How to calculate the ROI and benefits of procurement automation
You understand the benefits of procurement automation. You’ve convinced your boss that it’s worth looking into. Now, how are you going to convince your finance department? Writing a business case is hard, but we’re here to help you crunch the numbers.
Get started: The big picture
Procurement organizations are tasked with containing costs, reducing risk, and achieving better results by coordinating with many suppliers and internal stakeholders through the use of multiple systems.
The quality of data in these systems is key, so organizations limit non-procurement stakeholders’ access. Different departments in a company may have some access to do basic tasks, while external suppliers usually have none. Even worse, procurement processes depend upon data transfer between systems, even though these systems frequently aren’t linked together. To compensate, procurement professionals have come to rely upon manual work-arounds to receive stakeholder data, usually developing spreadsheets to manage between systems.
While this may seem like time-savings in the moment, think realistically about the amount of time it takes to open an email, download an attached Word document, find a key piece of information, and then enter that data into a system like SAP—and doing so many times over. These repetitive tasks end up stealing a significant chunk of an employee’s work day, creating a business problem that automation can easily solve. And with that solution comes ROI.
To know exactly how much, we’re going to analyze:
1. The cost savings of automating supplier data management
2. The cost savings of automating purchase order processing
3. The cost savings enabled by improving spend analytics
4. The opportunity cost of assigning low-skill tasks to highly trained procurement professionals
Supplier data management
Most procurement organizations don’t receive data in the same standardized format across their diverse multitude of suppliers; and there are simply too many supplier records to be proactive about maintaining master data. To make matters worse, supplier data is liable to change, such as when a point of contact leaves a company. Updating this manually is not only time consuming, but it also naturally has a high rate of error. Intelligent automation solves both of these problems.
One of our clients, a Fortune 100 global manufacturer, uses Catalytic as a simple automation to check their suppliers’ contact information. Initially, they found that 26.4% of records were either wrong or out of date. To correct them, this automation sends those suppliers a standard webform requesting updated information, then it stores updates in a data table for a batch import into the system of record.
Multiplying this 26.4% error rate by the number of suppliers in your system and using a conservative estimate for the cost of an error—$100, according to Invensis—gives a safe measurement for the cost savings from automating supplier data management:
Average savings from automating supplier data management: $26,400 per 10,000 suppliers
Purchase order processing
We often underestimate the total cost to fully process a purchase order (PO). Once a purchase requisition has been entered, funneled through multiple levels of approval, and converted to a PO (plus finding and fixing any errors), you will have spent a lot of manual time before the invoicing process even begins.
Intelligent automation enables you to considerably lower this cost. Catalytic’s machine learning capabilities can analyze existing purchase requisition data to estimate the likelihood that an order will be approved, then automatically approve orders above a predetermined confidence level, leaving only a few approvals (those below the confidence level) for human review. This significantly cuts down the purchase order process.
To calculate how much this could save you, start with your PO processing cost. In this example we’ll begin with ProcureDesk’s reported median and world-class values of $162.08 and $35.88 respectively. The difference in these values gives us a savings of $126.22 per PO. Multiply this by the number of PO’s your organization processes in a year to calculate annual savings:
Average savings from automating PO processing: $126,220 per 1,000 POs
Spend under management
By increasing spend under management (SUM) for your organization, you can save between 6-12% on each additional dollar, according to CPO Rising’s 2019 survey. Unfortunately, it’s incredibly complex and takes a lot of visibility into spend data to do it the right way.
Many eSourcing platforms either provide limited strategic spend areas and decision-making criteria or require more complicated analytics with limited support and overly complex criteria. That’s why Jaggaer reports that 55% of procurement professionals manage bids using spreadsheets, which is highly inefficient.
With Catalytic, it’s easy to leverage data from all of your systems for better spend analytics. These reports can be totally automated and shared with the right decision makers for quick approval.
To calculate the impact of improving SUM, you’ll want to start with your organization’s SUM. For this example, we’ll use the 2019 CPO Rising survey average SUM of 53.6% and world-class SUM of 89.1%. The difference in these numbers is the potential opportunity for improvement in your SUM. Multiplying by the low end of the above 6% savings per dollar gives the potential savings per dollar of your total spend. Finally, multiply by your organization’s total annual spend to see how much you could save by improving SUM:
Average savings of improving spend under management: $213,000 per $10M of annual organization spend
Opportunity cost of giving low-skill work to high-level employees
Procurement organizations are filled with highly trained, highly skilled professionals who have adapted to their complex environments by spending a lot of time on low-level tasks. This McKinsey study shows that 45% of all work can be automated using existing technology. And when you think about all of the repetitive tasks that you have to do every day at your job, this likely isn’t surprising.
Using Catalytic to automate much of this repetitive work is not only good for morale, but it’ll also free up your procurement team to do the kind of valuable work that they are trained to do and grow in their capabilities to benefit the organization.
To calculate the opportunity cost, you’ll want to use the weighted salary of procurement professionals at your company. For our purposes, we’ll start with Glassdoor’s average salary of $80,000 times Bankrate’s standard factor of 1.3x for benefits. Multiply this by the 45% of low-skill work that can be automated and replaced with higher-value tasks to find the potential value-add per employee. Finally, multiply by the number of procurement employees in your organization to calculate the total benefit:
Opportunity cost of not automating: $468,000 per 10 procurement employees
As we’ve just shown, intelligent procurement automation can be transformational for your organization. With Catalytic, you can start with these low-risk, low-effort exploratory steps and build from there.
- Use our Procurement Automation ROI Calculator to determine what the benefits of procurement automation can be for your organization. Plug in the number of employees in your organization, how many POs you process each year, and an estimate of your company’s annual spend.
- Have a specific project in mind? Think of specific use cases to plug into our general Automation ROI Calculator.
- Connect with us to discuss how you can implement automation to optimize your procurement processes.