I had a very interesting session last week with procurement leads responsible for sourcing legal and consulting work for major organisations.
I came to the session wanting to talk about service-oriented, not product- or project-oriented strategic sourcing, and to lay out a vision for how organisations need to get better at managing their strategic – especially digital – capabilities. I wanted to encourage procurement professionals to think about building, buying or renting services rather than buying stand-alone products or projects. What surprised me was how well this aligned with procurement professionals’ own desire to move up the value chain to find a more strategic role for their function. In fact, as I was delighted to learn, some of them are already using advanced tools and services to bring elements of AI and machine learning into the procurement function.
On the supply side, we hear a lot about how professional services firms are experimenting with Blockchain, Artificial Intelligence (AI), analytics and smart technology in general, but it is fair to say that the necessary business model changes required to bring this into the mainstream of what they offer have not yet happened. On both the supply and the demand side, we need to have a degree of healthy scepticism towards these new technologies and try to identify the underlying principles that will matter more in the long run. Blockchain is simply a cryptographic distributed ledger that in theory cannot be tampered with. It might provide a better way to record transactions and support smart contracts, but as Vinay Gupta says, if you mentally replace the word ‘blockchain’ with ‘database’ then much of the hype starts to look a bit silly. If you delve further into the bizarro world of supposedly ‘sovereign’ code creating vulnerabilities resulting in hundreds of millions of dollars worth of Ether or other crypto-tokens being lost – more than once – then you might start to wonder if the immediate future for this technology is as obvious as the hype-pushers claim. Good luck getting your customers to remember a pin-code, let alone manage their own immutable ledger.
Artificial Intelligence and Machine Learning are labels applied to lots of products and services today, but most are essentially just good old-fashioned expert systems with an aspiration to become sentient. Both areas are developing rapidly, however, and there are real examples of both being used in business; but even here, it is worth considering the limiting factors on their adoption.
Big data has been a hot topic for a while, and we have yet to even scratch the surface of what this might mean for the relationship between professional services firms and their clients. In theory, we will move to big data real-time audit, rather than annual sampling, but the constraint here is not the technology but the client data – most firms still exist in a world of XLS files held together by chewing gum and undocumented exception handling, so the connected data environment does not yet exist in most cases on the client side to support real-time audit. In theory, professional services firms could have a real-time window on a client’s documents and communications as well as its data in order to identify potential problems or vulnerabilities; but in practice, most clients are just getting comfortable with limited use of cloud IT services, so are unlikely to open up their internal systems to this extent.
Buying the right products and services in such a fast-moving and hype-driven technology environment is hard, but if we look deeper, towards the bigger picture, then I think we can find some signposts.
Our large organisations are woefully ill-equipped to deal with the digital economy today. They need to accelerate their digital transformation, but that does not mean just adding some shiny apps onto existing process-driven ways of working. It means re-thinking some fundamental elements of their structure, culture, practice and leadership.
The starting point should be an analysis of changing market dynamics, new competition, changing customer behaviours – in other words, the ecosystem in which the organisation operates and how it expects this to change. Then we need to ask what the organisation needs in order to resist disruption and embrace opportunities to disrupt others. What business capabilities are needed? Which can we grow, which can we improve, and which need to be bought in either through acquisition, partnering or through third-party services?
A useful metaphor for how organisations need to change is to think of them like software.
Like large organisations, software used to be very vertically integrated and controlled by a series of top-down processes that each worker process below was expected to follow in order to achieve a predictable result. We would buy a piece of stand-alone software, and then if it no longer did the job, we might throw it away and buy a replacement. Over time, however, software developed a service-oriented architecture and became a layer-cake of services and micro-services connected by interfaces, with each layer moving at different speeds. In the case of software as a service like Facebook, the top layer of user interface changes every few hours, but the core platform and data storage at the bottom of the stack change much more slowly.
Gradually, we abstracted away much of the boring leg-work of underlying processes, which are handled by shared services or libraries, to focus on doing the value-added stuff. For example, it might seem daunting to think about building simple AI applications today, but many of the services you would need have been written already and made available as open source code or service platforms. This benefit of being able to stand on the shoulder of giants like this is one of the key features that has made the world of software such a rich evolutionary environment.
Another more recent change to software is the idea of ‘platforms + apps’. Look at your phone, your TV, your in-car multimedia system and even your smart home devices. Each consists of a core platform that is conservatively managed to deliver most of what people need in a secure, manageable way, and exposes services to the ‘apps’ that sit on top to deliver the customer experience and variety.
I believe our organisations will evolve in a similar way. They will develop and manage a core platform of Intellectual Property (IP) and core competence services, which will be made available via an internal platform, and then develop apps on top that use these services to deliver value to employees or customers. Perhaps, like Apple or Salesforce, they will seek to develop an ecosystem of partners and developers who create apps or services on their platforms, as this increases both reach and the variety they can offer to customers.
So what does this mean for how we procure products and services?
1. Map your strategic capabilities
First, given the complexity of new capabilities an organisation needs to orchestrate and manage, it is a good idea to have a map that shows how your portfolio of products and services support strategic business capabilities, and use this to identify duplication, gaps, and opportunities for re-use. The model we use for mapping capabilities is to look at all layers of the stack that make them up – so, for example, if we want to develop an AI customer service chatbot capability, we need to know which skills, services, software, data and core systems are needed to support it. But then, once we have mapped the supporting stack, we might find new opportunities for re-use elsewhere.
Right now, most CIO, CDO or even COO functions do not maintain this kind of map of strategic capabilities and the services they depend on, so perhaps forward-thinking procurement teams can help bring together the right stakeholders to create it. Minimally, this can help avoid buying the same services or products in different parts of the organisation. Stakeholders often insist they need a particular point solution or custom service to meet their needs, which is one reason why many organisations are struggling to manage a growing estate of technology containing orphaned or neglected products.
2. Automate and orchestrate
Second, think like a developer and, if you are asked to buy the same thing three times, seek out a service to make the ‘thing’ instead. Do you want to buy multiple slightly customised contracts or a system that enables you to build your own? Law firms are starting to package repeatable services as products, and some accounting firms are productising certain areas of tax reporting or investment vehicle setup, for example, by systematising their own process to cover 80% of cases and then making this available through an app. You may have seen the success of one of the first so-called legal AI apps built by a teenager, which was in fact a simple expert system (“if this, then that”…) that helped people navigate a parking appeals process with a high degree of success. In an instant, this commoditised one area of legal practice. Expect this to happen more and more.
3. Get the right mix of internal and external expertise
Third, use the capability map to understand how to get the right balance between internal and external expertise. Executives in fast-growing organisations sometimes hand over the ownership of strategic change or re-organisation to external consulting firms without fully considering available internal expertise. In many cases, the centre of gravity for change projects really should be internal for reasons of accountability, sustainability, but also credibility. Having a clear view of internal capabilities might help buyers break down requirements to a more granular level, and then instead of handing the whole initiative over to external consultants, it might be possible to combine internal expertise and external best-of-breed consultants in different areas, rather than just allow one firm to run the whole thing. It is very rare to find a single consulting firm with expertise across areas as diverse as culture, communications, technology and organisational design that beats specialist boutique firms in each of those individual areas. Why settle for a super-expensive solution that probably replicates what the firm has been doing elsewhere for years, and which does not contribute to building up internal capabilities, when you can have a superior solution at a lower price point?
A possible future for strategic sourcing?
In a service-oriented world, we can ‘compose’ services into bigger, higher-value propositions that contribute to the strategic growth of the organisation’s core capabilities and IP. So, instead of buying products and one-off engagements, I think we will see smart procurement operations focused on building up a portfolio of services that can be re-used and re-combined to create the strategic capabilities the business needs to face the future.
But right now, most procurement departments are not set up do this. Judging from the engaged and insightful discussion I enjoyed last week, I think this is where they are already headed. Instead of old last-generation priorities such as supplier consolidation, running procurement processes and basic catalogues, I expect to see more teams moving up the value chain to advise the business on where capability or service gaps exist and helping fill them with repeatable, re-useable services rather than point solutions or one-off projects. Perhaps we will also see more app store approaches like the UK Government’s G-Cloud catalogue, but smarter. And perhaps we will also see an increase in internal consulting where longer-term, sustainable solutions are preferred over traditional consultancies and their voracious land-and-expand approach.
In order to get started, my advice would be to begin by defining or re-defining the service that procurement provides to the organisation in more strategic terms (identifying gaps, finding external talent and capabilities, advising stakeholders on how to build up strategic capabilities through strategic sourcing, etc.) and to communicate this internally to reset expectations compared to the old perception of paper-pushing and process-enforcement. Assuming there is an appetite in the organisation to do things differently, I would then move on to ask the business to define the strategic capabilities it needs, and then think about which products or services it already has in place to support them, and where the gaps are.
Map the product and service landscape that underpins these capabilities and then try to find opportunities to swap out stand-alone products or custom consulting engagements for generic services that have the potential for re-use. A simple example from software is the content management system. Different parts of the business might have different needs, meaning a choice between buying the lowest common denominator product that hits most of the common needs or buying multiple systems. Nowadays, you have another option, which is to use a headless CMS service that does all the basics very well but can be given different front ends for different needs.
This process of off-loading repeatable and programmable tasks to commodity service providers has great potential for reducing costs and creating a more manageable infrastructure. We are seeing it today in cloud computing, but I think we will see it tomorrow in professional services too. It also gives your organisation more control and a greater ability to re-combine services to create new value propositions for your customers.
Following on from this, procurement probably needs to be involved in the strategic questions that set the direction of travel, e.g.:
- What is our core service platform?
- Which elements do we own, which do we rent?
- What new business models, products, services and apps can we create on top?
Professional services are changing, and we expect much more change to come. Hourly billing sucks, and is a real barrier to progress. Many accounting services should really be software apps already. Consulting as a model is pretty broken, and my colleague Cerys has written about how we are trying to wrestle with that question. In a push-pull relationship between supply and demand, smart, strategic procurement teams can play an important role in reforming the supply side by reconfiguring the nature of what they buy, just as the rise of internal finance and general counsel functions have begun to do the same in accounting and legal services.
The future organisation is likely to look more like a platform and less like a hierarchy of processes; procurement teams could become one of the main interfaces for new core capabilities to be discovered and sourced.