So you have your e-Procurement baseline, or you are at least in the process of implementing it and you need to scope out what module / solution to implement next. Where do you start?
The answer here is not as easy, even after careful deliberation and research, because there are very good, sometimes equally good, arguments for four different modules that should be high on your list. (Trust the doctor here. He’s heard them all, especially from vendors that want to be put first.) Plus, some organizations will need all the modules … as soon as possible … and sometimes the needs are almost so equal and businesses cases so good that the only honest response a consultant or expert can give you is “it’s up to you“. These are:
- Contract Management
- Supplier Management
- Strategic Sourcing
- Spend Analysis
We’ll discuss the rationale and key merits of each, but first let’s talk about why I2P doesn’t appear on this list. First of all, for many companies, basic capabilities will actually be part of the eProcurement platform that they select as many eProcurement players actually do provide at least minimal I2P coverage, just better eProcurement than I2P. Secondly, and most importantly, all I2P does is reduce low-cost tactical overhead (and reduce overspend if there is not enough manpower to review all the invoices, but that really is cheap). In a large company that requires 20 people just to process invoices, that still misses errors on a regular basis as only 10% to 20% of invoices are carefully reviewed, this will allow 99% of all invoices to be carefully reviewed even after 10 of those people are reassigned to more profitable Finance activities. However, that’s still a small, fixed cost savings on headcount and a small percentage of the overspend that goes out the door (as most overspend actually isn’t recoverable unless there’s a contract in place and most I2P solutions won’t detect fraud on their own). So, I2P is important. And there definitely is an ROI. But is there real savings? Real risk reduction? Real supplier / product improvement? Real protection? NO! In other words, implement everything the provider gives you, and focus on custom AP/I2P improvements later in the queue because once you have basic capabilities and m-way match, you really don’t need much else.
So let’s talk about
Contract Management. Why would this be high on the list? It’s mainly for the lawyers, isn’t it? And the lawyers still want to use Word, right? Plus, as long as you get the catalog / prices / rate cards into the PO system, why would you ever need a CLM? Efficiency and Risk. Especially Risk. Lawyers, or their paralegals, waste a lot of time drafting contracts that can be automatically assembled from clause libraries or, with newer platforms, similar contracts for initial review. If you need 30 standard clauses, adjusted for the category and the locale, and 20 specific clauses, that’s probably a 30 page contract before the statement of work and addendums, which is what the lawyer should be focussing most of her time on.
But moreover, you need to ensure that the contract includes clauses that cover not only all issues of relevance to your organization (liability, insurance, governing laws, etc.) but all issues where there are laws and industry regulations in place in each country where you, or your supplier, will be producing goods and services or selling those goods and service. Also, if the products will pass through intermediate jurisdictions, they must transported according to any regulations that must be satisfied, which should also be addressed in the contract. Not addressing any of these issues up front in a contract puts the organization at significant legal and financial risk. In particular, risk that could result in the loss of hundreds of millions of dollar in inventory when customs intercepts the shipment, declares it illegal, and destroys goods that are perfectly useable and saleable in any other country but the one country they were shipped to that recently enacted enhanced “safety” requirements (that the products didn’t meet). (Sony once had 1.3 Million PlayStations seized by the Dutch Government, with a total inventory value of $276 Million in today’s dollar, due to high amounts of cadmium … PlayStations which could have easily been sold in the US.) The best protection against any risk is one captured in a contract. And if the organization is extremely services or supplier dependent, contracts cannot be overlooked. Thus, for some organizations, a good contract management solution is super critical.
But not every organization has super high risks, contract overload, or multiple jurisdictions to worry about. Sometimes, its greatest risks are suppliers not being able to produce the products it needs on time, on cost, and on spec … including the quality and reliability requirements. As a result, it needs to focus more on suppliers. This brings us to our discussion of
Supplier Management [which] is high on the list because if the organization is ultimately dependent on key suppliers to provide required, and strategic, goods on time (and on budget to spec), it needs to track, manage, and develop those suppliers. And if those suppliers are not making the cut, are too expensive, or not in tune with the organization’s diversity and sustainability goals, the organization needs to identify new suppliers.
Also, for fact-based negotiations, an organization needs to know what it is buying from a supplier annually, across all categories, how much spend that constitutes, how much of its total spend that supplier constitutes, and how much of a supplier’s business it constitutes. It should also have stats on the supplier’s carbon footprint, diversity, and publicly available risk ratings, as well as any performance, CSR, or other audits that are available. How are you going to collect all of this information and get it in one place to make good decisions on suppliers to invite, verify, select, onboard, monitor, manage, develop, and so on? Your organization needs a good supplier management system, and you really can’t wait (too long) on it.
But there’s also
Strategic Sourcing which is what you use to identify significant cost savings, or at least avoidance, and what the CFO/CEO is clamouring for (and denying your budget requests unless there is a considerable, believable, ROI attached to those budget requests). (And paying for a full suite for six months before anything is usable and two years before everything is usable is not good ROI.) Strategic sourcing allows you to collect bids, analyze them, optimize them, and negotiate contracts and awards fact-based and can often identify 3% to 15% savings, depending on the category it is applied to. (Well managed direct categories won’t have more than a few points of fat, poorly managed low-end CPG and service spend could contain waste up to 30% in some categories, with 15% on average near, and in, the “tail”.)
And even though the first dollar won’t materialize until the first order is delivered, verified, and paid for at contracted rates, if you put the right e-Procurement platform in place that will help you realize 90%+ of the identified savings (demand projections will always be slightly off, unexpected events will happen and you’ll need to expedite, etc., so 100% of the identified savings never materializes; but without a good eProcurement foundation, you’ll be lucky to see 70% of the negotiated savings, and sometimes lucky to even see 60%), over time the opportunities Sourcing identifies can pay off big time. The opportunity is so large that many organizations mistakenly start here (and then get disillusioned when the identified “savings” don’t materialize because they failed to put a proper e-Procurement platform in place to capture those savings).
It’s all so compelling, but there’s still
Spend Analysis [which] is the best way to identify opportunities for spend, and cost, reductions through better sourcing, better contracts, better supplier management, and better processes. It not only identifies top x opportunities, but it can identify variances, opportunities against benchmarks, overspend, process bottlenecks, unnecessary supply base costs, supply base risks, off-contract spend, etc. etc. etc.
In other words, it’s the tool that helps you maximize the value you get from the other tools in your suite. On its own, its value is limited, combined with other tools that help you capture the opportunities it can identify, spend analysis has a value that is limitless. So where do you start? Do we use the “data first” argument that we used to justify e-Procurement and start with something else to increase the value of the Spend Analysis solution? The answer here is actually “not this time” because eProcurement captures the core data, and spend analysis will help you identify the next module where the organization is likely to get the most immediate value (i.e. Contract Management, Supplier Management, or Strategic Sourcing).
Plus, unlike the other modules, you don’t need a tight integration between spend analysis and the rest of your Source-to-Pay ecosystem to start — you just suck the data out of the enterprise systems, map it, cleanse it, homogenize it, enhance it (and spit back the improved data into the applications the data was sucked in from to the extent that you can do so), and analyze it. You can start with spend analysis as soon as the eProcurement core is selected (as you will likely want to clean up and verify the data before you push anything into the eProcurement system) and use spend analysis to help you plan out the module implementation order and timeline as well as the corresponding Procurement project waves for value generation that will kick off as each module is implemented.
So, while the arguments are good for many of the modules, and the choice is tough, after e-Procurement, it’s Spend Analysis next (and, in fact, right away). Nothing stops you from starting with a standalone BoB tool and then integrating it (or selecting a different ecosystem tool for data management later, and some organizations actually use one tool to manage the warehouse / lake / lake house and serve as the management reporting tool and a lightweight, low cost, BoB analytics tool for the spend analysts to do the deep what-if).
The discussion is continued in Part IX.