Introduction
In our first instalment, we noted that the ambitious started pumping out 2025 prediction and trend articles in late November / early December, wanting to be ahead of the pack, even though there is rarely much value in these articles. First of all, and we say this with 25 years of experience in this space, the more they proclaim things will change … Secondly, the predictions all revolve around the same topics we’ve been talking about for almost two decades. In fact, if you dug up a Procurement predictions article for 2015, there’s a good chance 9 of the top 10 topic areas would be the same. (And see the links in our first article for two “future” series with about 3 dozen trends that are more or less as relevant now as they were then.)
In our last instalment, we continued our review of the 10 core predictions (and variants) that came out of our initial review of 71 “predictions” and “trends” across the first eight articles we found, in an effort to demonstrate that most of these aren’t ground-shattering, new, or, if they actually are, not going to happen because the more they proclaim things will change …
In this instalment, we’re again continuing to work our way up the list from the bottom to the top and continuing with “Cost vs. Value”.
Cost Vs. Value
There were 3 predictions across the eight articles which basically revolved around a shift from “cost cutting and management” to “value creation”. As with almost every “prediction” and “trend” in this series, this is yet another prediction that makes headlines every year, no more important this year than the last, and still as unlikely to actually happen because, despite all the lip service around value, at the end of the day, all the CFO and CEO ultimately care about is increased profit from cost-cutting to make the Board happy. Before we discuss further, here were the three predictions:
- Cost Management and Value Creation
- Cost Management vs. Value Creation
- Shift from Cost Cutting to Value Creation
Every year is the year Procurement is going to switch en-masse from cost cutting and cost management to value creation, and every year it doesn’t happen. We’re constantly being told that Procurement is not a cost center, it’s a value center, and proper Procurement adds value to the business, as a foundation for the “visionaries” to preach the power, and future, of Procurement.
However, as we stated in our discussion of “Strategic Value”, there’s a lot of talk about value creation, but at the end of the day, the majority of CFOs and CEOs define “Value” as “Cost Savings” and, unless Procurement cuts costs, they are not seen as “valuable”. And all of the proclaimed focus on “value creation” gets left on the cutting room floor (where Gen-AI should have been left with the rest of the discarded manuscripts).
However, once Procurement acquires the right technology, it will be super simple to make the right buy at the right price every time. (More specifically, optimization backed sourcing and procurement platforms that build baseline models, capture real-world constraints, import risk data, build minimally constrained risk-aware models, auto-solve them, make the optimal low-cost recommendation, and make what-if analysis easy if the buyer wants to see what would happen by substituting a preferred supplier. Not BS AI!) This means that Procurement will have all the time it needs to focus on strategic value vs. just finding the lowest cost (which takes up all its time now). So this is someplace Procurement should get to relatively soon — but considering we’ve had modern SSDO (Strategic Sourcing Decision Optimization) for almost 25 years, and that for the last decade it could solve large models in real-time with the computing power available, and that the vast majority of Sourcing and Procurement departments have not adopted it, our guess is that they won’t. And Procurement will thus continue to spend the majority of its time focussed on cost cutting.
What Should Happen? (But Won’t!)
If it doesn’t have it already, and it probably doesn’t, Procurement should immediately acquire SSDO (Strategic Sourcing Decision Optimization Technology) and use it for every sourcing event, even if to get a baseline to understand the cost baselines (and how much more they are going to pay regardless of inflation no matter how much they try to negotiate or buy). In addition, if they don’t have it already, they should acquire subscriptions to market cost data (commodity markets, public sector contracts, GPO data, etc.) to understand baseline commodity and product costs.
Then, when they understand the expected cost, use a combination of constraint-aware optimization and analytics to make the right decision as expediently as possible — and not waste time on futile spreadsheet analysis or negotiations that can’t go anywhere (because a price reduction from a supplier would mean the supplier’s bankruptcy).
Then, the focus should shift from minimizing costs, because that’s only going to get an organization so far, and finding value in every buy it makes, partnership it takes, and direction it breaks. It needs to, as per previous entries in this series, focus on maximizing the value of each supplier relationship through performance management and any collaboration required to make sure the expected value is realized for both parties. Focus has to be not just on the lowest cost, but quality and features that buyers will pay more for. Focus needs to be on identifying new products and services that are simultaneously more sustainable and more desirable to the market. And on curbing demand for MRO products and services to prevent spend in the first place. (Just make sure you have the Procurement Infrastructure to support you.)
That’s eight down, two to go.