E-procurement's new dawn

When it was first touted, e-procurement promised an end to the tedium for organisations which had relied on paper-based procurement systems. How does it look now?
Written by Stephen Withers, Contributor

In the heady days of the dot com boom, pundits were predicting many -- perhaps most -- routine corporate purchases would be made via electronic exchanges or markets. Suppliers' systems would be invited to quote against a buyer's specifications, and an automated process would select the best bid according to price and other criteria.
Where is e-procurement now?
While some exchanges were successful, Paul Liddiat, supply chain marketing director Asia-Pacific at PeopleSoft, says the model was too advanced for most organisations as they were only just moving from paper-based systems. "Crawl, then walk, then run," is his advice.

Another possibility is that procurement is traditionally a relationship-driven process and businesses on both sides of the fence were reluctant to treat goods and services as if they were commodities, unless that really was the case, and the only differentiators were price and availability.

Some industry-based exchanges are still going, including those in the steel, chemical, and grocery markets, says Peter Dowling, Asia-Pacific procurement leader, IBM Business Consulting Services, but those in horizontal markets were less successful. Part of the problem was that some companies had enough buying power to drive prices down to where they wanted them, while some suppliers refused to participate in an environment that reduced everything to price. However, exchanges "were great to clean up spaghetti junction," he says -- integrating suppliers and buyers in a many-to-one-to-many structure was easier to implement and manage than a many-to-many network of relationships. While there wasn't sufficient momentum for widespread change, the experience did educate organisations about the value of e-procurement, and companies such as Corporate Express (in the office supplies market) are effectively aggregators rather than traditional suppliers.

Bruce McCabe, technology analyst and principal of S2 Intelligence, suggests most electronic markets are really private networks comprising an organisation and its top suppliers, typically between five and 10 companies. A big network comprises 20 or 30 organisations. "But that doesn't mean it's not worth doing," he says, because even very small networks can give good returns and some organisations are getting excellent returns.

Regardless of the success of exchanges, organisations are successfully implementing e-procurement as a way to reduce administrative costs and to provide better monitoring and control of purchasing.

Industry players identify three major benefits of e-procurement: administrative savings, elimination of maverick spending, and analytics.

Simplifying the administration of the procure-to-pay process will reduce costs. "It tends to be a very manual and administration-heavy area ... and therefore costly," says Neil Richardson, iPOS commercial product manager at Professional Advantage.

Close integration between e-procurement and financials or ERP software is essential if these savings are to be achieved.

"Procurement processes, when they aren't automated, are riddled with waste," says Liddiat. Forcing users to select from an online catalogue saves their time, and automating the workflow adds to the administrative savings. For example, users can track the progress of their purchases via the e-procurement system instead of phoning procurement staff.

One objective of e-procurement is to "make it easier for people to buy from preferred suppliers than not," says Greg Higgins, e-procurement specialist at Capgemini. He recommends organisations prioritise areas of expenditure that will give the best return, though this may be in terms of cultural impact and behavioural change (eg, eliminating unnecessary travel) rather than a simplistic financial analysis.

The elimination of maverick purchasing yields benefits soon after implementation, Richardson suggests.

Even the settlement process can be improved, suggests Liddiat. "It's all about getting the supplier off your back," and clear communication and quick resolution of discrepancies leads to quick processing.

Greater control over purchasing can be gained through the analytic tools provided by e-procurement systems. These give more insight into the purchasing process, revealing where, how, and with whom the expenditure is occurring, and whether suppliers are adhering to contract terms.

E-procurement can bring about a (possibly subconscious) change in users' senses of responsibility, suggests Higgins, reducing demand for some items more effectively than any management edict. "You're creating an environment where people are trying to do the right thing."

Are you analytical?
Analytics are crucial, according to Liddiat, "if you can't measure, you can't improve." By continuing to gather metrics about suppliers, the best and worst performers can be identified, allowing continuous improvement through (re)negotiating terms with suppliers, and by directing the organisation's spending to the most appropriate supplier (in terms of product, location or time).

McCabe too believes analytics are a key factor behind e-procurement. He interviewed procurement managers at 210 Australian and New Zealand organisations, and their top savings were coming from better data on purchasing, reduced purchase errors, and getting staff to buy from contracted suppliers. "It gets straight back to analytics," he says, but "that wasn't mentioned four years ago -- it wasn't even on the radar."

However, "the amount of insight you get [from analytics] is directly proportional to the amount of spend captured," warns Higgins. If the catalogue only covers stationery, that's perhaps three or four percent, so you won't make big inroads. Based on his knowledge of 40 large companies doing e-procurement, the best are around 40 percent (though one exceptional client is close to 100 percent), the worst are doing two percent or less, and the average is around 10 percent.

"Those are pretty low compliance numbers," he observes, but they can be enough to support a business case.

Some organisations are addressing strategic sourcing -- a process for reducing the total costs of externally purchased goods and services while maintaining or improving quality and service level -- but according to Liddiat few Australian examples have reached the implementation stage. Foxwoods Resort Casino in Connecticut, USA, applied PeopleSoft's Strategic Sourcing module to the purchasing of cutlery, crockery, and glasses, and even though managers thought they had very competitive contracts with existing suppliers, Foxwoods saved US$500,000 on a US$2.5 million spend.

"One of the misconceptions ... is that it's all about reverse auctions for commodities," says Liddiat. Collaborative business agreements are often needed for both parties to prosper, and strategic sourcing provides a standard procedure for defining terms and conditions, and automates contract reviews for both sides. "It's an effective way of removing waste from business processes." Negotiating contracts is a team sport, he says, involving purchasing departments, business units, and suppliers. Avoiding the transmission of physical documents and eliminating the re-keying of data into different systems speeds up workflow and drives out costs.

Dowling has a similar opinion. E-procurement is more than just reverse auctions, he says, even though they are particularly popular with government agencies as the process is "squeaky clean" it can be difficult to evaluate factors other than price.

The real advantage comes from integrated procurement, says Dowling, where a full suite of technologies is applied to reduce processing time (and therefore costs) and enforce compliance. Not only can you remove people from the accounts payable function by eliminating manual matching of invoices, delivery notes and orders, but by analysing how items are used it is possible to rationalise the range of items held and reduce total stock levels.

For example, an engineering firm might consider using a single, high-quality bearing instead of ‘good, better, and best' grades for different applications. While that would appear to be more expensive, the reduction in total stockholding costs (fewer bearings would be held in aggregate, and administration is simplified) and in service requirements could yield a net saving.

E-procurement is also about collaboration and communication with suppliers, Dowling suggests. This can be seen in the automotive industry, where car manufacturers are sharing designs, bills of materials, etc, with their suppliers, reducing cycle times and getting new products to market more quickly.

Consider this
Visibility of spending is often an important consideration. Kevin Jones, iPOS technical product manager, points to one of the company's UK customers in the construction industry. While the architect in charge of a project may have formal control of the budget, he or she normally cannot see how the money is being spent until after the event. E-procurement allows people on the ground to order supplies as necessary, while constraining their choice of products and suppliers, and gives the architect a real-time view of the purchasing process.

Administrative improvements can make major differences to an operation. Another example from the UK involves a chain of pubs. Under the old paper-based system, around a week elapsed between orders being placed and the delivery of beer and other products. The group switched to e-procurement using iPOS, and now orders placed by 2am are delivered by noon the same day, allowing managers to respond more quickly to changes in the weather or special events (eg, a rescheduled soccer match) that affect demand. It also takes less of the manager's or cellarman's time to place orders electronically, and the chain's back office is freed from the task of manually matching orders to deliveries and invoices as this process is automated.

While Professional Advantage has local clients in local and state government, and property and health services, they are still at the earlier stages of implementation. UK customers report payback in as little as six months, though smaller organisations generally take longer. In any case, getting control of the procurement process may be more important than immediate costs savings, says Jones.

That said, defining a ROI for e-procurement is easier than for most IT projects, suggests Richardson, because you know what you're currently spending and you can set targets for improvement. It's not just a matter of getting lower prices by directing business to cheaper suppliers: reducing the number of suppliers can significantly reduce administrative costs.

Jones points to one iPOS user that eliminated 1000 suppliers, cutting the number of invoices and payments processed each month, while Liddiat reports New Zealand Post made significant savings by eliminating suppliers and auditing invoices against negotiated contracts.

Start your services
While people tend to associate e-procurement with goods, it can also be applied to services. Some services, such as window cleaning or lawn mowing, can be treated as products as far as procurement is concerned, explains Liddiat. Higgins extends this list to include items such as business cards: as an intelligent form can easily capture the required data (name, title, etc) from the HR system or by manual entry.

"Many companies are putting in sophisticated services such as travel and contractors," says Higgins.

Some vendors, including PeopleSoft, cater specifically for services procurement. Liddiat says this can be used for casual and contract staff, for example. A manager needs mechanisms to request a person from a provider, specifying the required skill set. It may be necessary to interview candidates, and then formally order their services from the provider. Time and expenses, and performance must be logged during the assignment, and the provider's bill must be checked before it is paid.

Slotting in standards
The UK e-procurement market is more advanced than ours, says Jones. Here electronic invoicing isn't widely accepted even though it is mandatory for doing business with some retailers. Richardson points out that each of the large groups has its own incompatible standards, so it's important that e-procurement software has the ability to reformat electronic documents on input or output, or that a gateway is available to perform this task. The UK is moving towards standardisation through the efforts of organisations like the Business Applications Software Developers Association (BASDA).

In Australia, some standardisation has grown out of exchanges as an alternative to allowing buyers to enforce their own protocols, says Dowling. One example can be found in the mining industry, he says.

Incremental Implementation
PeopleSoft's customers typically start in a small way, says Liddiat, either in one area of their business (eg, to enforce standards and automate authorisations in IT purchasing) or in a specific area such as stationery that cuts across the entire business. For example, Barwon Health (Victoria's largest regional health care provider) wanted its nurses to focus on patient care rather than administrative tasks, so it implemented an e-procurement system to streamline supplies procurement for hospital wards. Another PeopleSoft customer, the University of New South Wales, started by creating a single catalogue of frequently purchased items and is now extending that system to all faculties and adding more categories of goods.

A straightforward catalogue helps drive compliance, observes Higgins. "Work to scale," he says: make sure the business processes work on a small scale, and then increase the number of items and users. Even if the project is to be rolled out on a global basis, start with a few items or categories. Liddiat says all the successful projects he's seen were developed this way.

Higgins agrees, but says it is important to keep the momentum going, pointing to e-procurement projects in the 1999-2000 period that didn't have a properly developed business case and only involved a limited number of users and items. Stationery ordering is easy to implement, for example. "It's a great aim," but "a relatively small proportion of the total spend."

Most of the benefits around information and control are only gained when the majority of purchases go through the system, he says. Organisations currently implementing e-procurement are putting more effort into building the business case, maximising the number of users and the percentage of transactions that go through the system, and checking that the required ROI is being achieved. "There are real, tangible benefits to be got," he says.

IBM itself has adopted e-procurement (or ‘technology-enabled procurement' to use Dowling's preferred phrase) in a process that began more than a decade ago as part of former CEO Lou Gerstner's "one IBM company" push. All supplies would be sourced through one procurement operation to standardise deals and leverage the company's purchasing power. By 1998, IBM began a move into e-business, identifying suppliers' capability in this area and eliminating paper. Early experiments with e-procurement began at this time, incorporating catalogues and workflow management.

From 2003 onwards, e-procurement was extended across IBM's supply chain, so that changes in customer requirements are immediately propagated along the chain.

"We actually practice what we preach," he says, and the results are there to be seen. Purchase orders are now raised in one day, compared with 30 days in 1995. "Escapes" (orders that bypass purchasing agreements) are now less than one percent of the total (vs 45 percent in 1995), internal client satisfaction has risen from 40 percent to over 80 percent, the contract cycle time for a new item has been slashed from six to 12 months to 30 days, and procurement contracts have been trimmed from over 40 pages to around six pages.

The cumulative saving from e-procurement exceeds US$15 billion, and last year over US$6 billion was trimmed from annual costs, he says. "It's a pretty good tale to tell."

Like Liddiat, Dowling encourages organisations to start simply and then scale up. He also recommends re-engineering rather than merely automating existing practices: "We started with strategy and ended with technology," he says. Dowling also suggests suppliers should be brought into the transformation process at an early stage.

Integration importance
The degree of integration is "probably the biggest constraint" on an e-procurement project, according to Higgins.

"If you don't have integration with financials, you don't get the full benefit [of e-procurement]," says Liddiat. For example, you may want to check that an order is within budget before it is placed, to record expenditure against particular projects, or to capture asset information upon delivery. Integration with other systems may also be desirable. Accessing organisational hierarchy information from human resources may remove the need to explicitly enter an approval hierarchy into the e-procurement system.

"The goal should be to maximise the amount of integration," says Higgins. It's less of an issue for smaller organisations: with 50 to 100 users and a similar number of cost centres, moving data between systems is "not that onerous a maintenance issue," but it's a different story for a big company with 1000-plus suppliers.

That said, he also warns against over-integration. While it might be attractive to link the e-procurement system with budgets, fixed assets registers, and so on, you should consider carefully whether they should be part of the initial deployment or added later. It's a question of costs and benefits, and if you're starting with stationery and travel, they may not be essential from the outset.

"Integration is there for a purpose," says Liddiat: tight integration supports business rules, and "you need it to work at the same pace as the business is running."

"Procurement is about making people play by the rules," so those business rules should be in (or accessible by) the e-procurement system, he says.

Organisations running PeopleSoft 8 can add the e-procurement module and the integration is automatic. With older versions, there is some out of the box integration but the rest involves customisation, he says.

iPOS is "completely and seamlessly integrated with Sun Systems from Systems Union," says Richardson. Sun Systems is a significant second-tier enterprise package that's perhaps better known in the UK than in Australia. Professional Advantage has been building complementary products for more than 10 years, and is the OEM supplier of e-procurement software for Systems Union.

One of the biggest causes of failure of e-procurement projects is a lack of integration, he says, citing an AT Kearney report showing that 79 percent of e-procurement failures were due to inadequate back-end integration. Tight integration avoids the time-consuming double entry of information and provides real-time visibility and control, he says. For example, if dealings with a particular supplier are suspended, that decision should take immediate effect.

Another problem concerns data validation, says Jones. When information is moved from one system into another, it is normally validated and if necessary corrected at the receiving end -- but feeding those changes back into the source system can be a more difficult process. A ‘single source of truth' is preferable.

iPOS provides out-of-the-box deep integration with Sun Systems, he says, so the e-procurement system knows about the organisation's suppliers, payment terms, locations and so on.

Although Higgins favours integration, he points out that batch (rather than real-time) integration may be sufficient, depending on the nature of the catalogue items. Even so, he still advises organisations to plan for increased integration as the system develops. "Try not to start with the most complex solution," he says, instead add complexity as it is needed.

Ease of integration doesn't only come with e-procurement modules designed for specific enterprise software. According to Liddiat, PeopleSoft's PeopleTools supports seamless business processes that span multiple systems, including Oracle Financials.

While larger and more forward looking suppliers are already set up to handle electronic ordering and invoicing, others aren't. Yet an organisation needs as much as possible of its procurement to go through its e-procurement system in order to achieve the maximum benefit. So PeopleSoft offers a supplier portal that provides suppliers with an online view of the e-procurement system, and can also handle e-mail, fax, or print-and-mail communications. Orders, purchase schedules, delivery notes, invoices, and accounts can all be viewed or processed through the portal.

"You have to make sure there aren't any barriers to the supplier using the portal," says Liddiat. So the portal uses plain HTML, the licence fee is independent of the number of suppliers, and because "people typically don't go looking for a manual" it was designed to be easy to use from the supplier's perspective.

Integration with suppliers' catalogues can also be an issue. "As standards get more concrete, people will become more comfortable exposing services to the marketplace," says Darrell Ryman, technology fellow Asia-Pacific, at Avanade.

Epicor Software's model for e-procurement involves hooking into vendors' catalogues, says Jason du Preez, director -- Asia-Pacific. This means individual users can select the items they need, but their choice is restricted to approved vendors. Epicor provides an open trading network and the software supports buyer-managed, supplier-managed and aggregator-managed catalogue content.

Don't underestimate the effort required from suppliers, warns Higgins. He recommends the information and connectivity needed should be taken into account when negotiating contracts if there is any chance that you will want to implement e-procurement during their lifetime.

E-procurement can address three of the main concerns of CEOs. A recent IBM international survey of over 500 CEOs found their priorities include growth (while containing costs), responsiveness, and implementing change quickly, says Dowling. It can help fund growth by reducing costs, allow customers and suppliers to be dealt with more quickly, and allow more rapid change by partnering with suppliers that can handle non-core activities.

Executive summary
  • Build the business case carefully. Low hanging fruit such as stationery may be attractive for pilot projects, but you may get a better return on your efforts elsewhere.
  • Start small, but once the system is working move rapidly to extend its use across the organisation and in as many areas of procurement as possible.
  • Initial savings come from reduced administration and better staff compliance with procurement policies.
  • In the longer term, the use of analytics can rationalise purchasing and yield significant savings by eliminating unnecessary suppliers and items, but this relies on capturing as many purchases as possible.
  • E-procurement is also about collaboration with suppliers.
  • Reductions in the delay between ordering and delivery can make an organisation more responsive to its customers' changing needs.
  • E-procurement is as relevant to services as it is to goods.
  • Integration with other enterprise software is highly desirable to avoid re-entry of data and to smooth workflow, but avoid pouring resources into providing more integration than is necessary in your situation.
  • Consider providing a portal for suppliers that aren't themselves set up to handle electronic ordering, etc.

This article was first published in Technology & Business magazine

, a ZDNet Australia publication.

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