Strategic e-Procurement

E-Procurement is all the rage, but is it ready for prime-time?

In 1999 the British government launched its coordinated corporate IT strategy aiming to deliver all of its services and procure all of its products electronically by the year 2008. That date has now been brought forward to 2005 and questions are being raised about the ease with which such monolithic purchasing environments can be re-engineered.

A recent research report entitled "E-procurement in Europe," commissioned by MRO.com, estimated that traditional procurement processes cost European companies over $1billion each year in lost productivity. Problems in purchasing procedures were caused by an abundance of red tape and the amount of management time being tied up in transaction processing.

With large numbers of software vendors piling into the procurement space, packaged applications now exist which can help. But, while savings of up to 20 percent cannot be ignored, fundamental issues still exist. Implementing a procurement application does not necessarily cut out the authorisations required for conducting a purchase and making a payment, nor are all goods and services appropriate for online procurement. Moreover, the offerings from vendors are still maturing, and the essential decision-support capabilities are, in many cases, not yet present.

Full Deployments in Short Supply
For early adopters of e-procurement, benefits have been dramatic. Diageo wanted to smarten up purchasing across the organisation and consolidate its suppliers by forcing compliance. Ariba has been implemented globally and Diageo's e-procurement programme director Keith McLeod reports more efficient purchases, better payment processes and more analysis of purchasing trends.

But, according to Forrester Research, implementation reality often falls far short of marketing hype. Analyst Laurie Orlov says: "There is hype about e-procurement because it is a B2B Internet application and on the face of it sounds like a quick win. I think it is a tough project, as the process is a new one with a long way to go before problems are ironed out."

In Forrester's report, Hands-Free Procurement, research into global 2,000 companies suggests that few full deployments of e-procurement have taken place. There are still too many manual touchpoints, particularly concerning authorisation. E-procurement needs to manage the exceptions by workflow engines sending e-mails flagging up purchases over a certain figure rather than individual transactions.

Indirect Procurement
Internet-based procurement currently refers almost exclusively to indirect procurement, the requisitioning of maintenance, repair and operations (MRO) goods and services. Chris Phillips, director of marketing Europe at Commerce One, says: "There have been three phases of development. The first challenge was to automate the buying process by taking the paper process and putting it into an intranet-based system. Second was the realisation that a system could only be as good as its accurate catalogue content, and now the model has evolved to connect buyers and suppliers via an extranet."

E-procurement links buyers to their chosen suppliers over the Web and individual users drill down to find the item required. An order can be sent to the supplier after approval procedures, and the item can therefore be delivered more swiftly. Peter Loughlin, a principal consultant at KPMG, says: "Early adopters of e-procurement will be fortunate as they will be the first to get quick savings. Increasing demand for e-procurement will outweigh the supply of skills to deliver." Gartner Group warns companies to bear in mind the hidden cost of ongoing development and support as they garner the expertise to deploy, exploit and manage the system to its full potential. Within two years the system should have justified its costs, but large companies may not achieve a total return on investment in this time.

The Race for Market Share
The race is on between the vendors to gain early market share. Ariba, which Mitchell likens to a Web chameleon, does not have a huge share of the UK market, but hangs onto the number one spot with its ORMS system. It has recently negotiated a deal with i2 to offer direct and indirect procurement together as part of i2's TradeMatrix. Oracle offers its Internet procurement as a standalone or neatly slotted onto its database environments.

On top of savings, vendors cite improving relationships with suppliers as a benefit. E-procurement can assist organisations in reducing the number of their suppliers, negotiating more favourable contracts, enabling discounts and incorporating new suppliers online. Maverick or rogue buying--where users cannot wait for stationery orders and rush out to buy items in shops--should become obsolete.

Vendors also claim that as individual users manage their procurement processes, purchasing officers can concentrate on identifing buying trends, track costs and watch supplier performance. However, users questioned for Forrester's Hands-free Procurement research said that even when they had installed e-procurement software, authorisation processes still required management and orders were still being transmitted by EDI, e-mail or fax. Most organisations needed to match an item's receipt with its requisition, invoice and delivery before payment could be made. The pull of strategic purchasing departments was dismissed because most companies hadn't yet looked at their buying and supplying behaviour.

There can also be integration problems. As e-procurement is done over the Web it is easy to overlook issues such as integrating back-office systems with customers' and suppliers' systems. Gartner Group cites SAP R/3 as an example: a customer must ensure its e-procurement application supports SAP's Remote Function Calls and Business Application Programming Interfaces.

If this doesn't cause a headache for buyers it can for suppliers that need to accept orders electronically. Smaller suppliers without electronic catalogues could find themselves out of the game altogether. Even if they do have the facilities, they still need to integrate orders received from the Web to fax machines and sales systems.

Another big problem for suppliers is content management, as buyers have put the onus on them. Loughlin says: "Suppliers will lose out if they don't react to the challenge of e-procurement--soon they won't be able to compete. Catalogue management is not trivial, and buyers don't want to do it, so suppliers must. Prices can change on a daily basis, and it is up to the supplier to update the information."

UK managing director of Aspect Development Nick Ford adds: "Suppliers must keep data clean and up-to-date, manage the catalogues properly, and provide tools to enable customers to find the required product swiftly. If a buyer isn't careful he can end up trawling through on the Web as he would on paper." Mitchell agrees, saying that suppliers face price pressure and competition from world-class suppliers as e-procurement drives efficiency in the market.

To ensure their core information on buyers' suppliers can be rationalised and is accurate, vendors such as Oracle, SAS Institute and SAP have joined forces with Dun & Bradstreet, a B2B information provider. This gives buyers further assurance. Once a buyer has agreed on an e-procurement package and has handed over the names of suppliers it wishes to do business with, these are matched up to Dun & Bradstreet's global database, which verifies and highlights duplicate suppliers. The data can then be dropped back into the buyer's business intelligence tools for analysis. Dun & Bradstreet or the buyer can periodically clean up the data.

strategic Possibilities
The move to business intelligence supports vendor claims that e-procurement can be strategic, as purchasing departments begin to analyse feedback. Mitchell agrees that e-procurement needs business intelligence tools, but stresses the need to interrogate with the back office. Problems can occur with the quality of tools, and companies will not get maximum benefit unless the staff is properly trained.

The move towards adding analytics means a data warehouse is needed to identify what, from where and when products are bought, and measure suppliers' performance from the period elapsed between placing an order and its delivery. Forrester's research labels such analytic applications and strategic procurement software as the way to manage the move to direct procurement, and to allow e-procurement to manage exceptions rather than transactions.

Ford says: "Procurement is seen as an activity at the end of a supply chain and is very reactive, but with e-procurement there is the opportunity for the department to become much more strategic without shedding headcount."

The icing on the cake for strategic e-procurement is its integration into the finance department to minimise duplications. If the back office has a record of a purchase then invoices can be sent electronically. Forrester's research indicates that manual authorisation needs to be replaced by smart payment processes. Ford says: "Finance must close the loop of e-procurement. E-procurement sits around an ERP system like a layer of marzipan, and feeds off the HR and ERP systems."