Back in the late 1990s, when he was a senior supply management executive at United Technologies Corporation (UTC), Shelley Stewart, Jr. says he was an early skeptic of the potential benefits of e-procurement. In fact, when the founders of FreeMarkets (later acquired by Ariba) showed up to speak with him about their pioneering e-sourcing solution, Stewart says, "Basically I wasn't going to give them the time of day."
However, UTC's top supply management executive at the time, Kent Brittan, was an early enthusiast for applying technology to address the challenges of procurement. Brittan tapped Stewart to be the point person for UTC's relationship with FreeMarkets, which helped produce $1 billion in savings over the course of four years. That experience, along with his work with IBM on an electronic req-to-check payment system for UTC, changed Stewart's attitude about using technology to enable supply management processes.
"I really learned how technology can help bring value to the procurement process," says Stewart, who subsequently did stints as vice president of supply chain management for Raytheon Company and senior vice president of supply chain management at Invensys before joining Tyco International (US) Inc., where he currently is senior vice president for operational excellence and chief procurement officer.
e-Procurement Gains Acceptance
Stewart's experience with e-procurement — initial skepticism giving way to acceptance and then a measured enthusiasm — mirrors the changes in the broader marketplaces' attitude toward electronic procurement technologies over the past six years. The hype about e-procurement peaked shortly before the tech bubble burst around 2000-2001, and in the post-bust environment solution providers in this niche had difficulty living up to the high expectations they had been built up for their applications. For example, an April 2004 survey by Forrester Research found 35 percent of respondents reporting that procurement or sourcing software was not meeting expectations for anticipated benefits. Reasons cited for the disappointment included "organizational and process changes, the expanding set of applications required for success and resistant suppliers."
Still, none of the business challenges that prompted companies to look at e-procurement in the first place have vanished. Organizations are still looking to cut administrative overhead and reduce their direct and indirect spend; improve compliance with procurement contracts and purchasing policies; drive procurement savings into new categories; and reduce — or at least better manage — their supply base.
Moreover, evidence has begun to appear suggesting that investments in e-procurement technology can produce significant payoffs. Research released by business process advisory firm The Hackett Group in its 2005 Book of Numbers indicates that "world-class" procurement organizations (those in the top quartile in both efficiency and effectiveness) spend more than their peers on technology (21 percent of their spending, versus 13 percent for typical companies) but 20 percent less than typical companies on total procurement operations. The effective use of technology allowed world-class procurement executives to improve efficiency, helping them reduce their cost per purchase order to $8.48, while typical companies spend 153 percent more, Hackett found. In addition, world- class procurement executives operated with 50 percent fewer staff than typical companies and showed dramatically improved cycle times and reduced error rates.
Achieving ROI at HP
Greg Shoemaker, vice president of central direct procurement with Palo Alto, Calif.-based technology company Hewlett-Packard, agrees that e-procurement has produced a substantial return on investment for his organization. "We have definitely seen tremendous benefits over time from using e-procurement tools, and those benefits fall into categories like speed, efficiency and security," says Shoemaker, a 20-year HP veteran who manages about 40 percent of the company's $45 billion in total spend. Shoemaker also believes that e-procurement tools that can automate previously manual processes are becoming simply a necessity in the current economic environment. "Paper purchase orders are quickly becoming a thing of the past, and that's a good thing," he says. "The volume of transactions that we run is staggering, and you can no longer manage a growing, dynamic business in a manner that's manual anymore."
Not that e-procurement has made purchasing organizations obsolete. On the contrary, Shoemaker believes that in some ways the new e-tools have accentuated the value of the function by reaffirming the impact that skilled procurement staff can bring to the bottom line. "The electronic tools make things faster and more efficient, but they don't take over for the expert content knowledge that you need to manage a category," he says. "You still have to do the basic procurement work of understanding your marketplace, understanding what the needs of the business are, putting together sourcing strategies that are going to result in getting the most competitive pricing at the quality levels that you require to maintain your position in the industry and your brand recognition. Electronic tools don't displace all that work."
Shoemaker manages teams of HP procurement staff that meet periodically to review current and emerging IT tools to support procure-to-pay processes at the company, and he participates in cross-functional teams of executives that make buying decisions and recommendations on procurement solutions. As such, he emphasizes that e-procurement tools will only benefit an organization if the solutions are a fit for the company's way of doing business and part of an overall strategy. "You can't have a solution that is searching for a problem," he says. "You need to make sure that you're designing your toolset upfront to meet your business model and the business process." At HP, Procurement works on solutions development and selection with IT through teams that include tech-savvy staff from the business side. "This helps ensure that we get to the end game that we want to achieve," Shoemaker says. Currently HP uses an e-procurement solution from Ariba as well as a number of homegrown solutions to manage its procurement processes and interactions with its suppliers.
Creating a Roadmap at Tyco
Shelley Stewart also believes procurement executives must ensure that their senior staff includes subject matter experts who have in-depth experience with the types of tools and processes that a company plans to deploy. "Having the right person leading this type of project is critical," he says. "It lends credibility not just in the procurement world, but with IT and the business unit as well."
At Tyco, for example, Stewart has tapped Falgun Patel, director of e-sourcing and e-procurement, to lead the implementation of a central data repository to collect and "cleanse" spend information from more than 200 enterprise resource planning (ERP) and other systems across the company's four core segments. Patel was a veteran of a similar initiative at Motorola, where he led a team that implemented a spend data warehouse using a solution from Informatica. After he joined Tyco in 2003, Patel drove a nine-month rollout of a similar solution, based on an application from Ariba, to give the company's procurement and sourcing staff visibility into spend across the enterprise. "We're talking a mammoth task here, with about eight million purchase orders annualized," says Stewart, "and we've been lucky to have Falgun lead this project over the last couple years."
Stewart also stresses the importance of creating a roadmap before a company heads down the path to enabling its procurement processes. The five-year roadmap that Stewart, Patel and their team crafted at Tyco in 2003 addressed the fundamental "pain points" in the company's procurement and sourcing processes, and it encompassed the overall strategy for addressing those business challenges, the process changes necessary to support the strategy, an outline of the types of technology required to enable those processes, and the overall goals and milestones along the way. The roadmap covered the period through 2007.
Drafting this type of roadmap offers several benefits, including providing a framework for selecting enabling technologies. This is especially helpful in today's technology environment, in which any number of software companies vie for the attention of supply chain executives. "Between Falgun and I, we probably get a call a day from companies that have all kinds of tools," says Stewart. "But if you build the roadmap, you know the next technology that you need, and you can begin talking to the technology providers about what you want to do and then make the technology work for you." In addition, the roadmap serves as a tool for selling the overall technology strategy and specific solutions to senior management to gain funding; for validating that the e-procurement strategy supports the company's greater business objectives; and for keeping the initiative focused as it progresses through incremental stages.
Preparing for Next-generation e-Procurement
HP's Shoemaker and Tyco's Stewart believe that their companies have achieved significant gains by implementing e-procurement technologies, but neither is willing to rest on past accomplishments, and both are looking out for the next generation of e-procurement capabilities. They are joined by other early adopters of the technologies who are planning to drive their enabling initiatives more broadly across their organizations and more deeply into their purchasing and supply management processes. This strategy makes sense, says Chris Sawchuk, procurement practice leader at The Hackett Group, because considerable opportunity remains for purchasing organizations to move staff from transactional activities into more strategic work such as strategic sourcing and supplier management.
For instance, based on Hackett's benchmarking data, Sawchuk says that "world-class" procurement organizations have 46 percent of their staff focused on what Hackett calls "higher-value processes" versus only 37 percent of their peer group. "That means that 54 percent of purchasing staff even at world-class organizations are still focused on lower-value processes," Sawchuk notes. More extensive adoption of appropriate e-procurement technologies could help any organization move more staff into those higher-value activities, Sawchuk says, provided companies are willing the necessary investments in suitable solutions, ensure that end-users have access to the solutions, and verify that users are, in fact, adopting the solutions.
Looking to the future, Sawchuk believes that the next generation of e-procurement capabilities will focus on the demand management side of purchasing. This shift, he explains, is a result of the changing nature of the value that procurement is bringing to the table. "Today the chief financial officer and senior management are valuing Procurement unidimensionally, based on the amount of money that it can save," Sawchuk says. "But cost savings will slow over time because inherently we can't save ourselves down to zero spend. When Procurement is valued only on annualized cost reduction savings (typically price), its organizational value proposition is potentially at risk." As a result, procurement organizations must look for tools that will allow them to have greater control over the value and utility of the enterprise's spend, which is a function of better managing end-users to align their individual and aggregated purchasing decisions with the broader procurement strategy.
Jay Baitler, executive vice president of Staples Contract Division and a long-time e-procurement evangelizer, agrees that demand management is the next frontier of enabled purchasing. In part, he says, companies can do this by ensuring that the electronic tools they provide to their employees are user-friendly and offer an easy way to find and purchase the goods they need, when they need it. But companies must also look beyond simple compliance and begin to either leverage their own spend data or take advantage of the types of data that a supplier like Staples can provide to understand the total delivered cost of each purchase and how buying behaviors can be altered to lower the total cost. Using these data, for example, a company might limit next-day delivery options for non-critical items — say, pens and pencils — to lower a vendor's costs and, ultimately, share in those savings. "We have the ability to look at trends and modify those trends to achieve lowest total delivered cost," Baitler says.
No Time to Fail
Reflecting on the potential for e-procurement, Shelley Stewart says that purchasing and supply management organizations have a great opportunity to take advantage of new technologies as a way of bringing greater value to their enterprises. But he cautions that procurement executives must be careful to benchmark themselves against their peers at every point along the implementation path to ensure that they are deriving the greatest value from the technologies that they deploy. That helps both in selecting appropriate technologies and in selling the ROI to senior management, a crucial success factor for long-term e-procurement initiatives that rely on continued funding. "Because you certainly don't have time to fail," Stewart warns. "One misstep, and the next time you won't get the money to buy these tools. So you've got to be very careful."
Sidebar: Advice from the Veterans
The standard advice for implementing technology certainly applies to e-procurement solutions:
- Get senior level support to ensure proper funding and broad-based adoption throughout the enterprise;
- Fix the workflow before applying technology so that you don't enable a broken process;
- Be prepared for a significant change management effort to bring end-users onboard;
- Use cross-functional, cross-business unit teams to pick technologies; and,
- Measure results and publicize them throughout the enterprise.
In addition, e-procurement veterans have a few additional tips for supply chain executives looking to enable the procure-to-pay process at their enterprises:
Think long-term: Develop a roadmap that identifies procurement "pain points," the overarching strategy and goals, the necessary process changes and the technology required to support the strategy.
Bring in the experts: e-Procurement is still maturing, but early adopters have already seen results, and a growing number of executives have technical and management skills that can be critical to the success of an e-procurement initiative. Be prepared to tap into this talent pool.
Prepare for the future: The enabling technologies that power e-procurement are a moving target, so continuous education is a necessity to ensure that you are leveraging the most advanced capabilities available on the market. Assign staff members to track specific types of enabling technologies. (See Supply & Demand Chain Executive's Global Enabled Supply and Demand Chain Map on www.SDCExec.com for a comprehensive listing of enabling technologies in various segments of the supply chain.)