The Change Management Myth: Why e-Procurement Initiatives Fail

One of at the presentations that I really wanted to see at the Fourth Annual International Symposium on Supply Chain Management was Jon Hansen‘s presentation on The Change Management Myth: Why e-Procurement Initiatives Fail. Unfortunately, as happens from time to time, the author could not make it. However, Jon Hansen, of e-Procure Solutions Corp., did send in the paper his presentation was to be based on, which had some really good points that I am going to discuss herein.

Before I get to what may be the fundamental reason, I’d like to reiterate a statement by Dr. John K. Potter who stated in his eight step process for change (in Leading Change) that transformation within a company can take between 5 and 10 years while, conversely, employees will abandon the initiative if the do not see compelling evidence that the change is working within 12 to 24 months. In other words, major organizational changes typically take 2.5 to 10 times longer than an employee will wait – so the pace of change, and your change management, needs to be relatively rapid if you want to succeed.

Secondly, I’d like to point out that despite their potential to revolutionize your organization, e-Procurement failures, especially partial ones, are much more common than you might think. Studies (IDC) and publications (Fortune Magazine) have reported that 75% to 85% of all e-Procurement initiatives fail to achieve the expected results. In other words, according to these studies, your chances of complete success are at most 1/4! Those aren’t good odds.

As an example, I’d like to point out the results of INCO‘s eProcurement Transformation. At the conference INCO, one of the world’s largest nickel producers, presented the results of the initiative they started in 2001 (primarily through Quadrem, an eProcurement marketplace) as a success. However, given their reported results, I would only classify it as a partial success.

As of last year, INCO calculated that their eRFQ initiative has saved them $3M on 907 events worth $300M – a mere 1%! If, like me, you’ve been tracking the industry studies by Aberdeen and AMR over the years, you will find this quite low. Now, an eRFQ initiative is not going to save you double digits like an eAuction or decision optimization can, but, considering the size of their organization and their spend, I would have expected efficiency savings at least 2 or 3 times that amount.

Furthermore, they have only run 26 events to date for a savings of 17M! Now, I don’t know all the baselines for this statistic, but I expect that their savings could have been a lot higher with more events. After all, industry statistics would suggest that they could have run considerably more events than they did (since at least 30 to 50% of events should be suitable for their eAuction tool and they have been running 180+ events a year through their eRFQ), and doubling or tripling the events should significantly increase savings. After all, their public financials indicate capital expenditures of almost 1.2B a year, and given average first time auction savings typically in double digits, if they had run even a third of their spend last year through an eAuction, I would conservatively expect that they should have been able to achieve a savings two times what they actually did. I could be dead wrong, but I’ve seen some considerable successes first hand when projects are appropriately implemented, managed, and, most importantly, supported. (And I’m sure the change management and the slow pace of a large corporation was the issue for the long implementation and what I consider to be weak results, and not the technology or their procurement team, who struck me as very on-the-ball.)

Back to the topic at hand. Most initiatives fail to achieve the expected results. (And sometimes drastically so! Consider the State of California who entered into a 6 year, $95M contract with Oracle on the basis of an unverified vendor savings estimate of $163M, which was not backed up by the $111M estimate by Logicon, Oracle’s consulting partner. When the deal was audited by the State’s auditor, the forecasts were found to be wildly inaccurate and the conclusion was that instead of saving money, the 6 year, $95M contract would actually cost taxpayers $41M.

The major reason, as hinted at by the above example, is typically lack of technology alignment. I’m a technology guru by training (PhD in Computer Science specializing in Multi-Dimensional and Spatial Data Structures and Computational Geometry), and I know (from experience) that great technology, including technology with a multi-million dollar price tag, can produce an ROI many times what you invest – but the truth is that it only produces results if it is aligned with your needs and solves the problem you need to solve. More importantly, even though the right solution can often save you millions and millions of dollars, the wrong solution can cost even more!

So why is the wrong technology often selected? There are a number of reasons for this. One reason, as I inferred in the software panel at the conference, is that the decision is not always made by the right person, but the primary reason is probably due to a lack of strategy. If your strategy is to simply “select an eProcurement / eSourcing tool” and reap rewards, you are bound to fail.

As Hansen says, any e-procurement strategy should be built upon a solid foundation of process understanding and refinement before technology is introduced into the equation. This way, when you make the decision to investigate the available applications, you are doing so with a clear understanding of how technology can work to accelerate the process, not define it. In other words, you need to know what you need before you select a solution, so that you can properly evaluate the solutions on the marketplace and select the one that is best matched to your needs.