Procurement Costs Increase, But Top Performers See Increased Advantage

If the push to undergo a digital transformation needed a boost, new research from The Hackett Group provides fresh evidence. The research firm found that “Digital World Class” organizations operate at a 21% lower cost than their peers and have 32% less staff as a result.

However, the group did find that procurement costs have increased in 2023 and now comprise 74% of total spend, up from 69% a year ago, as Digital World Class organizations. Costs are peer organizations also increased from 89% of total spend in 2022 to 93% of total spend in 2023.

The findings are part of The Hackett Group’s Resilience: The Digital World Class Procurement Advantage research report.

The Hackett Group defines Digital World Class organizations as those that achieve top-quartile performance in business value (a composite of stakeholder experience, digital enablement and traditional effectiveness metrics) and operational excellence (a composite of efficiency and business process automation metrics) in The Hackett Group’s procurement benchmark.

“Inflation, supply disruption, and other factors presented unprecedented challenges over the past year, driving up costs to support both typical and Digital World Class procurement organizations,” explains Amy Hillcox, senior research director. “But despite this, the performance advantage achieved by Digital World Class procurement organizations is more impressive than ever. They are better at navigating uncertainty, risk, and complexity than peers because they are more disciplined at maintaining strategic focus and more adaptive to rapidly changing circumstances. In large part, they do this by harnessing actionable data more effectively, which enables them to deliver faster and better insight, and make better decisions.”

The research found that Digital World Class organizations see improved resiliency and higher business excellence across an array of key metrics. For example, they drive nearly 2X more savings due to spend cost reduction, generate a 2.4X higher ROI, are 86% more likely to be viewed as a valued partner, and see 76% lower process costs per order.

The result is that these organizations have a $6 million annual cost advantage over a peer (based on a $10 billion enterprise).

The data concluded that companies with at least one business services function operating at Digital World Class levels see a five-year average performance premium over their industry medians. These include 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.

“To achieve their impressive performance improvements, Digital World Class organizations obviously focus procurement strategy on technology enablement. But to truly unlock the potential of technology, they also invest appropriately in the five other areas as well: data and advanced analytics; modern cloud architecture; evolving their operating model; more effective business partnering; and improved talent management,” Chris Sawchuk, principal, says.

SC
MR