PracticePeople In PracticeBuying power through e-procurement

Buying power through e-procurement

Buying staples can be a costly business for a large company. It's not just about the catalogue price - firms also rack up costs when they actually buy the little critters.

A typical UK organisation spends between 50 and 70 per cent of revenues on procurement – buying the bits and pieces from staples to computers and office space – that keep a company ticking over, according to research from BT.

The need to transform the repetitive and costly process of procurement has long been an issue for IT departments. EDI and extranet-based links to suppliers could have provided the answer, but these proved expensive and complex, leading many companies to abandon plans to streamline their supply chains. Only since the arrival of the internet have companies looked anew at the potential of electronic procurement.

The numbers – and the potential – are staggering. US companies spent $11.5tn in 1999 buying and selling goods, according to AMR Research.

Allowing for the cost of labour, materials and overheads, companies still spent $2.5tn on sales, and general and administrative costs. A two per cent reduction in procurement could save those companies $21bn annually – more than the sales of the top 100 UK companies combined.

Despite the potential savings, fewer than 40 per cent of the UK companies surveyed by BT considered online procurement to be a critical issue. It’s a perception that will soon change, believes analyst Gartner. It predicts that $7.3tn will change hands across procurement networks by the year 2004, while researcher Forrester forecasts a more conservative $4.3tn.

Big numbers

These numbers might seem implausible, but there has been a shift in attitudes towards online procurement. Royal Bank of Scotland (RBS) Financial Markets (formerly Greenwich NatWest) is typical of many organisations. The bank had looked at e-procurement but found it expensive and technically complex, explained Paul Batten, the bank’s head of market data and commercial services.

“We only began to look again when the bank merged with NatWest and we were faced with the task of integrating three distinct procurement processes into a single system,” he said.

Now that the right expertise is more readily available, the bank has switched to full online procurement for IT hardware, and partial online procurement for IT services. The system has halved the time taken to authorise purchases. “Because the system is automating the whole process, it saves us using internal mail and relying on people signing forms,” said Batten.

The bank is now looking to extend the system to include full online service procurement and integration with its telecom suppliers, beginning with BT.

The development of an online purchasing system such as the one used by RBS Financial Markets is more than likely to land in your lap. In 89 per cent of companies, the IT director is responsible for e-procurement strategy, according to research by procurement systems supplier TomorrowFirst.

Early online procurement adopters report five key aims:

  • Adding value to their companies
  • Cutting operational costs
  • Complying with authorisation procedures
  • Tackling the issue of ‘maverick’ buying;
  • Speeding up management information on spending.

When Capital One developed its online procurement system, the primary aim was to protect existing investments while achieving a fast return on investment for the new initiative.

The credit card firm generates around 30,000 purchase orders per year, and expects big returns, said Colin Davis, Capital One’s head of purchasing. With cost control in mind, the company opted for a hosted solution from Elcom, which it uses to purchase PCs, IT consumables and furniture.

The bank recently embarked on the next phase of online procurement, which will see temporary staff and services such as credit card embossing move over to the web-based system. Ultimately, Capital One wants to get as much procurement as possible online. “I don’t think it is a hard sell,” said Davis.

Finding the right strategy

Your company’s strategy for online purchasing will depend on whether you are on the buy or sell side. For buyers, e-procurement offers an opportunity to manage suppliers using software from an electronic catalogue supplier, a consulting group or e-procurement software supplier. For sellers, it allows the business to exploit online catalogues, potentially slashing inventory costs.

“Even those suppliers who weren’t ready saw the advantages of the slickness of the system,” said John Padgett, senior manager of procurement at Sainsbury’s. The supermarket group rolled out two online procurement systems in May 2000 – one for goods that are resold, another for goods used internally.

Within three months of starting the project, Sainsbury’s decided to run all maintenance resource and operational purchasing processes using a single web-based system.

The supermarket’s online purchasing system builds on a pre-existing centralised procurement database. Purchasing staff can register on the system via their desktop and obtain immediate access to the supplier’s online catalogue and invoice system. When an order is placed, an electronic invoice is generated, triggering an automatic electronic payment.

The main advantage has been the improved efficiency of ordering goods online. Because the process is now automatic, there are fewer mistakes, said Padgett, and “fewer mistakes equals greater speed equals less waste”.

However, there is a price for these gains. E-procurement software is expensive and can be tricky to integrate with internal systems. In addition, the products currently available tend to meet one but rarely all of a company’s needs.

Online procurement software is still fairly new, and while most applications perform some functions well, such as workflow, analysis or catalogue management, none does everything well, warned Forrester. This means companies may end up using a patchwork of products, creating another set of integration headaches.

Don’t be lulled into thinking that online procurement will be cheap. Capital One has spent 15 per cent of its annual IT budget on web-based purchasing, a figure that could increase to 45 per cent within three months.

The company is sceptical about the more ambitious numbers put out by vendors, and Davis is unconvinced that online procurement will ever support most of the company’s purchasing needs.

“There are too many intangibles and too much disparate spending,” he said. “For example, you wouldn’t put the cost of taxis through a system like ours. And there will always be one-off purchases for which it just isn’t worth involving the system.”

Counting the costs

Online procurement systems can be as expensive as any other enterprise-wide software deployment, according to analyst Giga. Software licences for products can range from $10,000 for low-end systems up to $4m for high-end software from vendors such as Ariba and Commerce One.

Then there’s the implementation costs to consider plus the need to ensure integration with existing computer operations, which will bump the price tag up much further. Two thirds of 40 early adopters of online procurement surveyed by Forrester said vendors should offer better integration.

Suppliers, fearful that their own margins could be cut, can also hinder e-procurement adoption. A white paper from consulting group Axon claims that web-based purchasing will bring about empathetic, collaborative relationships between suppliers and buyers, but others are less optimistic.

“It’s going to be a jungle out there. Only the fittest will survive,” said Mike Thompson, director of research with analyst Butler Group. Far from entering cosy collaborations with suppliers, Thompson believes, e-procurement will bring about a fiercely competitive marketplace where anything less than stiff negotiation simply won’t be supported.

“We did meet with some resistance from suppliers,” admitted Padgett. Sainsbury’s tackled this by reassuring suppliers that its aim in deploying online procurement wasn’t simply to drive down margins, but to create added value.

“The value is in things like inventory management, an audit trail and supply chain management. Nothing e-procurement does should cut supplier margins. That’s our experience and no one’s raised any objections,” he said.

At Capital One, suppliers weren’t even aware of e-procurement systems. “The hardest concept was getting all the suppliers on board – there was a lack of knowledge about e-procurement,” said Davis.

Even where suppliers are willing, the systems may not support electronic trading between companies if procurement methods differ between partners.

For example, most companies have their own methods of classifying goods, and there is still a good deal of confusion about whether online procurement systems require standardised classification techniques.

A lack of standardisation won’t necessarily prevent the deployment of e-procurement any more than it has stopped the use of XML, said Adam Jacobs, founder and chief executive of electronic catalogue startup Cataloga. “Large companies have their own standards built up over years of trading. They are not about to abandon them,” he explained.

The Electronic Commerce Code Management Association, however, is trying to persuade businesses to do just that. It wants all firms trading over the web to use the same product codes and classifications.

Convincing staff of the benefits

Companies implementing e-procurement software struggle not just with technology issues, but also acceptance of the system by employees.

Many of those staff may previously have had purchasing autonomy, and feel threatened by a corporate mandate to adopt new processes and vendors, believes Pierre Mitchell, a research analyst with AMR. “There will be a lot of religious battles. When you go on to the factory floor and tell people to use Snap-on instead of Stanley tools, you should expect a backlash,” he said.

To persuade its 130,000 employees to work within the new system, Sainsbury’s enlisted PricewaterhouseCoopers to review its procurement processes. “We are a big Oracle user, so we tried not to change that, but we had to still take all the processes, review them and then roll it out,” said Padgett.

At present, 60 per cent of Sainsbury’s’ procurement is completed online, but the company is aiming for an ambitious 90 per cent eventually.

The key to successful deployment of e-procurement is planning from the start, said Batten. Before RBS Financial Markets bought its online procurement system from Biomni, the Computacenter-owned supplier, it brought in an external project manager.

“We started from the perspective of what we could do in an ideal world, then appointed someone from outside to evaluate the offerings in the marketplace,” said Batten.

The deployment wasn’t without problems, largely because of the complexity of integrating three divisions into a single system. “If I was doing it again, I’d define the business process before bringing in the technology, but at the time, it simply wasn’t possible,” explained Batten.

For businesses, online procurement promises to cut the cost of buying materials and services dramatically. For IT departments though, it can still be a complicated challenge.

However, unlike previous enterprise-wide initiatives such as enterprise resource planning and knowledge management, the return on investment of e-procurement isn’t hard to find – or prove.

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