The Current State of Affairs
The buzz this year has been the top-down emphasis on cost reductions, driving leading firms to aggressively employ all the tools procurement and sourcing applications have to offer.
Says Forrester's Metcalfe: "The resurgence in sourcing and procurement applications is largely because in this current business cycle there's a huge focus on cost control."
Pierre Mitchell, vice president of research for AMR Research, adds, "From a corporate standpoint, sourcing has always been active. What's really picking up is the interest and response from the slow adopters. Corporations that have already engaged sourcing applications are showing great gains. In addition, management's pressure to deliver on efficiency savings that their competitors are realizing is influencing interest not seen before. Given the fact that early adopters are realizing 10 times the return on investment, it becomes a very strategic issue."
So if the right sourcing applications will support an organization's systematic sourcing processes — that is, applications that support global sourcing programs, not just bidding events — and apply true automation of the step-by-step strategic sourcing process, then what are companies newly interested in this application looking for? The analyst firms list the following:
- Contract management — Closing the loop on the sourcing process ensures that different procurement systems are executing against corporate sourcing policies, especially in complex services spending that is not managed easily through e-procurement catalogs or enterprise resource planning (ERP) item masters and purchase orders. While this market segment size is only about $200M, automated contract management is a key component of any procurement and sourcing effort.
- Supplier performance management (SPM) — SPM guides both supplier rationalization efforts and joint supplier collaboration efforts with persistent supplier relationships.
- Niche technologies — These attack more complex, strategic spending categories. For direct materials, this is where strategic sourcing, product lifecycle management (PLM) and the supply chain converge toward integrated supply management.
With so much going on in the market and a bright light shinning at the end of the tunnel, Supply & Demand Chain Executive was curious to hear about surprises in the sourcing application market, of which there are quite a few.
Derome had two points on this. "First, the market did not accelerate as much as we anticipated in the first quarter of 2003," he comments. "Second, the amount of interest in the marketplace in spend technology and spend technology to aggregate and manage spend data is bigger than expected. We're picking up a clear trend of growing interest in spend visibility technology. This interest in spend data, as well as the ability to manage and aggregate the information to make better business decisions is the obvious reason users want visibility."
Derome discussed the new opportunities eXtensible Markup Language (XML) and Java standards offer, creating a less expensive environment to gather data across multiple systems. Plus, suppliers' products have matured to an extent that they allows organizations to consider a software product to gain spend visibility instead of spending that money on consultants.
A pleasant surprise for Metcalfe is the increased use of the Internet by purchasing and supply management professionals. In the latest ISM/Forrester report on e-business, the responses from 291 professionals revealed that 66 percent are using the net for the request-for-proposal (RFP) process. "This is an interesting number in itself," says Metcalfe, "because the consistant growth in this area shows the significance of Internet-based purchasing. If you look back a few years ago, everyone was talking auctions. The sweet spot on online sourcing is not auctions."
Another interesting fact for Metcalfe from the report is that low-volume direct materials spenders narrowed the spread with larger purchasers, purchasing 9.1 percent of their direct materials online, up from 6.7 percent in Q4 2002. "From our results, the findings show that the Internet is mission-critical for procurement," he says.
AMR's Mitchell points to a more obvious concern in the arena of surprises. "One surprise for many of us is that the quality of information for supporting corporate sourcing is still very poor," he says. "Take the fact that most corporations still cannot determine what percentage of their spending is actually maverick spending. What's the leakage? If that could be captured, most corporations would not only understand their true spend more clearly, but they could also more effectively clamp down on this problem. Plus, a corporations desire to track spending by supplier and by commodity is still difficult. Even today, this poses a big challenge for organizations."