Would you spend $1 million or so in return for a dramatic increase in profits? That's pretty much a no-brainer for most corporate executives. And that's the promise of e-procurement.
Christa Degnan, a senior analyst at Aberdeen Group in Boston, says purchased goods and services are often the largest expenditure at many companies. "We estimate that for every dollar a company earns in revenue, 50 cents to 55 cents is spent on indirect goods and services—things like office supplies and computer equipment." That half dollar represents an opportunity: By driving costs out of the purchasing process, companies can increase profits without having to sell more goods.
Automating the procurement process can, in theory, reduce unauthorized spending, slash administrative costs and enable companies to better manage purchasing by analyzing spending patterns. In fact, Degnan cites research showing that the average cost for processing a purchase order manually is $114 per P.O. By automating that procedure, the cost goes down to an average of $31.50 per purchase order, she says. In terms of time, e-procurement drives days out of the process—from just over a week to two days, Degnan adds. And unauthorized, or maverick, spending drops by 51%.
In these trying times, any opportunity to wring dollars out of the budget is hailed, so it's not surprising that many big companies are evaluating some sort of e-procurement system. In fact, Aberdeen estimates that sales of e-procurement systems will grow to more than $9 billion by the end of 2003.
Perhaps your company is one of the many enticed by the allure of e-procurement. How do you evaluate the many kinds of products and services available in order to choose the system that best meets your company's needs? The following tips will help.
|
User Profile: Motorola Broadband Communications
|
|
Motorola has been using Ariba's e-procurement software since 1999. It has also conducted e-RFPs for more than five years and e-auctions for more than a year. Here are some facts about the company's e-procurement experience:
Users: As of March 2002, Motorola has more than 21,500 users representing 309 locations in 19 countries.
Catalogs: The company has 697 internally hosted catalogs, which include a total of 650,000 items.
E-procurement prevalence: For e-RFPS, 60% to 70% of the sourcing spending is performed online. For e-auctions, it's 10% to 15%. More than 80% of e-requisitioning is done online, says Robert K. Harlan, the director of Internet negotiations for Motorola.
ROI: In 2001, Motorola saved $126 million using e-requistioning. Harlan says that the ROI on e-auctions in particular "has been huge—50 times the cost of the project."
Usage: Motorola used Ariba to process more than 160,000 purchase orders in 2001.
Technology setup: For Motorola's e-Requisitioning program, the company runs Ariba's Buyer software with a Web-based interface from Emptoris. It uses BEA's Weblogic for middleware and Oracle databases, along with Sun Solaris servers and Verisign for security.
|
|
|
 |
Get acquainted with the various types of e-procurement
The basic definition of e-procurement is the business-to-business purchase and sale of supplies and services using the Internet, but there are several different market segments underlying that umbrella term. Most commonly, companies purchase e-procurement software to automate internal processes. Typically, such software offers a self-service model, in which employees choose products from a number of electronic catalogs containing goods that have been pre-approved and priced by corporate purchasers. The catalogs can be hosted either internally or by the company, or software users can 'punch out' through the corporate firewall to use catalogs hosted by suppliers. Internet market exchanges attempt to exploit the power of aggregate purchasing by allowing numerous companies to join an online exchange. The group then bands together to negotiate better prices with various suppliers. The big three automakers' Covisint exchange is one example. Internet B2B auctions are yet another flavor of e-procurement, in which companies put out requests for goods and services and suppliers bid auction-style for the business.
Your overall investment depends on the type of e-procurement project
For companies that plan to buy and install in-house e-procurement software, the price can range from $200,000 to $3 million, says Sharyn Leaver, an analyst at Forrester Research in Cambridge, Mass. "And that just covers software license costs and getting suppliers connected," she says.
"For full e-sourcing applications, such as e-RFPs and e-auctions, the investment tends to be less than $4 million," says Robert Harlan, director of the Internet negotiation program at Motorola's broadband communications sector in Horsham, Pa. "For [software such as] Ariba, it can be between $10 million to $15 million, depending on the scope of the implementation." (See sidebar for Motorola's e-procurement experience.)
Degnan is a little more temperate with the cost estimate, saying that the average cost of implementing in-house e-procurement software is just over $1 million. Hosted e-procurement, in which companies pay a monthly fee to a company to host its electronic catalogs outside the firewall, is the cheapest way to go, she says. Companies that maintain a mix of internal and external catalogs and maintain ties with a large number of suppliers can expect to spend the most.
Most e-procurement software vendors come in two distinct flavors
The so-called pure-play e-procurement vendors, such as Ariba, CommerceOne and Clarus Corp., all focus primarily on building and selling e-procurement software. Their offerings tend to have more depth and functionality than the software sold by their chief rivals, enterprise resource planning (ERP) vendors such as SAP, Peoplesoft and i2 Technologies. Ariba, for instance, has an entire suite of software that includes not only e-procurement features but also software that lets companies better manage spending by analyzing purchasing patterns. Ariba also has a 'supplier hub' that makes it relatively simple to hook up suppliers to e-procurement systems.
ERP vendors, however, offer the huge advantage of straightforward software integration. For e-procurement to work, the software must hook into back-end financial systems, a complex process that generally requires middleware software. E-procurement software from ERP companies comes pre-integrated. The module just plugs into the rest of the ERP suite of software.
Choosing between the two types involves a little self-analysis, Leaver says. Companies that don't need the latest and greatest features can afford to wait for ERP e-procurement offerings, which tend to lag the pure-plays in terms of functionality. But if e-procurement software is a pressing business need, it may be preferable to go the best-of-breed route, she says.
Yes, of course there are drawbacks
There's no such thing as a hassle-free software implementation, and e-procurement is no exception. According to an October 2001 Forrester report titled "E-procurement Applications," companies reported four types of problems with e-procurement projects:
- Back-end system integration is a bear.
- User expectations/change management can be difficult. Thirty-two percent of those interviewed for the Forrester study said that they wrestled with getting employees to use the new software. "It's not just about technology," says Frances Howarth, the research director of e-business at Aberdeen. "Change management is an essential cornerstone of a good e-procurement implementation."
- Suppliers don't always want to get on board. This is a surprise to many companies, but 26% of the Forrester respondents reported being blindsided by their suppliers' reluctance to do their part of an e-procurement project.
- Content management is tough. Internally hosting electronic catalogs can be a cumbersome process, survey respondents said.
The future holds more change
The e-procurement market is still evolving, with new business models being tested all the time. Degnan, for example, likes the look of what she calls the procurement service provider (PSP) model, which looks like an ASP for procurement. "The PSP will be a new method of doing e-procurement," she predicts. "They'll take care of catalogs, content and supplier relationships."
FOR MORE INFORMATION:
SearchCIO expert Alan Kotok offers his tips on developing an e-procurement strategy
The Best Web Links on procurement
