The Cost of e-Sourcing's Cost Savings

Given smaller-than-claimed price reductions, firms must be more strategic with online sourcing, Forrester recommends

Tempe, AZ  October 4, 2002  e-Sourcing technologies are not producing the kinds of bottom-line savings that some solution providers are claiming, and companies should take a more strategic approach to applying e-sourcing tools, asserted a recent report from technology consultancy Forrester Research.

In the report "The Painful Reality of e-Sourcing Cost Savings," Forrester analysts David Metcalfe, Mathew Nordan and Jennifer Chew wrote that while e-sourcing providers frequently claim average costs savings of 10 percent, a more realistic estimate would be half that figure, or 5 percent.

One reason for the discrepancy is that the solution providers frequently measure reductions by comparing a final price against an inflated opening bid, a historical price that is no longer relevant or the price set for a smaller volume of a good. "Execs with online sourcing experience at firms like TotalFinaElf don't believe in price reductions from online sourcing above 5 percent," Forrester wrote.

In addition, as companies expand the application of e-sourcing beyond initial "low-hanging" fruit categories, where savings are most easily gained, into direct materials categories where savings are harder to come by due to existing cost controls, the potential price reductions are again likely to fall below 10 percent.

In extreme cases, the analysts warn, some companies have actually seen price increases from e-sourcing. One food manufacturer paid a higher per-unit price for honey "due to a flawed multiform sourcing event," Forrester wrote. And even if firms with weak sourcing capabilities do manage to capture significant, double-digit savings in their initial trials with e-sourcing, they are unlikely to repeat that experience the next year because they will have already found the low end of the market.

Moreover, firms must consider the costs of e-sourcing when they are adding up the savings from using the new solutions. License and consulting fees can add up to millions of dollars over time, and companies must also be aware of the costs involved in redesigning their sourcing processes to take advantage of the new technologies.

Similarly, companies must make sure they have the process and technologies in place to ensure compliance with the contracts negotiated online. Some e-sourcing suppliers lack contract management features, while others charge extra for it. In either case, all the e-sourcing in the world will go for naught if end users or regional buyers persist in their maverick buying even after an e-sourced contract is put in place.

Given the potential savings, Forrester said it expects that corporate executives eventually will pursue a less tactical, more strategic approach to using e-sourcing tools. "As executives discover the source of cost savings, they will shift their e-sourcing focus from short-term price reductions to sustainable value creation on multiple criteria like product quality and delivery timeliness," the analysts wrote.

To do this, the consultancy recommended that companies integrate the accounts payable modules in their enterprise resource planning systems with the contract management modules in their e-sourcing applications. This can help ensure compliance with the deals achieved through e-sourcing.

In addition, the analysts predicted that e-sourcing suppliers are going to have to provide greater requirements gathering capabilities in their applications so that companies can streamline this process for their complex products. Forrester said it believes that some of the collaborative design solution providers, with expertise in just this area, may wind up purchasing e-sourcing suppliers to round out their offering.