Robert Kugel's Analyst Perspectives

In late February I attended Spark, the Scout annual user group meeting. This was the third and likely the last such meeting, as Scout was recently acquired by Workday. Scout’s users represent a new breed of purchasing managers and executives looking to change the role of the purchasing department. This change is critical for businesses. Saving money is the essential job of sourcing and purchasing departments. But departments can go far beyond that, helping support product and go-to-market strategies that are more complex and innovative. To empower this change, the bulk of conference content included experience-driven advice from practitioners who are pioneering the evolution of sourcing and procurement. I observed two key themes at the conference. One was providing the rationale for the Workday acquisition and providing an assurance of continuity at Scout. The second was Scout’s emphasis on the evolving role of sourcing and purchasing, especially in services industries. Customers usually are concerned when a young and scrappy company such as Scout is acquired by a larger one, so Workday went to lengths to allay any misgivings. I think it’s best to view the acquisition as part of Workday’s broader strategy to strengthen its presence in the Office of Finance. Today, Workday’s main tentpoles are human capital management (HCM) and financial management (including ERP). The organization faces a challenge in growing the latter part of the business because organizations replace their ERP systems infrequently — doing so is expensive, somewhat disruptive and therefore risky. Indeed, our recent Change in the Office of Finance benchmark research finds that the average age of a corporation’s main ERP system is six years, suggesting that these systems are replaced about every dozen years or so. To increase its opportunity to supply a replacement financial management system, Workday has looked for ways to create ongoing engagement with the Office of Finance, especially with existing HCM customers. To this end, in 2018 Workday acquired Adaptive Insights, a planning and budgeting software vendor. One reason for that acquisition was that while this category has been around for decades, market penetration of dedicated planning and budgeting software is low: Our research shows that fewer than one-third (29%) of companies use third-party dedicated software for budgeting, while 58 percent use spreadsheets. This is despite our finding that 66 percent of corporations that use a dedicated planning and budgeting application have a planning process that works very well compared to just 36 percent that use spreadsheets. A second avenue of engagement with the finance department is through managing the acquisition of materiel. In services companies (Workday’s target customers), those that manage the acquisition processes typically belong to or report to the finance organization. In product organizations, management more often is handled by the manufacturing or operational organizations. Services businesses are different from product companies because, unlike the steel, chemicals and purchased parts that go into manufactured goods, little or none of the materiel that services companies acquire is used directly in their offerings. Instead, they acquire office equipment and supplies as well as other services such as advertising and specialized consulting capabilities. This “indirect” spend often represents a considerable percentage of a services company’s expenses. Scout’s mission from the start was to create highly capable, easy-to-use software that focuses on these needs. Good user interface design as well as streamlining a core but often-overlooked business process are reasons why Ventana Research gave Scout an innovation award in 2016. At the time of the acquisition, Workday was offering a purchase-to-pay (P2P) process management system, which includes catalog and item management, purchases, receive and put away, invoice processing and payment. Scout’s software complements these functions, covering the source-to-purchase (STP) activities that precede P2P. These consist of managing the sourcing of specific products and services, including the internal management of sourcing projects and external engagement in the request-for-proposals or RFP stage. The software also facilitates acquisition and reverse auctions, supplier performance management and contract management. Combined, Workday is able to handle an end-to-end source-to-pay process. The business case for customers or prospects to invest in source-to-pay software rests on improving efficiency and effectiveness. Organizations gain efficiency by, for instance, automating and coordinating what are usually manual and disjointed tasks often handled in spreadsheets and email attachments. In the past, employees often viewed measures designed to rationalize and control a company’s spend on goods and services as a burden and an obstacle to doing their job. Disjointed manual systems force those in sourcing and purchasing as well as those looking to buy things to spend a significant amount of time dealing with data and process challenges. Consequently, frustrated employees bypass the purchasing process. Reducing the hassle involved in buying from approved suppliers — especially where volume discounts have been negotiated — has the potential to lower the cost of purchased goods and services because often there is less incentive to “maverick” spend (namely, use an unapproved supplier). Simplifying the invoice matching process can enable companies to take advantage of early pay discounts, which offer a far greater return on cash than current low interest rates. Achieving savings is certainly important but so too is getting “more bang for the buck.” More effective marketing and advertising, more innovation or differentiation in service offerings or service delivery can provide a company with a competitive advantage. Employees often don’t recognize that those in sourcing and purchasing have a much better idea than they do of the market and vendor capabilities that can be useful in designing or configuring services. By not utilizing the knowledge and experience of the department, the company might miss an opportunity to create a more competitive offering or may experience quality or fulfillment issues that could have been avoided. To this end, I’ve observed that the sourcing and purchasing process for indirect spend is undergoing change in many corporations. To deliver superior value, sourcing and purchasing professionals need the time saved on trivial tasks to engage more with the rest of the company. Technology can transform the management of the source-to-pay process to increase the value of the sourcing and purchasing role. Organizations can increase effectiveness through more intelligent and consistent management of suppliers. By using software to manage the process, especially orchestrating handoffs as well as approvals and reviews, and ensuring access to accurate and timely data, companies can achieve at least four benefits: First, technology can simplify the process for employees while increasing control and visibility into spend. Organizations can now join disparate and disjointed elements of the source-to-pay process, for example, by using APIs and other methods to connect the various strands of applications that touch this end-to-end process. Second, a great deal of time now spent on tedious activities (such as handling the details of the RFP process or managing a reverse auction) can be saved by using software to manage the details and provide instant visibility into the state of a process. Software also enables access to all of the data needed for analysis and decision-making. Technology can make a company’s purchasing process far easier, encouraging compliance. Third, technology enables finance organizations to have greater visibility into future spend, greater control over the process and access to reliable data with which to evaluate the effectiveness of company spending. And fourth, by eliminating tedious and low-value work, those in sourcing and purchasing can devote more time to expanding or deepening their areas of expertise. Technology is a necessary part of changing the role of sourcing and purchasing, but it’s also insufficient by itself. That’s because sourcing, procurement and purchasing are usually overlooked by most people in an organization and those that manage these essential tasks are in the background. These functions are changing because the traditional objective of the department — saving money — is necessary but no longer enough in modern corporations. Sourcing and purchasing professionals who want to make a difference must have an internal marketing effort in place to raise their profile and to increase their engagement with the rest of their organization. Those managing the department should engage with senior leadership to map out a change management effort that covers the people, process, data and software aspects of the transformation. Technology is often a useful first step in this regard, since software can automate time-consuming and low-value repetitive work. It also can foster greater collaboration between sourcing and procurement and the rest of the organization. Whether or not a company is a Workday client, I recommend looking at what Scout has to offer in the form of both software and joining a community of like-minded sourcing and purchasing professionals. Regards, Robert Kugel

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