With the global economy set to continue its bumpy ride for the foreseeable future, AI will take a leading role in managing company spend. And that’s a good thing.
There is no denying we have a very mixed economic picture currently, particularly when viewed on the global level. Enterprise companies will continue to face an uncertain outlook with China’s impending slowdown set to impact Western markets and inflation only now subsiding from its recent decade-high levels.
However, there are still some areas of an organization’s financial operations that can be optimized to reduce OpEx and increase efficiencies, providing much-needed immediate cost savings and improved workplace productivity. One opportunity in particular that stands out like a beacon is indirect spend, which is the goods and services a company purchases to keep its business running smoothly. Indirect spend is estimated to equal as much as 20% to 40% of revenue at the average Global 2000 company, but has often been dismissed as a non-issue given the limited managerial control or visibility available to optimize or better manage it.
And while enterprise resource planning (ERP) systems have made strides in streamlining supply chains and making the purchase of direct goods more straightforward, they have never been a perfect solution, particularly when it comes to managing more complex and less tangible areas of spend such as IT, marketing, legal, HR and facilities services.
Earlier this year, our CFO research confirmed these suspicions: 82% of procurement leaders revealed that their indirect spend is poorly managed during the sourcing process, which means companies are missing out on considerable opportunities for cost savings. The survey showed that the majority of chief procurement officers (CPOs) feel their legacy sourcing technology is outdated, lacking in its ability to foster collaborative efforts across different functions and existing within isolated silos. Some 96% reported no connection across teams and suppliers, 94% highlighted the non-intuitive nature of their technology, and 89% acknowledged its deficiency in offering intelligent insights.
The positive development here is that CFOs are not prepared to just accept this any longer. Global strategy and operations consulting firm Hackett Group reported that 45% of executives surveyed said they are accelerating digital transformation as a means to address this challenge. In fact, 73% identified this as their foremost priority for 2023 (the next highest priority was optimizing working capital, at just 32%). And a huge opportunity stands out. In that same Hackett survey, fewer than 10% of CFOs said they had invested in artificial intelligence (AI) to help them get a better grip on that 40% of spend. But among those bold leaders, a remarkable 100% reported that the implementation not only fulfilled but actually surpassed their business objectives.
Global 2000 companies reaping the rewards
To provide specific examples, let us consider two instances. In 2021, Santander Bank underwent a complete overhaul of its procurement operations by introducing an intelligent, automated procurement platform. Business managers are equipped with the tools to precisely outline the parameters of a sourcing project. They also gained access to multiple, best-fit, top-ranking supplier options from a preferred suppliers list, increasing competitiveness. The result was an average of 15% cost savings, while procurement specialists can now redirect their attention to the strategic aspects of the buying process, which increases efficiencies and lowers operating expenses.
Similarly, at the UK-based telecoms provider BT Group, procurement and business stakeholders are successfully leveraging AI with impressive outcomes, honing the ability to precisely scope requirements and avoid overbuying. Moreover, they’re successfully uncovering valuable new suppliers and enhancing collaboration among colleagues and suppliers alike. Thanks to this automation of the sourcing process, BT has enjoyed double-digit cost reductions across the £4bn of spend placed on the platform, as well as being able to derive data-driven insights that provide intelligent analysis on how to gain more value from each sourcing project and drive better business outcomes.
Digital transformation that drives cost savings
The evidence is clear: AI needs to become your trusted ally, as it is the on-ramp to achieving these kinds of efficiencies for your procurement workflows. At present, CFOs are looking for assets that create tangible value to create and sustain revenue growth, operating margin and capital efficiency. The most effective route to achieve these objectives is through AI-powered digital transformation. For example, supplier discounts drive cost of goods sold (COGS), which subsequently enhances operating margins. If a digital transformation in the sourcing area can help drive supplier discounts, CFOs will readily embrace such an opportunity.
It is well-documented that fear of change is the biggest barrier to transformation, but the reality is everything that can be automated inevitably will be. Work tasks are being divided up into smaller chunks and the ratio of people, bot, and AI-driven functions is shifting. What we are seeing, in fact, is almost a full circle. As business processes were standardized, they were first offshored, then outsourced; now, they are moving back in-house but being given to digital colleagues to complete via automation and AI. (Once again, this aligns with Hackett’s findings: high-performing companies automate over 90% of their routine transactions, in contrast to just slightly over half among their peers.)
The spotlight has now turned to procurement and how a company spends its money. To reap the biggest rewards from digitizing indirect spend by making it work as well as other core functions, finance, procurement and IT leaders should work together to understand their operating processes. Then they need to train new autonomous sourcing models on the best and most complete procurement data before embarking on a journey of experimentation and validation within a controlled environment, utilizing a representative sample set that enables accurate measurement of success.
Taking these proactive steps to embrace autonomous sourcing will position finance and procurement in a very favorable position when the CEO or executive board asks why the company is not fully capitalizing on the potential of this new wave of game-changing AI-powered technology. Being able to confidently state that you have already harnessed and integrated AI across your company spend model is going to hold significant value within the organization.