Most procurement executives agree that artificial intelligence and other advanced technologies will be transformational additions to their teams. Two-thirds see mastering artificial intelligence (AI) and generative AI (Gen AI) as the most critical issue they will face in the next few years, according to a recent survey by The Hackett Group.
They aren’t wrong. Our own forecasts suggest procurement process costs may fall by as much as 47%. We also predict that Gen AI will greatly enhance decision-making insights. However, this will only happen when the technology develops to a point where organisaitons can thoroughly integrate it into the supply chain. Nevertheless, those gains are only part of the potential.
The combination of AI, machine learning, advanced data analytics, and other digital advances will enable procurement to be much better informed about their supply base, giving teams the opportunity to play a much more proactive and strategic role in the business, and deliver on a range of other urgent priorities beyond cost to include supply innovation, sustainability, and third-party risk management.
Surveys, as well as feedback heard at The Hackett Group’s Gen AI Breakthrough conferences, confirms that organisations are in the exploratory stage with these new technologies. Procurement is lucky, with some great innovative tools including new capabilities already proven and commercially available.
About a quarter of companies surveyed are piloting autonomous sourcing and/or negotiations, or contract lifecycle management. The same number again are further ahead with the implementation of supply analytics.
Five best practices
If your company belongs to the uncertain majority, chances are good that you are still struggling to develop a strategy for integrating these new technologies into your ways of working. This can be overwhelming: with many systems to evaluate and priorities to rank, it’s not easy to know where to start. However, although every company is different, the experiences of the early adopters that are already piloting AI and other advanced technologies provide useful guidance to accelerate your own course for digital integration.
Most of these companies belong to an elite group of top-quartile performers we call the Digital World Class®. Already market leaders because of the skill with which they have innovated their operating models to embed the latest best practices, Digital World Class® companies are undertaking this next stage of their journey in a very disciplined way. When we talk with them about what they have learned handling this transition, five lessons stand out:
Don’t boil the ocean.
Just because AI and Gen AI can be used in many contexts doesn’t mean you should try to do everything at once. Digital World Class procurement teams focus on specific use cases. They select suitable pilot partners. They find the data they need, make sure it’s digital and preferably structured, and back it up with whatever external sources are required. Where you should start will depend on your business, but in response to a multiple-choice question, procurement executives ranked supply market insights and analytics as the greatest opportunity (59%), followed by contract management (43%), and supply risk management (33%).
Build the right team.
Integrating these advanced tools demands much more than bolting on a new software package. To take full advantage, you will need an agile team of specific skillsets that understands both the business opportunity and technological development. Organised as a centre of expertise, this team will need to be savvy enough to build a bot, an analytical dashboard, or algorithm. Needless to say, they will need good change management skills. Without them, it’s unlikely they can adopt and ensure your pilot projects successfully.
Own your data.
Only use enterprise versions of Gen AI engines. Trying to save money by using the free version will put your data at major risk of leakage. Take care with your data. Amend contracts appropriately to ensure you remain secure and compliant.
Keep it real, don’t hallucinate.
Particularly with your first experiments, remember that Gen AI can confabulate details. Taking your bot at its word can lead to some serious mistakes: just ask the New York lawyer who was disciplined after submitting a court brief that cited imaginary cases. Context can also be a problem. (For example, if you direct your Gen AI to find a way to modify a pizza recipe to make sure the cheese doesn’t slide off, it might advise gluing it down!) Although organisations can mitigate such problems through using retrieval-augmented generation (RAG), an algorithm that gives your bot the virtual blinders it needs to focus on a specified data set, don’t assume that the machine is infallible.
Buy the right stuff.
So far, much of the Gen AI technology development for procurement has focused on enhancing core source-to-pay tools, mainly category, sourcing, contracting, and purchasing operations tools. Using any of the modern CLM tools, for example, Gen AI can generate contract clauses, review and summarise contracts, flag non-compliant terms and associated risks, and guide on, or even negotiate, improved terms. Some of these technologies are advanced enough to make buying off the shelf better than building. In other areas, such as data or contract analytics, you’ll likely be better off building yourself, because you’ll want insights tailored to the specialties and greatest challenges facing your business.
The road ahead
Even before Gen AI arrived on the scene, Digital World Class procurement organisations were already outperforming less tech-savvy colleagues. On average, they needed 32% fewer employees. This gave them the ability to redeploy significant resources into strategic procurement and helped position them to take the impressive leaps forward they are making today.
No one knows just how much further the Digital World Class organisations will get with this next generation of digital, data analytics and AI, but it’s clear that it will put more distance between the best and the rest – which is why you need to start following their lead now.
