With electronic procurement only a few years old and e-commerce evolving on a daily basis, purchasing professionals seeking a good roadmap to guide their e-procurement initiatives might feel like conquistadors looking for a map to the City of Gold. Fortunately, a handful of pioneering companies have taken on the challenge of drafting that map while they blaze the trails that lead to the El Dorado of e-procurement.
One such company is Hartford, Conn.-based United Technologies Corp. (UTC). In fact, few, if any, companies are as far along as UTC in implementing an end-to-end e-procurement solution. Working with IBM Global Services to automate general procurement, and with the Net marketplace FreeMarkets to run reverse auctions for commodity inputs, UTC is on track to cut $850 million off its $14.6 billion annual spend by the end of 2000. The company’s supply base, which included 58,000 suppliers a few years ago, is due to shrink to 10,000 in 2001.
Along the way, the company has documented the challenges it has faced and the processes it has adopted to change its purchasing operations. The result is a map to which other companies can refer as they set off on their own journey down the road to e-procurement.
The Data Challenge
UTC may be an ideal testing ground for the adoption of e-procurement. The 57th largest U.S. corporation according to Fortune’s 2000 rankings, UTC reported a net income of $1.5 billion on sales of $24.1 billion in 1999. The company’s nearly 150,000 employees are spread geographically across 1,800 offices in 183 countries and organizationally over six divisions, including Pratt & Whitney aircraft engines, Carrier heating and air conditioning systems, Otis elevators and escalators, Hamilton Sundstrand aerospace systems, Sikorsky helicopters and International Fuel Cells.
With such a dispersed and diversified spend, UTC's first priority when it began implementing its e-procurement effort, was to get control of the vast amount of data on what it was buying, according to Kent Brittan, who became UTC's vice president for supply management in 1997. "If you're really going to leverage the spend across divisions, you need to know what you’re spending on what," Brittan says. "Going after the data is the first priority. That's where e-procurement starts."
The data challenge involves two aspects: collection and analysis. An important element of this data collection effort was putting compatible systems in place in each of the company’s divisions that allowed information to be exchanged within the company. "You need systems that talk to each other," Brittan says. At the same time, the growth of the Internet provided a medium through which the company could collect the information from its various divisions and offices around the world.
Once the data was in hand, the task became analyzing it. IBM’s Gary R. Saunders, who heads the project to provide UTC with general procurement services, ticks off the types of information UTC sought by analyzing the data: "What are the commodities? What are the prices paid and value? How extensive is the commodity? Where is the opportunity? What are the expected costs and benefits?"
The answers to these questions allowed UTC to see where the company could leverage its buying power across the organization. But more importantly, the answers served as the foundation for the company’s plan to introduce e-procurement.
Frank Coscia knows a thing or two about planning an e-procurement system. Before becoming director of operations for procurement services at IBM Global Services, Coscia ran the project office to reengineer IBM’s own general procurement processes. (See "The New Money Makers")
Based on IBM’s experience and its work with UTC and other companies, Coscia says that a plan to implement a comprehensive e-procurement system must include strategies for such disparate elements as strategic sourcing, information technology, change management, business processes and policies and procedures.
"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.
Technically this component was time-consuming but relatively straightforward, according to Saunders. Because IBM had already implemented e-procurement systems for general procurement internally, it had developed much of the technology that it subsequently used at UTC. Nevertheless, Saunders notes that UTC’s diversified structure made the implementation a lengthier process than that experienced at IBM. The primary challenge involved ensuring that the IBM systems integrated seamlessly with UTC’s legacy systems.
In both cases – the FreeMarkets auctions and the IBM outsourcing project – UTC pursued a policy of introducing the new process at a single division to test the waters. The idea was to demonstrate concrete returns on initial investments in e-procurement, use the success to ensure continued management buy-in and then extend the program to other divisions. “The strategy was to go for some quick hits, show success, convince the leaders that this is the right thing to do and then move on," Brittan says.
Carrier was the first division to use FreeMarkets, followed by Otis. Carrier was also the first division to convert to the IBM procurement system, in July 1998, followed incrementally by other divisions, with all U.S. operations due to be connected to the IBM system by the end of this year. With FreeMarkets, Brittan explains that the incremental approach has worked because the auctions have produced such dramatic price reductions, even from long-time UTC suppliers. "Inside of our buying community, we had an event in January 1998 with PC boards," he says. "Our buying people all said that their jaw just dropped." More recently, Brittan had a top executive from a UTC division sit in on a buying event to watch the price dynamic during an auction. "It was a revelation [for the executive]. The price dropped, and the people that you had been dealing with all these years and who last week had told you that they had given you every last drop of blood, all of a sudden [give you a lower price].”
This incremental expansion process is continuing. UTC is set to begin converting its European divisions to the new general procurement system. The company conducted its first Asian auction in March and is now doing auctions in Europe as well. Further, Brittan is now using FreeMarkets for what he calls "totally nontraditional buying," that is, using the reverse auction process to select suppliers of such services as tax preparation and human resource consulting.
This gradual approach has also given Brittan an edge in managing the change to the new e-procurement systems and processes.
Change is always an uncertain prospect in a company with established business practices. In terms of business processes, UTC’s challenge was to introduce a uniform purchasing process into six divisions that had developed their own procurement culture over many years. "It's a time-consuming process of overlaying a corporate system onto the way that the [divisions] do business," Saunders says. "You can’t run an air conditioning business the same way you run an aircraft engine business. There are reasons for differences, and they all have to be accommodated, to the extent possible."
In addition to the inter-divisional issues, Brittan says that some degree of concern was to be expected from the company’s employees as the e-procurement system got rolling and the company began to introduce new practices. For example, e-procurement systems allow companies to involve non-purchasing staff in interactions with suppliers to a much greater extent than before. "It isn’t just a buyer and a seller anymore," Brittan says. "It's an engineer, a buyer, a finance person, a quality person, a manufacturing engineer, a [human resources] person and a whole bunch of different people working together with the supply base. You have to be able to manage that interface."
To meet these challenges, Brittan emphasizes the importance of change management to the whole process of introducing an e-procurement solution. "You have to have an intensive company-wide communications program," he says. "It's not enough to tell people once. You have to tell them over and over again what it is you are doing, why you are doing it and what the expected benefit is."
Education is also an important component of managing the change process. As an example, Saunders says that line managers must be trained in how to exercise their approval authorities under the new systems since they have a new capability operational control over costs.
As part of the change management process, UTC has been careful to chronicle the tremendous amount of learning that has taken place as it implements new aspects of e-procurement. Documenting key decisions, processes and results with regard to one division can ease the introduction of new systems into other areas of the company. UTC has actually institutionalized the learning process by creating a database available to its worldwide employees through the company’s intranet. For example, staff can learn why the company selected a particular supplier, what the criteria were and how the deal was structured.
Finally, management buy-in and support are again critical for ensuring that decisions get implemented. Line management was particularly instrumental in adopting FreeMarkets, according to Brittan, simply because the line managers themselves appreciate the organized structure of the auction process and the quick, measurable results that the auctions produce. Consequently, Brittan has been able to rely on these managers to intervene when necessary to ensure that the e-procurement process moves forward.
Purchasing's Next Frontier
UTC’s e-procurement initiatives have clearly had a tremendous impact throughout the company. The projected cost savings alone speak for themselves. But e-procurement has also had the effect of raising purchasing to the level of a core competency within the organization. Awareness of purchasing and supply management has increased significantly throughout the corporation, according to Brittan. "Purchasing was sort of a backwater, and it no longer is," he says. “The company is realizing that a high percentage of our cost is in the supply base."
UTC continues to expand its e-procurement program to embrace additional divisions. But one of Brittan's primary interests these days is designing methodologies for measuring the non-price savings generated by e-procurement systems, such as cycle-time reductions, quality improvements and improved processes. Brittan is working with teams of MBA students to develop these methodologies. By July, one team had designed a process for measuring quality savings, and UTC is running a pilot program in one of its divisions to test the methodology. Another team was working on material flow lead-time issues. Brittan clearly believes that measuring non-price savings is purchasing's next key challenge, and his enthusiasm for the topic is manifest: "This is exciting stuff. It’s like the wind and currents. You don’t see them, but you know they’re there, and they have an absolute impact. The company that can manage and measure this stuff will have real competitive advantage."
After more than three years leading UTC’s e-procurement effort, Brittan still speaks with excitement about being on the cutting edge of purchasing: “I love supply management, because we are smack in the middle of this whole e-business revolution. Every aspect of life is going to be affected by the Internet, but procurement is there now. It’s not tomorrow, it’s now."