The promise of generative AI has carried the stock market to new heights, and some even believe we’re at the precipice of a technology boom that the world hasn’t seen since the advent of the Internet in the 90s.
That’s great for investors – but finance leaders don’t care about the hype. They only care about generative AI to the extent that it can impact key financial metrics such as working capital, free cash flow, and EBITDA. In short, they only want to know about AI if it can drive tangible business outcomes and improvements.
Globality is at the forefront of unlocking the massive cost savings of AI. We call it Transformative Spending, and it’s revolutionizing the way companies spend their money.
So how does it work? AI can be threaded throughout the procurement process from creating the sourcing event all the way to awarding to a selected supplier. Along the way, you will have automated mundane tasks, increased competition among vendors, and automatically generated key documents all whilst staying in control of spend decisions. Think of this application of AI as a way to prevent margin leakage and thus improve free cash flow.
Margin Leakage and the Impact on Free Cash Flow
In its most basic view, net income is revenue minus expenditures. The typical view of margin leakage is that it represents decline in the profit margin occurring as a result of pricing and promotion shortfalls on the revenue side. A different kind of margin leakage can also result from the expenditures side of the equation where the act of purchasing goods and services falls short of best practices.
In some cases, a small, persistent drip of revenue leakage can become a raging torrent. Likewise, company’s management needs to plug holes in operating costs and overhead costs from expenditures. The procurement function can be an incredible leverage point for increasing net profit margin through operational best practices and reducing expenditures.
The Power of Procurement + AI
How can AI prevent margin leakage and reimagine the value that procurement can actually offer an organization?
1. Increase vendor competition to realize massive savings. If an employee is sourcing a project, the more fully-vetted vendors that the AI invites to participate the better and the greater savings the subsequent competition will create.
Furthermore, key alerts can be put into play: an AI-powered system can notify superiors when a buyer is inclined to award business to a proposal that isn't the most cost-effective, providing an opportunity to rectify the decision and optimize savings. It can also alert and notify stakeholders when spending is about to be sole-sourced, promoting multiple bids and fostering a more competitive procurement landscape.
2. Get a better price without raising your blood pressure. AI makes negotiations easy: it can automate the communication where a vendor’s bid is received and understood, but nevertheless requires some price adjustments. When this practice is done at scale, the result is substantial decreases in the costs of goods and services.
3. Streamlined vendor onboarding to reduce risk. Navigating existing Master Service Agreements (MSAs) and approved vendor lists can be daunting to employees. This AI-guided feature reduces the time and effort required to engage both approved providers and with new vendors, and therefore reduces the risk of the entire project.
4. Keep your people on track with AI-piloted scope definition. Writing scope documents is hard. Often, users don’t know what to say – or they say the wrong thing. AI can guide them, helping them with prompts and even filling in large portions of the document based on what’s been done previously. With an AI “co-author” at hand, employees can be prevented from engaging in wasteful buying.
5. Make information accessible with transparency throughout the entire process. AI platforms provide transparency with comprehensive rate card analysis and pricing insights, while also making supplier and product information readily accessible. Since the platform also has access to both past purchases and market trends, it can offer up recommendations for recent purchases at lower costs, provide benchmarks for negotiation, and facilitate cost-effective procurement strategies.
6. Enable economies of scale through collaboration. An AI-powered platform can identify opportunities for collaborative sourcing, helping aggregate demand across business units and geographies and therefore drive down costs.
7. Accelerate renewals and approvals. AI simplifies contract renewals and enforces approval policies, ensuring competitive bidding and proper oversight to maximize savings on strategic projects.
8. Turn everyone in the organization into a procurement professional. Here’s a big one. The velocity of the business can slow down if procurement has to drive every single spending project – not just the strategic purchases, but all the tail spend as well. That can be avoided by giving the entire organization the ability to source their own goods and services while keeping them safely within AI-mandated guardrails.
Doing so can speed up business outcomes by a factor of three. Purchases don’t have to run through a central department anymore; the act of sourcing can be “democratized” and every business unit can be empowered to complete their own purchasing projects. According to BT CPO Cyril Pourrat, AI-powered autonomous sourcing is making it possible for his non-procurement team specialists to sit down and create a sourcing request “with one sentence”.
The collective outcome of the cost drivers described above are significant:
1. $100 million returned to the balance sheet. Costs that would ordinarily have been wasted on poor purchases or incorrectly negotiated ones return tens of million dollars quickly. How quickly?
2. Payback period in less than 12 months. It takes less than a year to realize the return on the AI-powered purchasing platform.
3. Sourcing projects completed 6x faster. Because of the efficiency gains inherent in having each employee source their own purchases, with AI guiding them while safeguarding the interests of the organization, projects can be completed at a high velocity. A leading US-based investment firm who use Globality is now competitively sourcing spend that would have taken 50 additional people to achieve and is seeing a 20% price improvement.
Bottom line savings with AI-powered spend management
Far more than simply “adding AI’ to the existing procurement process, a Transformational Spending approach finds a complete rebuilding of the function to both empower the existing team while enabling all employees to source and complete their own purchasing projects – all while preventing margin leakage and returning tens of millions of dollars to free cash flow. Some organizations have already realized this vision, while others are racing to it.
But it’s only a matter of time until the rest catch up.
Contact us here for a demo of Globality’s AI-powered autonomous sourcing platform to see how it uses gen AI to deliver 70% efficiencies and 10-20% cost savings instantly.