Category Archives: Procurement Innovation

e-Procurement Benefits – What’s the ROI? Part I …

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?

e-Procurement Benefits – Just What Are They?

A couple of posts ago we indicated that e-Procurement benefits were true, but left you with a caution that process was a key element. How much so? Well, let’s talk about what the big benefits are.

On-Contract Spend

If there’s a contract for a product or service, the system can steer the user towards the contracted product or service, and not even allow a purchase to go through unless it is for the contracted product or service. This can significantly cut down on off-contract maverick spend and this makes a noticeable bottom-line impact when the off-contract spend was significantly higher than the market price.

Market Costs

When a product or service is not on contract, a good e-Procurement platform with a catalog that has multiple entries for products and services at market prices ensures that an organization will only pay market cost for a good or service the majority of the time. While the savings will not be as significant as when there is a contract, if the organization was generally paying more than market, this will still add up.

One-off Spend Approvals

Without a system with insights into on-contract goods and services and market costs for off-contract commodity goods and services, the best insight you, and your approvers, will have is the handful of RFIs that were returned from the 3-bids-and-a-buy. If all of these were above market cost, who would know? No one, and that’s why an organization overspends here as well. But with a good e-Procurement system, approvers will have insight into market costs and will make smart decisions and not approve anything excessive.

These aren’t the only benefits, but these are the big ones that cause many organizations to claim big, multi-million dollar, savings from their e-Procurement system. But, as per our last e-mail, how many of these are the system? And how many of these are the process supported — or instilled — by the system? And does it matter?

Stay tuned!

E-Procurement Benefits … Fact … But …

Last week, Tony Bridger gave us a great two-part series which asked if e-Procurement benefits were fact or fiction because it has fallen out of favour with the academics over the last decade, with few toting its benefits as they did when it first hit the scene.

And Tony had some great points. E-Procurement was touted as the panacea for all Procurement woes, but the first generation of solutions did not deliver. Many Procurement teams use systems to negotiate great contracts, but great contracts don’t deliver improvements — execution against them does. The best spend analysis system delivers zilch out of the box — it takes an educated, trained, experienced, intelligent buyer to sniff out the true savings opportunities. And, most importantly, every single buy is just a tiny bit different. And buys that are far enough apart need different capabilities and solutions.

And, most importantly, the best platform in the world is useless if it is not adopted and use by all of the buyers all of the time.

e-Procurement platforms can deliver the benefits they promise, namely an end to maverick spend, approval control, workflow configuration, and spend under management. But only if they are properly implemented, properly adopted, and properly used.

You can search the archives here on SI and over on Spend Matters for a description of the benefits, as well as a description of necessary platform requirements to get those benefits.

But one thing that is not always clear in our past articles, and that should be made clear as a result of Tony’s posts, is that e-Procurement is more than just platform, it’s process. It’s the process of doing a proper event, recording the contract and meta-data in the e-Procurement system, issuing the POs against the contract, insuring the invoices — and shipments — match the POs, and getting approvals before payments. If there are no contracts, and the buy is not big enough for a sourcing event, but over a certain amount, then it’s critical to get proper approvals. All spend haas to go through the system, and, when necessary, get approvals, according to the organizational policies and processes. A proper e-Procurement platform automates that process, simplifies the m-way matches and comparisons and classifies the spend for easy analysis. It enforces a process that saves money, it doesn’t save money out of the box.

And maybe when the academics realized this, and that they were writing about a solution which had no inherent sorcery, they dropped it like a hot potato. Even though there are dozens of companies that have went on record saying they saved millions with proper platforms (which saved them millions because they implemented, and supported, proper processes).

E-procurement benefits … fact or fiction? Part II

Today’s guest post is from Tony Bridger, an experienced provider of Procurement Consulting and Spend Analysis services across the Commonwealth (as well as a Lean Six Sigma Black Belt) who has been delivering value across continents for two decades. He is currently President of UK-based TrainingWorx Ltd, a provider of a wide range of Procurement and Analytic business training programs (inc. GDPR, spend analysis, project management, process improvement, etc.) and focussed short-term consulting solutions. Tony can be contacted at tony.bridger@data-trainingworx.co.uk.

In our last post we noted that it has been difficult to find anything recent in the academic world on e-procurement. Independent academic research appears to have started to fizzle out from 2007 as the e-procurement technology wave passed and moved on – as most technologies do eventually. However, e-procurement software vendors are still going and new development companies still seeking a new angle – despite the fact that many e-procurement systems, and concepts, have proven notoriously difficult to embed in to the culture of organisations.

We can hypothesise and speculate on some of the reasons for this:

E-procurement has often been touted as the panacea for all procurement department ills. Stops maverick spending, controlled approvals and extensive workflow;

This is correct to some extent. However, this focuses on a small slice of spend (i.e how much of procurement effort is actually spend under management?).

Many procurement teams write large contracts but rarely take the time or effort to check compliance to contract. No one ever said that vendor catalogues and associated pricing were always correct and accurate. Automated PO processing cannot fix compliance if the core vendor source catalogue pricing is simply wrong;
Spend analysis is still lacking as a core skill in many procurement teams – so validation and compliance checking of pricing to invoice compliance still seems to be a low priority agenda item. Therefore, e-procurement provides no better protection for contract compliance than any other process in many cases.
The generic nature of indirect spend activity remains in many cases. Simply, this means that in some categories, the variation in process to specify, order and pay means that a “one size fits all” process platform simply will not work. There are Purchasing cards and a range of other specialised P2P options available – but the advent of products like SAP Fieldglass for temporary labour and service time recording has started to erode the value of e-procurement investment in some categories. All-encompassing e-Procurement capability is simply being picked off at a category level. The purists will argue that it should all be on one system. However, the pragmatists are busy creating applications that deliver value.

Could it be that e-Procurement has simply passed its apogee? Perhaps.

However, do problems with purchase to pay in many organisations simply reside with procurement cultures?

There is little or no doubt that many procurement departments see the entire gamut of purchasing activity as their domain to control. Many procurement executives still initiate major P2P investment projects on the basis that this will provide an entire control platform – and that business teams will simply comply. That assumption is flawed as many imposed P2P initiatives run counter culture and are doomed to fail – or at best simply ignored.

It can also take time to set vendors up on e-procurement, maintain workflow using cost centre files, approve POs, set spend limits etc. There are many variations on a theme in the e-Procurement space – many systems will now claim to resolve a range of category-based issues. However, many business unit buyers have considerable market knowledge, good commercial evaluation skills and translate their domestic purchasing skills in to the workplace very effectively i.e. specify requirements, create opportunities and evaluate responses from multiple suppliers – and place an order. They also can save companies money. As the old Chinese proverb suggests, “give a person a fish, feed them for a day, give them a fishing rod, feed them for a lifetime”.

It may simply be that the majority of e-procurement platforms are designed, in many cases, to pander to the notion of total control desired by procurement teams – not commercial pragmatism around the way the purchasing and business world really works. A mystery for sure.

However, there are alternatives. The question is … is anyone looking?

Thanks, Tony!

E-procurement benefits … fact or fiction? Part I

It has been difficult to find anything recent in the academic world on e-procurement. What was once the doyenne of the procurement world does seem to have become very much business as usual.

However, it really does depend on how you define the term.

So, prior to running off at speed discussing an array of e-procurement related elements, let’s make sure that we discuss the right technology platform.

In 2016, I sat in on an EU conference that had a presentation session on “e-procurement”. Having implemented an end-to-end B2B procure-to-pay platform, I had considered that it was pretty much a common technology – and well understood. I was wrong. I was treated to an hour on e-procurement as an RFP (request for proposal) and optimisation tool. Not the e-procurement I was expecting. The (real) e-procurement, from my perspective, is the good old shopping cart and payment process. So, let’s stick with that definition for now.

At the turn of the millennium, e-procurement and the sister product e-marketplaces, were being implemented at a furious speed. However, as fast as the companies were starting up and creating e-procurement systems, the dot com era brought the entire edifice down and left very few players standing. I was amazed recently to discover that start-ups are still creating these platforms. So much for the concept of a mature market.

For those that have little experience with e-procurement systems, the simplest analogy is that it’s a little like a single organisation implementation of Amazon. The hoster (the buy side) will have access to the range of catalogues and suppliers like any Amazon user. However, these are only generally only contracted suppliers. The supplier makes available their catalogue and goods to organisational buyers. If you do not work for the client company you cannot see or interact with this environment. The supplier can have their own website catalogue (termed as “punch out”) or use third party or software vendor supplied catalogues. Once a PO has been raised and goods despatched, invoices can be submitted, matched and paid. All automated.

Sounds like a transactional nirvana. However, just how successful has e-procurement actually been?

Independent academic research appears to have started to fizzle out from 2007 as the e-procurement technology wave passed and moved on – as most technologies do eventually. This article does not suggest that e-procurement is a failure or is declining – it merely suggests that little real evidence exists to suggest that it is an outstanding success. One may assume that if it was a major success – there would be many (and wide ranging) articles that vaunt the case for investment.

However, e-procurement software vendors are still going and new development companies still seeking a new angle. There have been many variations – from free systems (with revenues made on services), to the more expensive, fully integrated ERP suites. However, none of these options are cheap to implement – and can be notoriously difficult to embed in to the culture of organisations.

Why?

Stay tuned for Part II