Finding the "e" in Procurement

Regardless of what procurement system they settle on, the company was ready to go the application service provider route. Why? They were certain they could save money.


The Usual Caveats
For many who have only a passing acquaintance with the ASP model, these figures may seem to fall in the category of too good to be true. Oftentimes, unfortunately, they are. While companies can generally assume there will be lower costs and less bother with installation, too many new users fail to properly calculate the total cost of ownership of these applications and then get burned by unexpected expenses, says Adrian Gonzalez, senior analyst with the Dedham, Mass.-based infotech consultancy ARC Advisory Group. Some ASPs don't guarantee connectivity, which means companies have to have separate agreements with their telecom providers,² says Gonzalez. Pricing models also vary, making it hard to compare one ASP with another. For instance one supplier may offer an application for $100 a month but not include in that price hardware, telecom fees or configuration costs, Gonzalez says. Another might include some of these items with a higher monthly fee. Another issue is catalog content: some suppliers make the user manage that while others include it in the service.

"A buyer should be aware of the costs that come after the initial licensing fees... consulting, training, etc,² agrees Andy Russo, director of enterprise solutions for PurchasingNet, an e-procurement provider that recently selected NaviSite to host its system. "Sometimes the cost of implementation services can quickly eclipse licensing and subscription fees." He also warns that in some cases installation may take longer than expected. "An application that takes a great amount of effort to implement in the traditional manner won't be much different in an ASP environment."

Happily, such instances do appear to be more the exception than the rule. Certainly the people at Digital Insight are pleased with the process. "We had a very rapid deployment and with minimal effort from the tech side," reports Joe Gomez, e-procurement project manager.

Yet the ASP model has really only been a viable one for the last year and a half or so (a lifetime and a half in Internet years). So until recently, users tended to be smaller-sized companies that had "no choice" as Gonzalez puts it. "Early adopters were the dot com companies that didn't have the time or money to go the traditional route." The larger companies, he says, "wanted to get some history behind these early adopters and took a wait-and-see approach." It turned out that many liked what they saw.

Gaining Acceptance
With annual sales of more than $6.5 billion and 150 manufacturing and research sites scattered in 25 countries, Rohm and Haas is one of the world's largest specialty chemical companies. As part of a new overall strategic sourcing initiative, Rohm and Haas weighed the costs and benefits of various e-procurement systems. "In all cases the hosting model turned out to be a better deal for Rohm and Haas," says Tom Chapman, purchasing manager. Eventually, the company chose the Ariba B2B Commerce platform, provided by USi.

Jeff Heller, Rohm and Haas' procurement process manager, expects the system to pay for itself within a year or so and in fact avoids citing specific numbers "because they sound too good." And that¹s not counting the indirect benefits, he says. "We will have around half of our 20,000 people using Ariba directly, saving them many hours a year buying goods and services. We also expect higher compliance with our contracts and discounts from our suppliers for electronic ordering."

At the same time, Chapman says, the company insisted on including certain provisions in the service level agreement (SLA) with USi. As it turns out, the 'wait-and-see' attitude has paid off in more than one respect.

SLAs are the contracts users and ASPs sign, usually lasting between one to three years. Until recently Gonzalez says, the language in SLAs did not receive much attention, something that is starting to change as ASPs become more popular and certain problems seem to reoccur from client to client. In a way the increased focus is too bad, he says. "I had one company rep tell me the goal should be to try to keep the lawyers out of it, that the two sides should operate more as a partnership."

"But SLAs are a necessary evil," he says. Basically, says Frost "you want the SLA to define who is responsible for what, and when, and at what cost, in every possible circumstance."

Create Powerful Provisions
A large order for a company of any size. Rohm and Haas, for example, included provisions for guaranteed online availability and a set number of consulting hours available to the company. There are other points that a company might want to consider as well:

  • Spell out the necessary procedures for implementation including time frames, necessary down time and even how to roll back in the event of a failure.
  • Establish acceptable levels of service, such as a certain percentage of permissible down time every month. Be careful with definitions. Many service providers promise a network uptime of 99 percent or better, according to an ARC strategies report, "Web Application Hosting; Strategies for Success."
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