In our last post we provided an overview of the big benefits of e-Procurement systems, namely:
- on-contract spend
- market costs
- one-off spend approvals
These are valuable benefits, and the reasons that many organizations claim big, multi-million dollar savings from their e-Procurement system. But are these the system? Or the process? And, the most important question, what’s the ROI? Remember, big P2P installations can run your organization a million dollars — or more — up front and millions more over the years.
At a high level, the ROI calculation is easy. The system costs 1M, but saves you 5M, so it’s a 5X ROI. Right? Well, if all 1M is the result of the system. But chances are, only a small fraction of that is the system. But even if we attribute all 100% to the system, is it really the system. Or is it just because you have a system.
Let’s start with on-contract spend. If before the system was installed the organization had a 65% on-contract spend rate and after the system was installed the organization has a 90% on-contract spend rate, then the system boosted on-contract spend by 25%. If this resulted in a 2M savings, 40% of the 5M savings is due to this boost. This also means that 40% of the cost can be attributed to the on-contract spend potential.
Let’s move to market costs. If the system reduces off-contract spend by 1M on average over what was 20M of market spot-buys, then the organization improves spot buy spend by 5%. And since this is 20% of the 5M savings, 20% of the cost can be attributed to this savings.
Finally, let’s end with one-off spend approvals. Let’s say the organization does a lot of big asset rentals and purchases and they are typically done whatever way the individual wants. But lets say the standardized approach supported by the system allows the organization to reduce costs by 20% on the 10 M+ they spend annually, then another 40% of the big savings is due to this ability and 40% of the cost is attributable to this capability.
In other words, the organization is paying 400K to increase on contract spend 25% and save 2M, 400K to save on one-off spend approvals and processes to save 2M, and 200K to take advantage of market cost data to save another 1M. At this point, you’re probably saying, so what? It’s still a 5X return any way that it’s broken down. And you’re right.
But what if an organization can acquire all the market cost data it needs from a subscription to a commodity price consolidation service that costs 50K a year? Is the 1M system worth it then? Especially since the amortized cost for what the organization is using is effectively 200K? Is it worth sacrificing a 20X return for a bit of convenience?
And if the organization just needs a better RFP process with embedded collaboration to reduce those one-off spend approvals by 1,600K, and that better process can be obtained from a simple e-Negotiation platform for a mere 50K a year, instead of 400K, the organization is sacrificing a 32X return for a bit of convenience. Is that worth it?
And if the on-contract spend can be increased by 20% with a simple best-of-breed catalog solution which can also be acquired for about 50K a year from a leading provider, then the organization could save another 1.6M for 50K, another 32X return.
In other words, the organization could acquire 3 basic systems for 30% of the cost and see 80% of the return for a 28X ROI. So why spend 1M on a complete S2P suite?