The Future of Enterprise Procurement

By Saravanan Narasimhan, Engagement Director, TCS-NextGen C&SI

The future of procurement lies within the digital landscape. Not only do the benefits of its implementation greatly outweigh the costs, but they also result in very profitable returns.  Digital procurement clearly demonstrates that it is far superior to manual procurement methods within the context of efficiency alone. “Research indicates that approximately 40% of the total cost of purchasing materials comes from the transaction costs associated with processing and managing the order.” (Boer, Harink, & Heijboar). This demonstrates that a significant portion of funds are being diverted from the nature of the transaction and towards the commitment of the transaction. This can easily be avoided through the utilization of the much more reliable, cost-effective, and efficient digital method. “Not only is it faster and cheaper, but digital procurement promises to reduce invoicing and ordering errors on average by up to 2%” (Yu, Yevu, & Nani, 2020, p. 31). While this number does not seem extremely significant when working with smaller transactions, the value of this percentage jumps to hundreds of thousands or millions of dollars for organizations with large spend budgets. With the interaction between businesses and vendors slowly encroaching on larger sums of currency, it can practically ensure the prevention of losses of tens of thousands of dollars.

Despite the rising popularity of digital procurement, it has not completely taken hold of many corporations to date. Companies such as Google, Toyota, Google Federal Express, United Technologies, Microsoft, Chevron, Texas Instruments, and British Telecom have taken the initiative to implement such technologies and have seen nothing but success. However, many others are still sitting at the fundamentally early planning stages of their strategies of implementation. Many companies seem to view electronic procurement in its current state as a tactical expense rather than a strategic investment, which, in essence, it is. This largely delves into the nature of technology and the rate of growth at which technology is known. It is well known that technology has a largely variable rate of growth. More often than not, the technology that is developed within a certain decade becomes relatively invalidated within a few decades and replaced by a newer technology. In those circumstances, large-scale investment into technology must be tactical decisions due to the initial expense versus the risk of net loss versus net profit. This raises the question: how sustainable is digital procurement in the long term?

Figure 1: Digital Leaders and Followers (Source: https://www.tcs.com/perspectives/articles/north-american-success-in-digital-business)

To that question, I add another: “What links digital procurement to modern business?”. The answer is simple, e-commerce. Today, the internet plays a major role in the lives of many individuals around the world. Beyond that, it also plays a major role in business growth across globally.  This relationship extends to vendors and also outlines the business-vendor transaction system in many circumstances. When viewing the past twenty years of the global economy, it is clear it was largely driven by the profits which were generated from the successes of e-commerce. The best example of this lies within one of the world’s largest companies: Amazon. Amazon has generated profits that largely stem from the growth of the Internet as a technology. As the Internet expanded to encourage user interaction in the early twenty-first century, Amazon took to capitalizing on that situation. Today, “Amazon is valued at approximately 1.56 trillion dollars in value” (Yu, Yevu, & Nani, 2020). While an estimate, this figure is an exhibition of Amazon’s headstrong dive into the world of e-commerce and its associated systems early in its precursor stages. The close link between the super corporation and the system of monetary interaction would pave the way to the successful state that Amazon finds itself in today.

The most successful means of digital procurement in the corporate world is through early involvement. While there are examples of late-stage implementation in business, many have trouble aligning the necessities and demands. This thinking aligns with a popular concept in the private sector: upgrading is significantly more beneficial than introducing a new technology – an idea better known as digital transformation.

Consider the German automaker Volkswagen. Volkswagen has stated that they plan on investing four billion dollars by the year 2025 in order to transform its digital ecosystem. This transformation is largely accredited to the evolving automotive industry and the emphasis on the link between vehicles and the internet of things. While the procedure has been finalized, it is clear that a large amount of time, money, and resources needed to be spent in order to ensure its success. On the other hand, consider Tesla which has had a very vibrant digital ecosystem since their conception. Tesla has no need to make expensive late-stage adjustments to their ecosystem. If  Tesla wishes to upgrade or improve said ecosystem then they would be able to do seemingly effortlessly given they already had the foundation for the new technology already set-in place. While a simple concept, it is a foundational one for growth and development. One that greatly outlines the significance of implementing digital procurement while it is still in its infant stages.

Figure 2 – Digital by 2030 (Source: https://www.tcs.com/perspectives/articles/north-american-success-in-digital-business)

However, the foundations that are set by digital procurement will almost certainly find their way into the implementation of future market strategies. Modern practice is readily moving away from primitive means of managing data, said transactions, etc., and moving towards a digital implementation as a means to accomplish such objectives. The success of that implementation, however, will largely be decided by two primary factors in which must be pulled into perspective. The first is the fundamental capability of said company to build a strong foundation for said systems to build upon. The second is a manner of the sustainability of electronic commerce in future markets.

While there are two factors, the first is the only one that beckons attention. In today’s world, electronic commerce is and will continue to be sustainable. In fact, it will be the defining factor that will separate the companies that will be relevant within the oncoming decade from those who will fall behind. However, we measure the potential savings, it is quickly becoming obvious that digital procurement is a viable and valuable new way of doing business Despite being young in essence, it promises that its foundational idea will be adopted by many companies and businesses all around the globe. Today, software companies, governments, and large-scale market creators are relentlessly pushing for the adoption of digital procurement. While prices can be driven down through better vendor management, adherence to discounts, and the reduction of maverick buying, the big savings come through greatly reducing the transaction costs.  While most programs currently find themselves in their infancy stage, the return on investment for digital procurement greatly outweighs the cost of the initial investment. Ultimately, in the long run, at least, this redefines the nature of digital procurement from a tactical expense over to a strategical investment, outlining the significance of electronic procurement in the future technological ventures.