"All these components really have to tie together," Coscia says. Just introducing e-procurement technologies will not produce optimal results unless a company has business processes and policies in place to ensure that employees actually use the system rather than continuing to live by old purchasing practices.
The key to tying these elements together is what Coscia calls executive sponsorship, which UTC’s Brittan agrees has been a key success factor in their e-procurement implementation. "You have to have top management support," he says.
Executive support ensures, first of all, that the necessary resources will be made available to work on the e-procurement process. Resources, in this case, mean primarily people, according to Brittan: "eProcurement is not a big investment, but you have to take some people and say, ‘I want you to work on this project.' And you have to spend some money on training."
In this sense, e-procurement is perhaps an easier sell than, say, automating administrative processes, expense accounts or financial systems, where it’s difficult to actually see the benefits. Although Brittan is certain that e-procurement produces non-price savings, he says that the substantial price reductions produced by the reverse auctions UTC has been running allow him to point to tangible savings. "There are the process savings, which people tend to discount," he says. "But at the end I also have a bang for the buck: the price of the goods went down."
Brittan further stresses that e-procurement systems must be built on top of robust financial controls. The systems must ensure, for instance, that the debits equal the credits, that proper controls are in place over who can buy and can’t buy, that approval requests are routed properly and that commodities and suppliers are properly coded.
Saunders goes further, saying that the financial department should be brought into the planning and implementation process. "When a procurement business process changes and an automated spend commitment system is put in, it’s primarily a financially driven process," he explains. "If the finance group isn’t involved in supporting the project in its entirety, you can run into difficulties." And as Coscia notes, "There is nothing more powerful than CFO endorsement of an e-procurement solution."
In particular, finance should be involved in setting the baselines of procurement activity so that subsequent savings can be tracked. This is especially important in an e-procurement implementation because so much of the resultant savings cannot be readily identified, such as improvements in business processes and reduced inventory levels.
Financial controls are also critical further along in the implementation process when it comes time to capture e-procurement savings and reduce budgets. It does no good for a line manager using the new system to save 10 percent on office supplies but then spend that 10 percent elsewhere. Financial controls can ensure that the savings actually result in reduced budgets, which is what ultimately boosts support for e-procurement throughout a company. Says Saunders, “The only real measure of success that seems to count to the broadest audience is getting the savings to the bottom line of the company."
On the strategic sourcing side, UTC took two approaches. First, they have made extensive use of FreeMarkets, the Pittsburgh, Penn.-based online reverse auction exchange for industrial parts, raw materials, commodities and services, in which UTC owns a 6 percent stake. UTC ran its first FreeMarkets auction in 1997 and has since conducted more than 80 auction events for goods totaling about $1 billion. No new technology had to be introduced since, for its users, FreeMarkets is entirely Web-based. UTC managers running auctions can post their RFQs and watch the auction process from their desktop PCs.
In addition, in 1999 the company began outsourcing its general procurement to IBM Global Services' sourcing and procurement operation in Endicott, N.Y., where Coscia now oversees a staff of full-time procurement and accounts payable subject experts who work on behalf of UTC and other IBM customers.