While incumbent companies have every reason to fear new waves of start-ups which threaten to disrupt their industry, they should nevertheless view the growth of procurement start-ups as a great opportunity for value creation. The primary responsibilities of procurement leaders within incumbent companies are to identify the most promising solutions to key operational challenges, and raise the procurement function to a higher level of performance. In this way, they will add value to their company beyond traditional cost savings, while reinforcing their vital role as business partners. They must also adapt their internal processes to facilitate successful partnerships with the start-ups they choose to work with.
Procurement start-ups: A recent boom in funding
Oliver Wyman has identified 700 start-ups worldwide2 in the field of procurement since 2001. The companies that have dominated this area can be divided into four clusters: cloud-based procurement solutions, business-to-business (B2B) marketplaces, digital procurement solutions and service providers. While total investment in these start-ups is relatively low in comparison with other sectors such as automotive (US$50 billion since 2011) or logistics (US$11 billion since 2007), procurement start-ups have managed to pull in US$2.9 billion from investors in the last decade. The fact that 75% of this investment in procurement has only been secured since 2012 illustrates the current strength of this area.
Most of these start-ups (amounting to 356 start-ups, or US$1.9 billion of funding) offer procurement solutions. This cluster comprises start-ups dealing with the complete source-to-pay process, as well as those focusing only on specific steps of the procurement value chain, such as supplier scouting, tender management or payment. Consolidation within this cluster is already taking place through incumbents such as SAP Ariba or Ivalua, or through younger companies such as Coupa or Tradeshift3. Meanwhile, start-ups formed in the last few years have intensified competition by improving the user experience and enhancing the collaboration capabilities of their offerings. Other newly founded start-ups in this cluster have opted to focus on very specific customer groups, such as small and medium-sized enterprises (SMEs) or particular industries.
Advanced procurement analytics: The new frontier
The most recent start-ups offer innovative solutions involving machine learning, big data or blockchain technologies (see digital procurement cluster in the exhibit below). A dozen start-ups, located in Europe, USA and Asia, are already building artificial intelligence platforms that can automate the cleansing and classification of structured and unstructured procurement data from multiple sources and many formats. They provide their clients with a comprehensive and consolidated view of their total procurement expenditure, together with its evolution in real time.
Apart from drastically reducing the time and burden involved in building those expenditure databases, these artificial intelligence platforms offer procurement teams a clear view of both expenditure per category and supplier performance, with the level of granularity adapted according to the needs of the particular procurement function. By applying advanced analytics and visualization techniques to such comprehensive data sets, they allow procurement leaders to identify cost-saving opportunities through predictive models, or to detect anomalies and risks in their supplier base.
When looking for innovative solutions, procurement leaders should not limit their search to start-ups that have a primary focus on procurement. We identified many start-ups offering advanced analytics solutions with a scope broader than just procurement. In some cases, their founders did not have any procurement focus at all when they launched their business. As their companies developed, they discovered that their machine learning-based solutions would have a tremendous impact on procurement.
Building winning partnerships with start-upsGiven the large number of procurement start-ups we have identified, and the variety of solutions and technologies they are offering, it is clear that procurement leaders can tap into an extraordinary pool of opportunities for innovation and performance improvement.
However, to exploit the full potential in collaborating with start-ups in their field, Chief Procurement Officers (CPOs) must ensure that they are building a successful long-term partnership. Identifying and selecting the start-ups to work with - based on their innovation potential and whether their solutions are both significant and robust - is just the first and probably the easiest part of the journey.
Successful collaboration with start-ups relies on being able to work closely with selected companies in a flexible and very pragmatic way. Start-ups and incumbents must cooperate together, focusing on one step after another: co-creation, fast prototyping or customization of the solution, test and learn with users to validate and adjust the end-product, and rapid scaling.
Leading procurement organizations have already acquired significant experience in implementing successful Proof of Concept initiatives, and have transformed these experiments into full-scale solutions. Some rely on dedicated units, or genuine procurement innovation labs. Other companies set specific objectives to team members to ensure that they test ideas and solutions with start-ups on a regular basis. With the latter option, they incorporate innovation into business as usual.
Corporates must also understand how the selected start-ups differ from the established companies they have been accustomed to working with. They should adapt processes and levels of support within the organization to avoid administrative and structural barriers that diminish the potential of the start-up for value creation. Given that start-ups are relatively small and have few resources, there are certain key success factors for those corporates wanting to engineer a successful collaboration with them. These involve lean processes, a rapid decision-making procedure, direct access to the decision makers, as well as sufficient corporate support to allow the scaling up of the solution.
In the course of our study, one CPO of a worldwide technology company summarized the change that needs to take place. “Buyers must understand that they cannot work in the same way as they have in the past,” he told us. “Leading corporations now focus their attention on digital leadership and prototyping as a way of instilling a start-up culture within their organization. Procurement leaders must therefore constantly try out new ideas over a very short space of time, then accept any failures and learn from them.”
1. Crunchbase, Global innovation investment report 2016, 2017.
2. Startups founded worldwide since 2001. Source: Oliver Wyman study “Start-ups in procurement”, December 2017
3. Coupa software founded in 2006, 9 acquisitions. Tradeshift founded in 2009, 3 acquisitions.