E-procurement software has failed to live up to the promises made for it when it emerged in the late 1990s.
Early customers were told by specialist suppliers, such as Commerce One and Ariba, that by web-enabling procurement processes and driving down prices through online auctions they could expect to slash procurement budgets by up to 50%.
They have, in most cases, been sorely disappointed. In Europe, companies that that use web-based e-procurement software have achieved average savings of less than 5% a year, according to research from IT market analysis company Forrester Research.
Moreover, online auctions have frequently resulted in lose-lose situations for buyers and suppliers: suppliers get stung as they watch margins plummet in faceless auctioning events;
buyers end up with the cheapest supplier, but also the most inflexible contract. Auction processes are often simply too clumsy to deal with complex, high-value contracts.
This is not news to purchasing professionals, who are well aware that they do not require technology that demands the wholesale replacement of existing procurement processes and contracts, as early e-procurement models proposed. Rather, they need technology that supports a more mature and comprehensive approach, that recognises the complexity of business-to-business trading, the value of existing trading relationships, and that is capable of supporting long-term savings.
The new savings frontier
In particular, organisations need to underpin their procurement strategies with tools that enable them to perform two discrete functions – to analyse spending data and to ensure that procurement policies are complied with. Together, these analysis and compliance tools can help companies better understand and manage their spend.
For example, by analysing historical spending data, a procurement executive can identify that his organisation spends between $2 million and $2.5 million annually on office cleaning products and services from a variety of providers. With this information to hand, he can subsequently negotiate a more favourable price with a single supplier of these products and services, based on the understanding that the chosen supplier will receive at least $2 million worth of business that year.
Moreover, he can guarantee that this amount will be spent on that one supplier by configuring the company’s procurement software to list them as the only provider of cleaning products and services – forcing each department to use only that contracted supplier.
Anticipating this shift in approach among buying organisations, e-procurement software suppliers are now embracing terms such as spend analysis and management and contract compliance. Ariba, for example, terms itself as “the leading enterprise spend management provider”.
None of these represent new concepts in purchasing. Indeed, tools to support such functions have been included in the portfolios of many e-procurement suppliers, such as Commerce One, Ariba and FreeMarkets, for some time. Spend analysis tools, meanwhile, are provided by business intelligence vendors, such as SAS Institute, Cognos, Business Objects and Informatica. In addition, enterprise resource planning vendors, such as SAP, PeopleSoft and Oracle, provide tools specifically designed to analyse transactions handled by their software packages.
But with such a huge variety of components and applications available from a wide variety of software suppliers, how are organisations putting together effective spend management systems?
Real life, real savings?
British Airways’ (BA) use of procurement software is a good example of why a spend management system is typically built from a variety of different components.
For many years, BA has used procurement software developed in-house to streamline purchasing across the 100 countries in which it operates. Alongside this, the company has more recently rolled out e-procurement software from Ariba in various areas of its business.
“The software devolves the procurement process down to the office level, so that, for example, secretaries can order office goods from their desktop,” explains Gavin Boswell, technology and performance manager at BA. By streamlining the procurement process in this way, the company has been able to reduce procurement team numbers. But this is just the start: BA also aims to achieve savings in the longer term by more closely controlling what money is spent and with what suppliers, says Boswell. For example, the BA procurement department focuses heavily on negotiating discounted prices for goods. These discounts are then included in a customised catalogue used by the procurement department.
At present, however, employees outside the procurement department cannot access the catalogue. Unaware of the discounts it holds, they order and purchase goods from suppliers that do not offer BA a discount.
This so-called ‘maverick buying’ frustrates much of the hard work put in by BA’s procurement team. It is also a serious barrier to the company reaching its savings targets. According to research by management consultancy McKinsey &Co, maverick buying can account for between 25% and 40% of an organisation’s total annual procure-ment bill.
To resolve this issue, BA is currently piloting catalogue management software from US company Frictionless Commerce, which it will integrate as a ‘best-of-breed’ component with its existing Ariba e-procurement software and use in conjunction with the aviation e-marketplace, Cordiem.
One of the long-term benefits of integrating procurement applications is that the resulting consolidated purchasing information can prove extremely valuable for procurement staff when they negotiate future contracts with suppliers. Indeed, the ability to aggregate and interrogate spending data across an entire organisation is the best way to maximise spend efficiency: this is the conclusion of a recent research carried out by IT market analyst company Aberdeen Group.
In future, BA plans to use business intelligence tools to analyse spend across the enterprise, and provide such information to procurement departments to improve its negotiations with suppliers. To this end, the company will create a sourcing portal that delivers news and research on suppliers to procurement executives. It will also provide access to spend analysis tools that will interrogate the company’s existing data warehouse of procurement transactions.
Procurement software vendors, such as Ariba and FreeMarkets, have recently added analysis and contract compliance tools to their products and tried to provide much of the functionality that BA hopes to deploy. But even though such e-procurement products are well-suited to the task, there are still many reasons to deploy third-party business intelligence software.
Telecoms equipment manufacturer Motorola, for example, has implemented an enterprise spend analysis system using business intelligence tools from Informatica. The reason was that Motorola has deployed numerous procurement systems, some of which handle only indirect spend, and some that manage direct spend on raw materials.
“We wanted an independent data warehouse that could analyse spend across the whole enterprise, not just indirect or direct spend,” explains Chet Phillips, an IT director at Motorola.
Using Informatica’s software, Motorola built a data warehouse that pulls data from around 30 sources across the organisation. Procurement executives at Motorola can then analyse this data using Informatica’s Power Analyser software when they negotiate with suppliers.
Motorola, which deployed the system at the start of 2002, is undoubtedly a pioneer in spend management deployment. And there is no doubt that many more will follow – one only has to look at the slew of new spend analysis and contract compliance products being released by all types of software companies. Unfortunately, there is little research into the savings achieved by companies that have gone as far as Motorola down this path. Those IT directors that are willing to guess at the amount they have saved using such software, come up with figures of around 3% to 5% savings on total spend.
These sorts of savings fall far short of the figures promised in the early days of e-procurement – but they are arguably more realistic, and in themselves, not insignificant. In a phrase, e-procurement has grown up.