Over the last couple of weeks, we have published a series of articles on the topic of solution suites vs. specialist providers in the procurement technology space. In the first article, we introduced and framed the question; in the second article we examined the benefits of the suite approach; and in last week’s article, we discussed the advantages of specialist solutions. Since the decision points are many, nuanced, and complex, we decided to use today’s article to explore one of the most critical factors in how you should decide between suites and specialists.
As stated in the first article, for the vast majority of procurement departments, it’s not about choosing one approach or the other. The plain truth is that for most organizations, the best approach is to utilize key components of a suite and extend and enhance those capabilities with specialist providers. And while that sentence alone should seemingly address the issue for 80%+ of our readers, it does the opposite … and creates many more questions.
[Publisher’s Note: one of Ardent’s publishing priorities next year is to develop a large number of reports and articles that help Chief Procurement Officers and their teams simplify the solution selection process by examining key strategy and decision criteria while also evaluating and highlighting the most capable solution providers in the market.]
Primary among them is the question — what is the right balance between suites and specialists? This will and should vary from team to team, depending on several factors. None is more important than defining your spend. What are your most important spend categories? What amounts? And how and from whom do you buy them?
What are Your Main Spend Categories?
What you are buying will have a direct impact on what types of solutions you need. Doing a spend analysis is a necessary first step in any procurement transformation process. Depending on your organization’s complexity, this might mean your first investment should be a spend analytics solution. Smaller organizations (or organizations that already have a clear picture of their spend) might be able to conduct a spend analysis manually.
Why is this important? Well, different categories of spend have different requirements depending on how you buy. This is most obvious in the P2P process. However, for some types of spend, there are also different sourcing and supplier management requirements. This is related to the strategic importance of the spend category. The more important a spend category is (which is often, but not always, related to the amount of spend), the more important it is to ensure that the specific needs of that category are met. Understanding the procurement processes for these categories and whether they have specific requirements is critical.
This doesn’t mean that existing processes should be taken as gospel. Rather, the processes should be critically reviewed, and all needs for non-standard functionality should be analyzed and validated. After all, standardization is a powerful tool for procurement organizations to scale operations and expertise, and not only when it comes to what other parts of the organization are buying. Also, as every consultant anywhere can tell you (for a fee): If you digitize a lousy manual process, you end up with a lousy, but digital, process … At the end of the day, if you have many critical spend categories with specific requirements, they are often better managed by specialist solutions.
While there are many additional layers and complexities, at a high level you should at least consider the differences between the categories below.
Direct Materials
This is a term that has been discussed at length and means different things to different people in different industries (I might very well dedicate an entire article to this topic in the future). But for this exercise, let me just state that I use the term direct materials to mean basically raw materials and components for manufacturing. In short, if you are not a manufacturer, you don’t have direct material spend!
Why this strict definition? Well, for the term to be meaningful, it needs to be specific and consistent. Direct material needs are typically generated based on sales forecasts, lead times, bill-of-material breakdowns, etc. in an MRP process. This is one of the core capabilities of ERP systems and is not handled in stand-alone P2P systems. This also means that an AP solution that is intended to manage direct material invoices must be able to integrate with one or more ERP systems. Matching is generally more complex as more factors than cost alone are used for matching (such as quality or partial receipts, for example). These complexities tend to favor a specialist AP provider approach for companies that want to standardize or centralize their AP operations.
Sourcing of direct materials is highly critical and often complex as there are many factors to consider, including total cost, quality, security of supply, ESG factors, and so on. Buying for multiple manufacturing or distribution locations can add further complexities. This means that the ability to perform cost breakdowns while optimizing sourcing awards for multiple, different business objectives is important. While some suite providers specifically support direct materials sourcing, there are also many highly capable specialist providers available that shouldn’t be overlooked.
Supplier management is also essential for direct materials spend. Managing, developing, and monitoring suppliers can yield a competitive advantage, especially in times of short supply and frequent disruption. Supplier management is a very fragmented solution space. Holistically managing your suppliers and supply risk using more than one solution probably makes sense. This means that whether you use a specialist or a suite module for some of the core supplier management capabilities (like managing supplier information and performance), you need to surround that with (other) specialists that, for example, provide risk or ESG functionality and data/information.
Direct materials are higher stakes and higher impact, frequently requiring more complex decision-making and much deeper collaboration. This means that while there often are suite modules that can be used, it’s frequently necessary to use more specialized solutions as complements to ensure direct materials spend and suppliers are managed optimally.
Indirect Spend
As a contrast to direct materials, indirect materials are everything an organization buys that doesn’t go into a product except, for the purpose of this article, services (that will be discussed separately below). This is where the S2P suites shine. Most of the suites are built around P2P solutions that are designed to manage indirect materials that can be pre-negotiated and put into catalogs for requisitioners and other enterprise stakeholders to find, search, and order for themselves. The solutions have, over the last decades, been very focused on ease of use to enable a self-service approach that will maximize adoption and bring more spend under control.
Sourcing and supplier management is often less complex with indirect than direct spend, which means that less specialization is necessary. For indirect materials, the direct connection between P2P and sourcing can also be valuable as high-value requests can be rerouted to sourcing, ensuring that proper competition and evaluation are applied. That said, there are areas where you still might need to look for specialist solutions. Examples of this include CLM, if you intend to manage sell-side contracts, or spend analytics. So, if the bulk of your main spend is indirect materials, you are likely to rely more heavily on using a solution suite as the core and building around it with specialists.
Services
Services are the most difficult categories of spend to manage (which is why so many are not managed). The challenge with services is that there is such a broad variety of service types with unique characteristics. Some simple services can be clearly defined, packaged, and bought through a P2P system in the same way as indirect materials. But when it comes to services where the final cost isn’t known up front, the idea of pre-approved requisitions/POs doesn’t really work. For example, SOW-based services need to be defined and managed in a way that isn’t supported by P2P solutions. Bigger outsourcing services contracts have much more complexity than can be managed by a standard S2P suite.
To make things even more complicated, in many organizations, a large part of services spend, such as contingent labor, is often the responsibility of the HR department as part of an overall talent management program. The size and scope of this spend is, in fact, such an important and strategic topic, that Ardent Partners has a dedicated site, The Future of Work Exchange, led by my good friend Chris Dwyer to cover it. In any case, if you are buying significant amounts of services, you will have to look at specialist solutions to properly manage this spend.
In sum, understanding your spend profile is a key factor in how to approach your procurement technology architecture. But it’s not the only factor. In next week’s article, we will continue this series and provide a new framework for how to find the balance between suites and specialists.
RELATED RESEARCH
Magnus Mondays: The Proliferation of Procurement Solutions
Magnus Mondays: Procurement Tech — Suites vs. Specialists Part One (Framing the Decision)
Magnus Mondays: Procurement Tech — Suites vs. Specialists Part Two (Home Suite Home)
Magnus Mondays: Procurement Tech — Suites vs. Specialists Part Three: I Wish I Was Special
