Magazine Article | August 1, 2001

Beat The Odds Of E-Procurement Failure

Source: Field Technologies Magazine

Some companies spend $1.25 million on an e-procurement solution only to find they've automated the task of wasting money. Find out what the experts recommend to avoid these pitfalls.

Integrated Solutions, August 2001

Most companies invest a lot of time and money into making sure their raw materials are consistently delivered at the right time and at the right price. After all, it's the product that drives the company's bloom or doom, so why not focus major efforts on getting materials in the door so the finished product can be shipped out the door? But oftentimes this focus overshadows another very important aspect to the business - the procurement of indirect goods. Consider this: According to the Aberdeen Group, non-production goods and services account for as much as 60% of companies' total expenditures. From office supplies and computer equipment to maintenance, repair, and operating provisions, these items add up, sometimes even more so than what your company may allocate for direct cost items. While it's true that running out of items such as copy paper won't bring your business to a screeching halt, paying too much for these items or poorly tracking them can be equivalent to throwing millions of dollars down the drain.

Avoid E-Procurement Pitfalls
So what could be worse than wasting millions of dollars? How about installing a $1.25 million e-procurement solution (the average cost of a solution according to Aberdeen) that helps your company automate the process of wasting millions of dollars? Before one can appreciate what a good procurement solution can accomplish, it sometimes helps to look at the common reasons for e-procurement failure. The first reason for a failed e-procurement installation is a lack of collaboration between the suppliers and buyers. Many e-procurement solutions incorporate a catalog system whereby suppliers give all their product and pricing information to a buyer who compares product features and prices among various suppliers. "Suppliers are frustrated with catalog systems," says Sarah Pfaff, co-founder and executive VP of eBreviate, the eSourcing subsidiary of EDS (Walnut Creek, CA). "They're asking themselves 'why should I make such a one-sided transaction by handing over my portfolio of products and that's the end of the discussion?'" For e-procurement to be successful there must be an atmosphere of collaboration between the supplier and the buyer. "The catalog method of procurement is uncollaborative by its very nature," says Pfaff. "A static picture of items and prices is like a brick wall - unmoving and unmotivating." According to Pfaff, the best type of e-procurement acts as a middleman between the supplier and buyer, enabling buyers to offer their own purchasing requirements and suppliers to give input related to their products based on the buyer's needs.

The second reason that e-procurement solutions fail is a result of miscommunication at the C-level as to exactly what e-procurement is. The CPO (chief procurement officer) typically sees e-procurement as a three-step process: determine the appropriate procurement strategy, determine the appropriate suppliers to procure from, and execute the e-procurement transactions. The CEO, on the other hand, tends to focus on the last part of the solution only, thus neglecting the bigger picture and severely dampening an e-procurement solution's effectiveness. "The CEO can mistakenly think the transactional part of the procurement system - which accounts for just 30% of the overall e-procurement investment - will do it all," says Pfaff. "In reality, it's the e-procurement strategy and sourcing modules - which account for 70% of the overall e-procurement cost - that are responsible for 95% of the purchasing process as well as a majority of the realized procurement savings." To further illustrate this point, Pfaff uses the purchase of a car battery as an example. "Of the full cost of the battery, 80% comes from the battery itself, transportation fees, and any special modifications that are made to it before it is delivered; 15% comes from managing the supply chain inventory; and 5% comes from processing the order. Transactional procurement solutions focus on the 5% at the expense of the 95%." The reason that the transactional procurement module typically costs so much is that it has to integrate with a company's ERP (enterprise resource planning) system as well as other enterprise solutions such as content management and CRM (customer relationship management) solutions.

The third reason for e-procurement failure is because of communication errors between buyers' e-procurement systems and suppliers' e-fulfillment systems. These systems rely on a variety of methods of sending messages electronically. For instance, one solution might use XML (extensible markup language) while another may use EDI (electronic data interchange). Other, less robust solutions, may even rely solely on e-mails or faxes for the procurement or fulfillment process. Which one is the best, you may wonder. That's where the difficulty lies. "Large businesses, such as GM, use EDI," says Roger Trout, VP of strategic supply chain technologies for Sterling Commerce. "Even though XML is recognized to be much more flexible of a medium to transfer data than EDI, the latter is much more established and standardized, and not going to be replaced any time soon without XML showing itself as offering a clear advantage." Sometimes suppliers do not have a choice in the matter as to what medium they use to transmit data. If you want to do business with large customers like GM, Wal-Mart, and McDonald's, you have to be able to send and receive EDI transactions. For businesses that are serious about e-procurement, they either need a solution with built-in middleware that can accommodate various transactions or they will need to purchase it separately. The only other alternative is to reduce the process to printing and sending documents the old-fashioned way, which is similar to preferring the quill and ink to the PC.

Consider A PSP For More Procurement Savings
There is one more thing to consider before setting up the ultimate e-procurement solution on-site: Rent the solution off-site. According to the Aberdeen Group, using a PSP (procurement solution provider) can offer a company a 23% reduction in deployment time, a 60% reduction in implementation costs, and a 40% reduction in ongoing operating costs. For businesses that may not have $1.25 million to invest up front, the PSP model offers a viable alternative. The other noteworthy benefit of hosted applications is that they are a thin client solution and therefore help enterprises focus on their core competencies. Additionally, purchase processing time can be a week faster with e-procurement, unauthorized spending decreases by 51%, the price paid for goods is typically 5% to 10% less, and overall inventory expenses drop by 25% to 50%.

The Proof Is In The Numbers
Even though studies prove that properly implemented e-procurement solutions can save companies money, analysts predict that only 8% to 10% of the largest companies have purchased e-procurement systems. Yet, in the same poll, 80% to 90% of companies plan to procure goods and services online by 2003. One of the significant changes we will likely see is a morphing of e-procurement solutions' ability to handle both indirect and direct purchases. "SAP bet $250 million on CommerceOne that it could integrate the purchasing of both indirect and direct goods into SAP's ERP application," says Trout. It appears that an e-procurement solution that handles direct spending could take some time to not only get up and running smoothly, but also to become the acceptable way of doing business. "Raw material purchases are quite different than indirect items," says Trout. "Raw materials are typically set up on long-term contracts that are negotiated face-to-face. What will be more prevalent is companies that pre-qualify vendors via the Internet and then call the qualified ones into their place of business. Once those agreements are set, however, and strategic partners have been established, the direct spend modules can come into play and help suppliers to more effectively reduce their inventory.

Despite what the future of e-procurement may hold, there may be no better time to implement an e-procurement solution than the present. Because whether the economy is slow or whether it picks up and rolls forward full-speed ahead, saving money always makes good business sense.

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