predictions, especially about the future.” ― Yogi Berra

You are mortal

The lazy route of predicting takes trends visible today and extrapolates. Many things are currently making procurement prominent, but not all of them will have a longer-term impact. However, 2022 will be the year when the function we have grown up with and the roles it performs will deliberately start to break itself up!

At the moment, this is procurement’s time. It is more visible than ever before. On the day of writing in early October, I have spoken to five FTSE 20 and Fortune 50 CPOs who have been to each of their last four monthly PLC / Inc meetings to discuss issues such as security of supply, energy prices, accelerating innovation, sustainability and Scope 3 CO2e emissions.

Procurement does not operate in a business vacuum. Today we see in no particular order:

  • Inflation pressures and commodity price volatility
  • Visible issues of supply and supply risk
  • ESG on the up
  • Digitization acceleration and demand for vendor innovation
  • Greater political intervention (trade barriers, pressing for local production), intervention in employment (furlough) and markets (subsidies)

Every article you see which simply restates these observations and predicts continuation ill serves you, the reader, with these lazy observations. Some of these current challenges are more long-term and more important than others, and then there is a question of how businesses are already reacting to minimize the consequences.

Separation of the great from the good has never been more evident than now

Darwin may never have said, ‘it is not the strongest of the species that survives, nor the most intelligent…It is the one that is most adaptable to change’ (with thanks to David Wylie from Thames Water for reminding me of this quote). Whoever did say it could have applied it to procurement functions; the ones that adapted and aligned themselves to the new 2020/21 business strategy fastest have done extraordinarily well.

Power flows to those that know how to wield it and take advantage of circumstance. Many CPOs have seen their remit expand to include property, sustainability, risk, supply chain, or overseeing corporate incubators or move beyond procurement full stop, and their voices are being heard. When talking about ‘gaining a seat at the table’ or delivering value ‘beyond savings,’ this is what it means and what evolution reaps. If your remit has not expanded in the last 12 months, what have you been doing?

2022 will see more dramatic business changes. The CPOs who showed their worth in Covid will adapt to the next crisis and keep reinventing the positioning and narrative to remain prominent, like Adrian Bower at Entain, who leads procurement, property, and the incubator program for the whole of his business. The rest risk stagnation, or worse, still being replaced.

We can’t assess enough important risks – so we are building in resilience instead

We ran a good times supply chain model pre-2020. We all assumed that the ‘just in time’ approach of undisrupted global supply chains would continue. There were clues it would not – for example, when the Japan nuclear reactor disaster of 2011 affected the smooth running of the automobile supply chain – but CFOs responsible for managing the balance sheet put the pressure on their business to remove the spare stock and slack in the system because they – like the rest of us – thought that the boundaries of volatility that needed to be planned for were narrower than they were.

It has only belatedly been understood how social media amplifies consumer demand to overwhelm supply. Lemming like we panic buy toilet rolls, PPE, or petrol, fearful that others get there first and we are now all equipped with a portable supercomputer pointing us to where the last remaining roll, mask, or gallon lies.

Into that mix, when Covid hit, every disaster plan was – to my knowledge – ignored. In conversation, I think many corporates have realized that risks are hard, if not impossible, to anticipate, so there is a desire to create bigger buffers that provide some protection. Some protection will allow better visibility in the supply chain via E-tools to interrogate the public or coordinate private information about suppliers. But the primary buffer in 2022 will be more stocks and fat in the supply chain to smooth the bumps. This will give more resilience because more events will be covered, which would have previously caused a problem.

Of course, by 2030, a new generation of management will probably be in place, and the lessons from Covid will have started gone from the executive memory, so expect pressure to mount soon to reverse these buffers (until the next crisis…sigh). I already see that a wide range of executives did not remember the commodity volatility of the 2000s…

Inflation will ease quickly – unless government stops it

There may have been bumps in our proverbial roads, but globalization (even after more tariffs and blips in supply) means it remains much faster to ramp up supply than it used to be. PPE was a case in point with provision rapidly being created. Oil/gas will be another where the swing capacity linked to fracking means the oil price mechanism will improve fuel supply in weeks and months rather than years. There will continue to be minor hiccups, but they will be overcome.

Commodities, in particular, are on a long run real prices decline as technology for extraction improves and we get much more effective at deploying (many commodities have peaked consumption, as Andrew McAfee points out in ‘More from Less’). This trend has not gone away.

The caveat to these last two points is the possibility of more government interventions causing disruption. So many of the problems, such as constrained HGV driver licensing, derive from the public impedance of markets, even if the intention is good and we no longer live in an era intellectually driving for less government. We will see more appetite to intervene in 2022. Just as some powers for the UK police date back to the second world war without being removed, so political leaders during Covid have tasted the fruits of immense power to intervene and then see payoffs of rapid action. As George Orwell said in his novel 1984, “We know that no one ever seizes power with the intention of relinquishing it.” 2022 will see more interventions the political classes have tasted intervention and – like sharks and blood – have decided they like it. I suspect that Facebook will not be the only large corporate to face legislative-led pressure to reinvent its structure / break up, leading to a degree of difficulty to predict uncertainty.

ESG is changing the boundaries of the business – collaboration and sharing are on the up

2021 was about making promises on emissions; 2022 is about figuring out how those promises will be kept! The rubber is genuinely hitting the road, but the road is slippery, and the GPS is not working well yet! However, five things are coming clear, and 2022 will crystallize:

  • Companies will collaborate – to have the mass/momentum/credibility, non competing businesses are co-operating to work with suppliers. As CPO of Diageo, one of the world’s largest producers of spirits and beers, Janelle Orozco is looking to work with businesses on glass industry emissions, and I have heard many other examples. The nature of the openness required from suppliers and co-operation with suppliers is going to increase. Interestingly, I think it will improve negotiations and be more fun as the variables will more clearly trade off price and carbon emissions.
  • “Greenification equals localization.” We will see an acceleration of more local, automated supply chains, which will create more socially, environmentally friendly options, but which may force clarity on the trade-off between higher cost relative to what may be available elsewhere and lower carbon. Without appropriate guide rails such as ‘internal carbon taxes,’ this will cause a lot of tension in 2022.
  • Reporting will tighten up – I know that a material number of quoted businesses have reported numbers on carbon emissions which are at best fanciful. The rise of better auditing to start to verify reporting and the intervention of the UK’s Competition and Market Authority on 20 September with rules about making environmental claims re products/services are leading indicators. Both have a long way to go, and 2022 will see some corporates get caught out. It is a natural stage of evolution for a nascent market.
  • More information flows from suppliers – this is going to be the driver for procurement taking over sustainability in many companies. CPOs such as Robert Copeland at G4S are part of the advance guard. More and more tenders require information on environmental performance, and the answers will be weighted accordingly; revenue will flow to the more sustainability-aware businesses. It is this link to future revenues and loss thereof which will drive business change.
  • Underlying monitoring and measurement tech to feed this beast will be the next big trend in procure-tech, something that solves a genuine business need beyond cost to serve. The answer is going to emerge in niches. There will be an explosion of niche Etools and services because that happens at the start of any market prior to simplification and consolidation.)

We are going to address the 30-year challenge of getting useful data from ERP / S2C platforms because we have to, so we can do something with the data

Of course, there is a connecting thread to plan better about the future and collate all the information coming in on multiple sources, finally and about 30 years late. Procurement functions will have to create high-quality data, nurture it to keep the quality, integrate it from multiple sources, and then automate and use it to improve decision-making materially. People such as Ninian Wilson at Vodafone have done the hard work of figuring out how to do this, and he can be counted as a procurement revolutionary.

Because of people such as Ninian, it is no longer the bleeding edge, but in the absence of utility solutions, it is leading edge. The general growth in start-ups in US / EU / UK economies will be mirrored in the emergence of procurement tech. This will really test the metal of the big ERP providers coming up against niche solutions that are best of breed.

And the big corporates pursue much more granular data for another reason….

The Procurement function, as many know it, is going to die. Tech is going to kill it. Self-service will start to reveal this path in 2022

The tough thing is that less clarity exists in defining the replacement entity overseeing the new commercial architecture, its role, and its responsibilities. I think more hints of this will crystallize in 2022. Because in 2022, the role probably shifts more consistently into leading business into a new era. Suppliers, customers, regulators, investors; the boundaries in which businesses operate have fundamentally changed or are changing. And the role of procurement is to make sense of that, calibrate then interact with the “external enterprise” in an optimum way, and in that sense, plus ca change

Digitising, like ESG, is going to be an ongoing part of commercial life; while today they are separate, soon enough, they won’t be. However, the biggest companies are not looking for digital to make their function more effective. They are looking to it to remove the need for a procurement professional to do most of the things that we have done. Sourcing, contracting, payment, negotiation will all be automated. In 2021, companies were experimenting and trying to sequence how this could be done. Some of the US west coast tech goliaths can see a route to revenues for them. Other big corporates see ‘autonomous procurement’ or what I term self-service as a way to deal with the tail. Either way, they need much more detailed data to apply algorithms and AI learning to.

Automating the tail, so stakeholders do not need human intervention from procurement is only the start. Multiple motives lead to one inevitable conclusion – the revolution will eat its parents. Technology can enable the stakeholder to do most of what procurement does today without procurement, and AI will help it get better and better. To be genuinely autonomous, however, the technology must understand changing needs, open and competitive markets, and non-standard behaviors human and technological behaviors. The tech needs to learn how to game.

Mortality…and the phoenix

So 2022 is a point of inflection. At the same time, procurement has made its greatest conquest. It is the closest it has ever been to the adoring crowds, like the victorious general going through Rome after their campaign triumph; someone has to whisper the phrase uttered in the ear of those same generals, but this time to procurement leaders. ‘You are mortal.’

This reminder of our mortality is a call to arms to think through the nature of the replacement to the old-school procurement responsibilities. Phoenix-like, something new is going to arise!

If you would like to find out more about how Proxima can help you and your business can get ahead in 2022, click here to connect with us.

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