Information Age (IA): Balfour Beatty spends more than £2 billion annually with more than 10,000 suppliers. How did the company settle on a strategy that it felt would enable it to collaborate more closely with these suppliers, while at the same time reducing its transaction costs?
Colin Darch (CD): What happened was this: a couple of years ago, Balfour Beatty got together with a number of other construction businesses – AMEC, Kvaerner, Bovis Lendlease and Laing – to create a trading hub for the UK construction industry, Arrideo. With the Arrideo project, we went though a year to 15 months of trying to get the [founding] companies to talk about the problems [they had trading] with suppliers, and to work out how we might collaboratively work together to create a hub to tackle these problems.
IA: And what happened?
CD: Well, collectively we spent a few million pounds – all that is a matter of public record. It quickly became apparent on our business plan that we needed £30 million plus to get the trading exchange off the ground, or £5 million to £6 million [per founding partner]. It was a bit of a shock, and I think we all took a sharp intake of breath. The main earners for Arrideo were advertising revenues and fees based on transaction values – we didn't feel these sat well with construction because it's a low-margin business. Plus, we've spent so long trying to disintermediate the supply chain, and there we were trying to put a trading hub in the middle of it. In the end, the business plan did not stack up. The model was quite ambitious, and financing it was too difficult. So we all agreed to go our separate ways. But we learned a lot in the process. There were aspects of Arrideo that Balfour Beatty really liked, and felt were very workable and could add value in the short-term, without us having to depend on the consensus of a whole community.
IA: So, in determining the company's subsequent ecommerce strategy, how did Balfour Beatty apply the lessons learnt during its experience with Arrideo?
CD: Part of it was helping us to identify what our strategy wouldn't involve. We quickly decided it wouldn't involve creating a trading hub and getting involved in reverse auctions and that sort of thing, although we did decide we could get involved with a hub in a minor way and participate in the occasional auction.
IA: What was your next step?
CD: Well, then we had to decide how we did want to do ecommerce. One of the things we decided we needed were project collaboration tools. We now [use these] via BuildOnline, an exchange in which we took a minor stake. BuildOnline offers hosted project collaboration tools that enable partners in construction businesses to work on a construction project, from design to completion, and to share information about best practice. We already have a number of projects going through BuildOnline. Two-thirds of our 8,000 sign-on sessions a month on the site [directly involve] our suppliers – the remainder are between internal groups at Balfour Beatty. As you can imagine, BuildOnline is holding quite a few terabytes of documents and data for us already. The second prong of our ebusiness strategy is knowledge management. We have made substantial investments in developing an online knowledge base aimed at Balfour Beatty's 13,000 employees. The data it holds is organised into ‘communities' such as health and safety, construction, and so on. The third prong is e-procurement. Our long-term objective is fully automated e-procurement. In the short term, we're looking to do some practical stuff that will help us immediately, but which contributes to that long-term objective. Our goal is to educate ourselves so that we make the best decisions in the future.
IA: Can you talk us through the steps you've taken so far in that path to fully automated e-procurement?
CD: Our focus is on reducing the cost of transactions, so first, we're looking at our back office processes and, in particular, how we handle invoices. This typically involves document management and workflow systems. These are things that [cannot be implemented] easily or cheaply – it's not just a matter of acquiring the technologies, but also of changing the way employees perform tasks, and possibly disrupting their work lives in the process. We are proceeding with caution. For example, we have been working with XML invoices for over a year. But at present, we are deliberately suppressing the flow of XML invoices from external employees until back office processes are automated to accept them. Basically, we're looking at ways of getting rid of all manual photocopying and filing of invoices – these are very practical but very necessary steps.
IA: Considering that e-procurement specialists were promising fully automated, seamless exchange of transactions and payments some two years ago, the steps Balfour Beatty is currently taking seem fairly basic. Do you fear that the company is lagging behind its competitors?
CD: If we had purchased a very sophisticated e-procurement system some time ago, we would by now have ended up with the ludicrous situation of having smart systems for getting bricks, concrete, and steel – but being forced to print out the data these generated. This is what we see at some companies – they've done it the wrong way round. They’ve built wonderful online procurement systems, wonderful online catalogues and everything’s hunky-dory – until they find that they have to send out data to some partners by fax and their partners don’t get the data because they’ve run out of fax paper. We said, ‘Let's invert that process, and see whether we can get some value now; let's educate our people, so instead of just having two or three evangelists in the business talking about [e-procurement], we build up an active community of people within the business talking about [e-procurement] – people who are able to understand about XML invoices, who understand about workflow, and can promote it among their colleagues and make it happen.' What we're doing is targeting the whole of Balfour Beatty [to make them aware of our e-procurement efforts] – not just one unit, one division, or one operating company. All these things are laying solid groundwork for more sophisticated e-procurement processes in the future.
IA: Beyond streamlining your own back-office business processes, what impact has Balfour Beatty's e-procurement initiative had on your suppliers?
CD: As part of our initiative, we are working more frequently with a number of preferred suppliers and encouraging them to bill us electronically. We started a couple of years ago with 39,000 suppliers. So our procurement strategy has been based on reducing the supplier base and on increasing the amount we spend with preferred suppliers. Now, our preferred suppliers number in the low hundreds, and the overall supplier base is down to around 10,000 companies.
IA: So right now, you are primarily concentrating on realigning business processes in order to migrate to e-procurement, but have you also implemented some e-procurement technologies?
CD: We decided to implement the Burns Business Exchange electronic trading service [from Burns Ecommerce Solutions] for our regular UK suppliers. We receive 965,000 invoices a year, and we aim to have at least half of them handled by the Burns beX system within the next three years. The first phase, which began in August 2001, involves an internal trading community of six divisions of Balfour Beatty: construction, power networks, specialist holdings, rail maintenance, rail projects and plant division. This reflects how much procurement goes on within Balfour Beatty between our individual business units. The second phase will involve a limited number of preferred external suppliers who produce a large number of invoices for Balfour Beatty. For example, [tyre company] ATS sends us 20,000 invoices a year.
IA: And what are your plans for a more extended roll-out of the system?
CD: We quickly realised that even though we have thousands of suppliers, we don't have to convince thousands to join the system in order to make a big difference in the costs of our transactions. For example, our top 50 suppliers account for 42% of the invoices we receive, so they are the focus of the third phase of implementation. Then we work on the top 75 suppliers, who account for 51% of invoices. Beyond that, we hit 250 suppliers, and then we've got 71% of invoice volumes covered.
IA: How do you persuade these companies to get involved?
CD: We try to avoid brute force. We don't say, ‘If you want to do business with Balfour Beatty, you need to do X,Y and Z'. We tell them, ‘We think there's a great deal of mutual common sense in doing this, and we think it will enable our companies to build a win-win relationship that will encourage you to do more business with us.' In a sense, the simple exchange of an invoice is the pull-through for a whole new level of business collaboration with partners.
IA: What are your future plans, and how closely do you hope to collaborate with your suppliers in the future?
CD: Once [all these systems are] in place for handling invoices, there's no limit to the number of different kinds of documents to which we can apply the same process. We will be looking up and down the information chain – which we consider a key component of the supply chain – looking at requisitions, orders, delivery notes, remittance advice slips. So we are targeting ebusiness, but from the point of view of what we can practically do at this point in time – and we're making measurable progress already. Our hope is this: if we do the groundwork better, we get the value back quicker.