Level Up With Gen AI – Insights From Top Procurement Performers

Level Up With Gen AI - Insights From Top Procurement Performers

In today's rapidly evolving landscape, generative artificial intelligence (Gen AI) stands at the forefront of transforming procurement as we know it. By challenging traditional norms and processes, it offers a pathway to uncover unprecedented opportunities and drive remarkable transformations. Those who embrace Gen AI now are poised to lead the next step change in procurement performance and redefine procurement excellence.

For procurement organizations striving to achieve Digital World Class^® status, the advantages are profound: operating at significantly lower costs with leaner staffing while achieving greater influence over spending and quicker value realization. These leaders are not only trusted advisors to their business partners but are also primed to leverage Gen AI effectively, thereby solidifying their performance edge and setting new benchmarks for excellence. As Gen AI continues to evolve, its potential to bridge performance gaps is clear, making proactive adoption crucial for maintaining competitiveness and leadership in an increasingly dynamic operating environment.

Top procurement organizations invest in value creation

Our annual Digital World Class analysis reveals the characteristics of top performers, or in other words, what differentiates them and how they achieve their advantage. Specifically, these organizations invest for value creation - leveraging technology and talent to deliver superior capabilities and enterprise support. Several traits stand out:

• They provide more proactive and better-informed commercial leadership because they are more knowledgeable about the businesses they support. Their more mature business partnering capabilities garner more credibility, respect and influence across the company. They are more likely to be viewed as a valued business partner and 1.5 times more likely to be rated by internal customers as "exceeding expectations."
• They operate at a significantly lower cost, while simultaneously investing more in enabling technologies to support both efficient transactional processing and strategic procurement activities. Some of their most important technology investments are driving their shift to higher-value activities.
• They have greater control of the supply base, with 3.7 times fewer suppliers per $1 billion in spend. This reduces complexity, allowing them to manage the supply base more effectively and efficiently.
• They deliver more value to the business through a combination of greater spend influence, more focus on value creation, faster time to value and more effective business partnering - all underpinned by their use of technology. These organizations returned two times more overall cost savings and increased the savings contribution from 2023 to 2024 at a rate that is 4.5 times faster than the peer group. Their procurement return on investment - total procurement cost savings versus the cost of the procurement function - is 2.5 times greater.

Understanding the Digital World Class advantage

Digital World Class procurement organizations operate at a 21% lower cost than traditional procurement organizations - an advantage that held steady over the past year. Yet, they deliver more value than the peer group, extending their outperformance well beyond cost.

Digital World Class procurement organizations invest 15% of their total operating budget in technology. A closer look at the composition of procurement operating cost as a percentage of spend highlights a 32% greater technology cost for top-performing procurement organizations as compared to the peer group. This demonstrates the investment in technology that Digital World Class procurement organizations are making to support efficient transactional processing and enable strategic procurement activities with emerging functionality such as category management tools, project pipeline and savings dashboards, and supplier risk and performance management solutions.

It is important to note that not all technology investments are associated with labor-eliminating automation. Leaders are also investing to equip their knowledge workers with the latest digital tools that facilitate spend analysis; strategic sourcing; category management; sustainability/environmental, social and governance; and other priorities. Digital World Class procurement organizations have traditionally run with far fewer full-time equivalent (FTE) staff than the peer group. In 2024, that gap stands at 32% across all procurement FTEs.

Digital World Class procurement organizations have fewer total FTEs per billion dollars in spend than peers for operations and compliance, strategic sourcing and supplier management, and management and administration roles. The most notable variation in staff allocation is for operations and compliance roles, where top-performing teams have 56% fewer FTEs as compared to peer companies. On the other hand, these organizations have 10% more FTEs in planning and procurement strategy roles, reflecting their greater strategic focus. This shift of resources into higher-value roles explains their superior value contribution. It also enables them to have a 14% greater management span of control (ratio of staff to managers).

There is strong evidence that the peer group hasn't embraced automation to the extent Digital World Class procurement organizations have, hindering efficiency. But their transactional and strategic staff are also far more productive - for example, they create 3.6 times more orders per FTE and produce 1.5 times more supplier contracts per FTE. Gen AI will increase the Digital World Class advantage. According to The Hackett Group's recent analysis, Gen AI will reduce procurement costs by 47% and boost procurement staff productivity by 54% over the next seven years - if organizations know how best to deploy it.

Superior business value

Digital World Class procurement organizations deliver greater business value by outperforming the peer group in effectiveness, experience and enablement. Our analysis highlights areas of significant advantage. Gen AI will have a profound impact in these areas - quickly extending the performance advantage.

Operational excellence

Digital World Class procurement organizations also outpace the peer group in key dimensions of operational excellence, including efficiency and automation. Our analysis found relevant examples in both of these areas - again, points of performance advantage that will grow along with adoption of Gen AI.

Leading procurement organizations are better prepared to capitalize on Gen AI

Capitalizing on Gen AI's potential requires modern architecture, a robust data foundation and clear value orientation. Our benchmarking shows that Digital World Class procurement organizations are well ahead of the peer group in establishing these capabilities. They have already taken significant steps to modernize their infrastructure - and not just by automating transactional processes. They have more mature deployment of self-service capabilities for both internal and external stakeholders - for example, they are 3.1 times more likely to make extensive use of electronic submission of requests for proposals, quotes and information. Superior technology enablement also means they can scale new capabilities faster and more effectively.

Digital World Class procurement organizations have 50% more optimized purchase-to-pay process flows - a key factor in reducing complexity. This includes data complexity, which inhibits digital transformation and the ability to benefit from Gen AI and other smart technologies. For example, having far fewer suppliers per $1 billion in spend significantly reduces the volume and complexity of data they must maintain.

Finally, the combination of superior technology enablement, better business acumen and more resources in strategic roles enables Digital World Class procurement organizations to focus on what matters: influencing spend and managing the supply base. This is where Gen AI is really poised to enhance procurement operations and create value for the enterprise. The next step change in performance will come from harnessing the power of Gen AI to solve procurement challenges and create super-powered procurement teams. In our 2024 Key Issues Study, just over one-half of procurement organizations said they are evaluating the use of Gen AI, with the most promising opportunities in spend analytics and contract life-cycle management - both areas where easy access to accurate data can greatly enhance the effectiveness of procurement personnel. Nearly one-half (46%) also see an opportunity for using Gen AI in advanced analytics - again the result of having a superior technical and data foundation.

Accelerate your procurement transformation

Procurement leaders are at a pivotal point. Those who wait for a Gen AI mandate from above or for information technology partners to catch up will see their performance fall further behind. On the other hand, those who act assertively and with speed to capitalize on the breakthrough potential of Gen AI can close the gap - and even leapfrog today's top performers. Following these essential transformation principles will inject speed into your transformation to Digital World Class procurement performance:

Take the lead - don't follow. Procurement leaders have a unique opportunity to move beyond trusted business partner and become the catalyst for driving breakthrough performance for both the function and enterprise. But this requires more than incremental changes. Procurement leaders must reimagine how work gets done.

Your approach matters. To realize meaningful Gen AI-driven productivity gains, procurement leaders must take a top-down enterprise approach to identify and prioritize use cases that will have the most significant impact on the business versus a bottoms-up approach that, at best, will yield incremental improvements.

Know where you stand. Successful transformation requires a strong understanding of your organization's strengths and weaknesses. To realize the full potential of AI, your organization must know where you have gaps in strategy, technology, skills, data management and governance practices.

Create the capacity to focus on breakthrough performance. Dedicate resources responsible
for driving change, and make sure they have the time to focus on it. If you are depending on people with other day jobs or the same resources that are supporting other key initiatives, you will struggle to build or maintain momentum. It is incredibly difficult - but also essential - to educate and mobilize the entire enterprise.

Architect your Gen AI future with confidence

The Hackett Group helps you explore, understand and implement Gen AI as part of a comprehensive, intelligent digital operations strategy. Learn about:

AI XPLR^™: Our groundbreaking AI XPLR^™ platform provides critical guidance for executives. Based on findings from hundreds of Gen AI assessments and deployments, AI XPLR^™ quantifies your Gen AI potential and produces a comprehensive readiness assessment and detailed road map.

Gen AI transformation services: Our consultants use leading-edge data, insights and metrics from AI XPLR^™ to architect your Gen AI journey. From ideation to implementation, we develop comprehensive plans to capture, deploy and mobilize your organization to capitalize on your best opportunities.

Executive Advisory programs: Our advisors counsel executives through their most critical and impactful decisions - exploring Gen AI opportunities, selecting providers, piloting solutions and more. Members have access to the collective knowledge of the world's best businesses and vendors through personalized, advisor-led guidance, and cutting-edge Gen AI research in our member center, Hackett Connect^™.

Download the report to learn more about how Digital World Class procurement organizations deliver greater business value and are better prepared to maximize the benefits of Gen AI.