Maximizing value in digital transformation: the strategic role of procurement during ERP system implementation

For many companies, the implementation of an Enterprise Resource Planning (ERP) system is viewed as a necessary and inevitable step towards business digitization. It's often seen as an obligation, a daunting journey with unforeseen expenses, heavy maintenance and licensing costs, and, most crucially, a delay in realizing the economic benefits of digitization.

However, the implementation of ERP systems presents an opportunity to reevaluate the business value chain. It allows for the distinction between processes that contribute significantly to the bottom line and those with marginal impact. Naturally, high-value processes receive more attention and resources, while non-core processes are standardized and automated as much as possible.

In well-planned digital transformation programs, initiatives are prioritized based on expected benefits, cost, and complexity. This approach helps select initiatives that are in line with the overall goals and balance transformation costs with synergies and cost savings.

It's worth noting that procurement, historically considered non-core, is often negelcted compared to functions like production and sales. The procurement function hasn't always been recognized as a strategic partner for value creation.

However, the recent global supply chain disruptions, the raw material crisis, pandemics, and geopolitical instability have transformed procurement into a fundamental driver, not just for economic goals but also for supply chain resilience and sustainable practices.

To ensure value creation in the digitalization of the procurement process, it's essential to establish the foundation of the transformation program:

1. End-to-end digitalization of the entire procurement process, from sourcing to payment.
2. Definition of the strategic role of procurement and the supply chain, with specific roles redefinition and digital skills training for buyers.
3. Availability and transparency of procurement cycle information to all stakeholders involved, following a "need to know" principle, with robust reporting and data analytics tools.
4. Alignment of procurement policies with strategic goals related to sustainability, emissions reduction, digital transformation and supply chain resilience.

These prerequisites have to be included in a long-term vision with clear, achievable economic objectives, defined in a business strategic plan of the transformation.

The strategic plan naturally defines the goals of the transformation and, in case of ambitious plans, breaks them down into separate initiatives and budget for the completion of the plan.

In reality it is important to note that things do not always go as planned. Digital transformation and, in particular, ERP implementation can follow different, sometimes sub-optimal paths, leading to lower benefits and increased operational complexity. In my experience of more than 20 years in digital transformation, I have come across less than perfect implementations. I used to call them 'process electrification', meaning that transactional processes and data were simply transferred into the ERP database without value creation or a strategic view of the procurement process. This led to obvious problems, such as the excessive standardisation of procurement processes without differentiating buying categories or the possibility of recording supplier invoices without purchase orders and many other sub-optimal situations. Of course it is up to the transformation leaders to recognize any sub-optimal path early on and make the right decisions to improve situation and return to maximizing value creation.

However, there are also successful implementations that achieve the intended objectives and exceed expectations. Drawing from my experience, I recall a transformation program in a multinational service company happened a few years back. It was one of the most interesting projects I've been involved in and aimed to turn the company's fortunes around.

The project stood out because it included a comprehensive business plan spanning several years, focusing on deep re-organisation, reengineering and digitalization of the end-to-end processes .

The strategic plan defined objectives, resources, and expected benefits to achieve a complete company turnaround, with a fundamental emphasis on procurement and purchaisng revamping.

In the digital transformation roadmap different projects were planned and the ERP implementation was one of the cornerstones of the program.

At the heart of the ERP implementation project was the renewal of the procurement function, starting from the sèparation between strategic procurement and transactional procurement with the aim of structuring and enhancing high-value activities in the purchasing process, also through digitalization.

Within the overall programme, a source to pay stream was defined, led by a visionary Chief procurement officer, who added other key projects to the ERP implementaiton, such as contract management, negotiation tools and e-auction, the supplier portal, the self service procurement, the automation of the invoice registration and few others.

Once the strategic transformation plan was approved, first initiative to start within the source to pay stream was the contract management project. The initiative had two main goals: to analyse the available procurement sources. i.e. any type of supplier agreement and contract, and in parallel to digitalize them (i.e. translate them into digital actionable data, not just scanned images).

This initiative lasted about one quarter, and successfully led to the digitalization of several thousands of procurement contracts split by buying category.

It was conducted by two different groups: a digital team that was responsible to prepare and migrate supplier contracts in the future ERP , and a strategic team whose objective was to assess current supplier agreements and evaluate possible synergies and financial savings based on volume aggregation, re-evaluation of internal needs, or simply vendors comparison and re-negotiation.

This first “quick win” initiative was successful and immediately resulted in a greater transparency concerning current supplier agreements, as well as bringing the first financial savings related to the contracts renegotiations.

As the digital team moved on to the next Source to Pay initiatives, such as ERP implementation and others, the strategy team continued to rationalize the current group of suppliers and develop long-term relationships aimed at creating value. For this, a new KPI was created to update stakeholders within the steering committee on the savings generated and value created month by month. Concerning the implementation of ERP, the most significant aspects I recall were a strong focus on defining standard procurement processes by purchasing categories (or macro categories) and an approach I would call "design to value": all implementation teams involved not only key process owners (e.g., requesters, buyers, approvers, and account payable colleagues), but also some cost controllers who had insight into both process and value creation.

The digital transformation plan continued after ERP implementation with initiatives in the area of account payable invoice posting. The goal of the initiatives was to enable automatic routing of invoices to the right accounting specialist and then partial or full automated registration in ERP after invoice image recognition. This initiative, which followed procurement process digitalisation, and was supported by both strict procurement policies (e.g., no PO - no Pay) and by strong supplier collaboration, proved to bring important synergies in the overall process and reduce cycle times for supplier invoice processing.

In addition to the ERP implementation, other source-to-pay initiatives were successful: the BI reporting tool, the supplier portal, and particularly the e-auction initiative, which positively contributed to generating and maximizing value in procurement processes.

During the project implementation significant benefits were observed, including cost synergies, transparent information flows, timely cost recording, reduced manual financial activities, and optimization of cash flow. Furthermore, the ERP implementation on procurement processes enabled an improved profitability model.

At the time I experienced it, the global disruptions and events of recent years had not yet occurred and were not foreseen (from pandemics, to supply chain problems or shortages of critical components, etc.). Today, when designing a transformation plan that includes the procurement process, I believe it is crucial to apply, along with a value creation perspective, a risk-based approach during the procurement of goods and services and to ensure that this is translated into the implementation of the system.

To conclude my experience, here are a few lessons learned for maximising the value of any ERP transformation when the procurement process is at stake.

Lessons learned:

1. Establish a long-term vision for procurement digitalization within an approved strategic plan. Make sure a suitable budget is defined and articulated in the relevant initiatves that will be inserted in the digital transformation roadmap.
2. Focus on the end-to-end procurement process, with particular attention to the strategic high value added steps of the procurement (e.g. sourcing, vendor development, negotiation and contracting)
3. Ensure the purchasing organization is split by purchasing categories, connected to the organization needs and refleced in supply chain processes and in the ERP implementation.
4. Have a group of people focused on digitalisation and a group of peoples focused on the strategic value creation. working together on their separated scopes and objectives
5. Establish multi disciplinary working groups on the transformation of the transactional procurement: requestor, buyer, supply chain, accounting professionals, cost controllers and IT experts.
6. Build and monitor the value creation along the implementation by specific KPIs, both strategic (e.g. savings generated, synergies established, etc) and digital (e.g. new process covered, contract data created, new digital users, etc)
7. Ensure as prerequisite before ERP implementation starts, a solid controlling and finance data model is established in the ERP to allow future data analisys capabilities + set up a reporting-BI model in place for detailed spend analysis after the implementation is complete.
8. Last and not least, make sure a strong change management stream is in place to help people succeed in the ERP implementation and maximize value and return on investment.

Here, as a closing, are some very interesting and thought-provoking articles that I recommend linking to procurement, value creation and digital transformation:

“A new era for procurement: Value creation across the supply chain” by M. Enriquez, T. Liakopoulou, J. Schaefer, M. Sommerer published on September 27, 2023 by McKinsey&C.

“Digital procurement for lasting value, go broad and deep” by A. Abidi, F. Russo, M. Sommerer, A. Streif published on November 10, 2018 by McKinsey&C.