During a slow economy, procurement and sourcing professionals are asked to cut budgets, do less-with-more and do it strategically. Yet, despite the many new tools available, progress in strategic spend management has been painfully slow.
There are few sources of reliable information available to help guide a chief procurement officer's (CPO) efforts in the mission to manage and curb spend. Software suppliers give biased viewpoints, and consultants' advice almost always leads to a big, new study. The message: We're not really sure because no one has ever done this before. As a result, CPOs must constantly reinvent the wheel, which dramatically increases the time it takes to get the job done.
What's the Problem?
Today's best benchmarking programs provide invaluable data to the purchasing professional. However, there are a number of issues that prevent them from being a useful tool for spend management transformation, such as:
· Long turnaround time: On average, survey-based benchmarking efforts have a turnaround time of five to 10 months. Yearly surveys might provide great input to the budgeting process, but they are not effective tools for the day-to-day management of a project team.
· Limited consistency: With surveys, the accuracy of the data is limited by the knowledge of the respondents. Seemingly simple differences in the understanding of a question can bias the data and change the conclusions.
· Limited data: Traditional benchmarking focuses on a small set of metrics that are merely snapshots of a procurement organization, like training levels, for example. To make them more operationally useful, a CPO needs benchmark data that shows dynamic measures of procurement or sourcing activity over time.
· Incomplete answers: The most natural questions a CPO asks upon seeing that his or her company has room for improvement is, How do I get there? What CPOs really would like to know is how they should change their policies, programs or technologies to achieve results.
Whether they are online or paper-based, surveys can be costly and time consuming. What's needed is a way to get systematically generated, real-time benchmark data in a way that can be used to manage day-to-day operations.
Automated Benchmarking
Peer group interaction and inter-industry data sharing have always been staples of the procurement profession. Now this idea is being applied in new ways to the deployment and usage of spend management technologies. And automating the benchmarking process provides management tools that are fast and objective enough to help companies finally deliver on a really new approach to spend management.
When applied to enterprise spend management, automated benchmarking is deceptively simple. Taking advantage of the new technologies allows companies to receive benchmarks more often, with more consistent data and with better operational detail. Additionally, this benchmarking program can be adjusted on the fly to keep up with changing technologies.
First, instead of the usual, time-intensive surveys, e-procurement and e-sourcing tools provide databases that can be queried quickly and easily to provide quarterly benchmarking insights that are delivered to a CPO within two weeks of a quarter's end.
The timely turnaround is possible because the data is gathered by a piece of software instead of a survey. It can be systematically aggregated and analyzed within just a few days. This enables CPOs to use benchmark data from the quarter before to make decisions in the current quarter.
Secondly, because the process is automated, much more data can be gathered than was previously possible. This kind of benchmarking now provides quantitative insights at a detailed operational level. For example:
· What's the average size of an e-sourcing event in my industry?
· What's the best practice for the average number of approvers per requisition?
· How much spend should I expect through my e-procurement system after I have been live for six months?
For the first time, CPOs can have benchmarking data that's detailed enough to use in managing the monthly activities of their project teams.
The third key benefit of automated benchmarking is the ability to adjust the program on the fly. e-Procurement and e-sourcing evolve on a daily basis and therefore require a feedback mechanism that is similarly fast moving. Benchmarking now allows data elements to be added quarterly based on changing technologies and changing deployment practices.
With regard to the actual deployment of spend management software, leading-edge companies are constantly trying different deployment methods or they are implementing new software modules. As they create new best practices, automated benchmarking allows their feedback to add more metrics every quarter. This way, new ideas can be discovered and distributed much more quickly.
A Peer Group You Can Turn To
As noted above, it is not enough to get timely, detailed and consistent data. In order to revitalize their spend management transformations, CPOs need knowledge of the business practices and policies that leading-edge companies are using to achieve their benchmark results. In other words, they need the How do I get there? information.
By providing a solid baseline of data for the identification and discussion of best practices, benchmarking enables more focused and more productive discussions of policies and practices. In addition, however, technology is also expanding the ways these discussions happen. Some of the methods being used today include:
· quarterly Web meetings to present and discuss current benchmark results;
· online discussion threads to raise specific questions and get answers from experienced peers;
· best practices workshops for networking and discussion of recent successes;
· and periodic surveys (on- and offline) to assess the usage and effectiveness of specific strategies.
In other words, the process of automated benchmarking is not just about data. It is about creating a fact-based community of procurement professionals who all have the common goal of reinventing their approach to spend management. Technology enables this, but it is about much more than technology.
e-Procurement An Example
Ariba and the Center for Advanced Purchasing Management (CAPS) have partnered to examine the benchmarking practices of 106 companies from a cross-section of industries including financial services, pharmaceuticals, healthcare, traditional manufacturing and high-tech manufacturers that are in the process of creating a new, multi-supplier program that will bring automated benchmarking to the world of e-procurement. By working with these companies, Ariba and CAPS disproved a number of traditional beliefs about e-procurement and e-sourcing and led to significant advances in the deployment of tools and practices.
The program included 12 different operational variables gathered for every month that a company had been live. The companies involved in the program discussed the results in quarterly Web meetings. In addition, the program was a major topic on the agenda of a recent CAPS best practices workshop, and plans have been put on the drawing board to create an online discussion facility to help users find answers for their ad hoc questions.
The CAPS 12 operational variables, known as the eC3 Benchmarks, consist of:
- Deployment age (months)
- Total spend volume
- Total spend on e-catalogs
- Total user accounts
- Active user accounts
- Lifetime user accounts
- Average number of approvers per purchase order (PO)
- Total supplier accounts
- Active supplier accounts
- Transaction volume (POs)
- Transaction volume (line items)
- Average PO approval time
Previously, most CPOs believed that e-procurement tools were limited to a handful of maintenance, repair and operation (MRO) commodities representing a small amount of their overall spend. All of these commodities were catalog-based and, therefore, buyer success was limited by the supplier's ability to build and maintain high-quality catalogs. The result was that e-procurement was seen as a tactical project, unrelated to more strategic programs like e-sourcing.
In fact, the CAPS benchmark data paints quite a different picture. Analysis of the data for a recent quarter demonstrates the following facts about the largest e-procurement users:
· The top 15 percent of all customers each spend over $1 billion a year through the system;
· the top three commodities are services, IT goods and capital goods;
· top-quartile companies used almost 800 different suppliers each month;
· and only 2 percent of e-procurement spend went through electronic catalogs.
Only by systematically benchmarking can participants move beyond the traditional beliefs of the market to the realities of what leading-edge companies are actually achieving. However, it isn't enough to just know the numbers.
Qualitative results Part of a Spend Management Transformation
When the results of the benchmarking project were being compiled and studied, it was found that there were significant differences in the strategies used by top-quartile companies to manage their spending. In particular, there were three key areas in which their different business practices and strategies stood out.
1. Single point of spend visibility The broadest deployments were pushing all purchasing activity through the system in order to provide the CPO's office with a single point of visibility to the company's spend. This allowed them to more easily identify contract leakage and opportunities for supplier consolidation.
2. Focus on changing user behavior No one wants a long, drawn out program to change user behavior each time a new supplier contract is introduced. Top quartile companies have been taking each new user group and enabling them to make all their purchases through the system even their maverick buys. Then, with everyone using the same ordering tool, it is a much simpler matter to "turn on" a newly contracted supplier while "turning off" older suppliers that are not preferred.
3. Integration with other initiatives Instead of being an isolated project, many leading companies are viewing e-procurement as part of a larger effort to fundamentally change the way they manage their spend. e-Procurement, e-sourcing and procurement planning efforts are being managed together. Common goals and timelines for all spend management projects can lead to improved efficiencies and faster time-to-value.
As a result of the rapid identification of these best practices companies and the discovery and dissemination of their insights, a number of participants have been able to dramatically change the direction of their deployments.
A More Strategic Community
Automated benchmarking does not invalidate the more traditional approach to benchmarking. It adds several more capabilities to expand the benchmarking toolset. Traditional survey-based benchmarks are still valuable, but now they can be focused on more strategic questions instead of gathering base data.
What is happening is a fundamental redefinition of the management data and infrastructure that is available to forward-thinking CPOs. Around the new spend management software, a community of CPOs that is linked by technology and focused on wide-ranging procurement transformation is beginning to emerge. Best-practices collection, analysis and distribution are becoming an integrated part of the software.
Programs like the CAPS and Ariba effort have been slowly emerging over the past year. However, they are clearly poised for dramatic growth in 2002. Automated benchmarking has proved its value in dramatically reducing the time-to-value of e-procurement systems. In the future it seems likely to become the new must have feature for any software in the CPO's spend management plans.
By Randall M. Joss, director of customer metrics, Ariba Inc.; and D. Steven Wade, director of benchmark research, Center for Advanced Purchasing Studies
The Center for Advanced Purchasing Studies (CAPS) at Arizona State University and enterprise spend management software supplier Ariba Inc. are working to finalize a new, multi-supplier program to bring automated benchmarking to the world of e-procurement.
