The ROI Case for e-Sourcing

There's more to strategic sourcing ROI than hit-and-miss guesstimates. Show your company's management the hard numbers that will get their attention.

Whether you're a strategic sourcing expert or a novice, you face the same challenges every day: How to decrease the cycle time of the sourcing process; how to accelerate the sourcing analysis and strategy steps without shortchanging the results; how to identify and involve more qualified suppliers in the process without bogging down the effort; and how to expedite supplier negotiations without leaving money on the table.

But as steep as these challenges are, you will get through them eventually, and then the savings are assured and sustainable, right? Perhaps, but before you can even address those questions, you face the age-old conundrum of not being able to save money until you spend money. That is, you won't realize the savings promised by your sourcing efforts until people within your organization actually start buying through the contracts you've sourced. This is often an overlooked challenge in sourcing: after all of the energy expended to finalize contracts, who has time to communicate the new contracts internally, let alone monitor compliance and supplier performance?

Procurement professionals increasingly are turning to e-sourcing tools to help them save time by accelerating their strategic sourcing efforts. Whether you have developed your own strategic sourcing process or adopted that of a consultant, the steps are basically the same and are now supported by a number of e-sourcing tools.

e-Sourcing tools typically decrease traditional sourcing cycle times more than 66 percent in the first wave by leveraging the power of the Web and collaborative workflow technologies. Furthermore, these tools result in astounding incremental timesavings in subsequent e-sourcing cycles. Through the capture and warehousing of intellectual capital developed through the first effort, knowledge and intelligence is readily available to future e-sourcing teams. Accordingly, a second e-sourcing wave can take place in as little as 20 percent the amount of time required by the first.

These timesaving efforts can translate into several different investment options for the organization. Some companies may opt to translate this increased productivity into staff reductions. However, we are increasingly seeing organizations choose to reinvest this time in launching still more sourcing efforts, thus compounding the benefits. Similar to compounding interest, the net result of reinvesting this increased productivity has an appreciable direct impact on the bottom line.

Let us consider an example of two companies, each with a $5 billion total annual spend, and look at the savings each might expect -- one through e-sourcing and the other through traditional sourcing. To start with, nearly 75 percent of a company's total annual spend is typically considered addressable by sourcing. This estimate holds true for both traditional sourcing and e-sourcing, but this is where the similarities end. In our example, both companies spend $5 billion annually, 75 percent of which is addressable. Therefore, $5 billion x .75 sourceable = $3.75 billion sourceable in the case of either company.

Sourcing 75 percent of a company's spend isn't typically feasible since companies simply do not have time to source everything addressable. Experience shows, however, that by taking advantage of the efficiencies provided by e-sourcing, one procurement professional might get to 80 percent of her addressable spend in the same amount of time it takes the other procurement professional, using traditional sourcing methods, to address one-third of his. Continuing with our two example companies: $3.75 x .80 = $3 billion addressable through e-sourcing; $3.75 x .33 = $1.24 billion addressable if sourced traditionally.

Speaking generally, during the negotiation stage, e-sourcing results in greater identified savings than traditional sourcing. But just for the sake of argument, let's suppose the traditional sourcing process results in contracted savings of 45 percent, while the e-sourcing only results in 30 percent savings. Even if we assume the savings that are actually identified by the traditional sourcing process are 50 percent greater than those identified by the e-sourcing approach, the total dollars to the bottom line are greater for the company that e-sources, since the sourced spend is greater. For our two competing companies, the results are as follows: $3 billion x .3 = $900 million contracted savings through e-sourcing; $1.24 billion x .45 = $558 million contracted savings through traditional sourcing.

That, however, is not the end of the story. These savings assume 100 percent compliance with the negotiated contracts by buyers within the enterprise. But remember the challenge of effectively marketing the newly negotiated contracts to all those buyers? Herein lies one of the greatest weaknesses of traditional strategic sourcing: it is not sustainable. Traditional sourcing savings erode quickly over time because contract compliance within the organization is difficult to monitor and enforce using manual methods. Additionally, the knowledge base created during the sourcing process is not captured and codified in an efficient manner for reuse in the future, making it difficult and time consuming to replicate results. e-Sourcing helps sustain the contracted savings by deploying tools to monitor spending and compliance, to capture and disseminate the knowledge gained during the sourcing effort, and to help the buying community understand how to buy using the contracts negotiated. Compliance to sourced contracts typically deteriorates to somewhere near 30 percent. Again, though, we find e-sourcing tools often raise compliance to nearly 80 percent. Our two hypothetical example companies finish with broadly differing results: $900 million x .80 compliance = $720 million saved via e-sourcing; $558 million x .30 compliance = $167 million saved via traditional sourcing.

The complete e-sourcing process results in more than four times the savings of traditional sourcing in this example, reducing the company's total annual spend by nearly 14 percent as opposed to less than 4 percent from the traditional process. Because e-sourcing tools dramatically reduce cycle times, procurement professionals are able to actually cover more categories, creating a much higher sourced spend. The company that e-sources is in a much better position to get the most out of its procurement function and maximize results to the bottom line.