[From iSource Business, January 2002] The research is clear. According to a study conducted by The Center for Advanced Purchasing Studies (CAPS), The Wacht Group and A.T. Kearney, 73 percent of all potential savings in purchasing can come from the e-sourcing function alone. AMR Research notes that strategic sourcing is at the top of corporate agendas, and they estimate the market for e-sourcing will grow from $275 million in 2000 to $3.5 billion by 2005. Therefore, in order for your corporation to remain competitive, the question isn't whether or not you should strategically source, but how: What do you need to know about e-sourcing and what should you look for in a solution? Finally, how can you sell e-sourcing internally, and how can you utilize strategic sourcing software to achieve new process efficiencies and increased return on your investment?
In the past, hiring expensive consultants was one of the few options for tracking strategic sourcing, until recently when technology-based point solutions hit the market. However, extensive research with chief purchasing officers, worldwide sourcing directors and other high-level executives has shown that traditional enterprise platforms are essential to drive hard-dollar, repeatable savings. Large global companies have sophisticated information technology infrastructures, significant professional sourcing personnel, and a need to integrate existing systems, like enterprise resource planning (ERP), with both, as well as extract and integrate legacy data from across the organization. Point solutions are just too limited in their scope to be able to drive the necessary results.
Fortunately, technology known as strategic e-sourcing has recently emerged, and it has the capacity to automate enterprise-class sourcing processes. By arming users with an end-to-end platform stocked with the necessary tools to strategically source online, this software enables companies to conduct sourcing efforts in a highly automated and comprehensive way. At its core, e-sourcing software leverages the Internet for better collaboration, communication, information sharing and automation, allowing for the realization of the following benefits:
- Operational efficiency - consistent processes result in reduced cycle-times and better utilized man-hours
- Best practices - a complete application accessible from the desktop makes it easy to use best practices at every step from analytics to contract development
- Knowledge management - empowering the purchasing function helps to improve sourcing metrics, encourage collaboration with stakeholders, and enhance knowledge transfer through commodity strategy development and data analysis
- Visibility - by delivering trusted tools and cooperation, there is painless company-wide collaboration, executive visibility into the process, and greater alignment with corporate goals and spend
When researching different e-sourcing solutions, there are some simple questions to ask of e-sourcing enablers to make sure your company's needs will be met. Find out if multiple users will be able to collaborate in the creation of sourcing processes, such as requests for proposals, and if the solution provides storage for easy access to information for auditing purposes. Also, you'll need to know if suppliers can be ranked on attributes other than price, and whether or not it is a platform that can share data with your company's legacy ERP and e-procurement systems.
By addressing the following questions companies should be able to come up with a short list of solutions from which to choose. Once the right software has been located, the next step will be to sell it internally. Gaining acceptance from the CFO and CEO is absolutely critical, but what will it take to convince them? e-Sourcing must be tied into a mission-critical area of the business, specifically a project that is a top priority for the chief financial officer (CFO) or CEO. In the pharmaceutical industry, for instance, the focus may be on current drug development efforts, because this is an area that is seeing dramatic growth in spend. By tackling areas that are critical to a company' core business and require efficient, fault-proof sourcing or have high budgets, the project's visibility is quickly raised, the interest level of senior executives is heightened, and the potential savings and process efficiencies are shown first-hand.
In addition, it is a good idea to concentrate on alleviating one of the corporate fears of your company, such as risk of supply. In the pharmaceutical industry, companies outsource 40 to 60 percent of their research and development budgets. The cost of inadequate management is too high for your CFO or CEO to ignore. e-Sourcing can alleviate this by promoting collaborative relationships, assuring that a company has the best suppliers with the best terms all of the time.
Finally, show savings through quantitative proof and quick return on investment. Analysis based on research conducted by CAPS shows there is a significant discrepancy between the top purchasing organizations and the less effective organizations. In fact, the top purchasing organizations save their companies five times more than the bottom organizations. e-Sourcing can help organizations become top performers.
A Bigger Piece of Pie
Reallocating short-term savings before the CFO sees the impact of the efforts is simply not good enough. To truly show the impact of effective e-sourcing, there needs to be hard-dollar savings that come off bottom-line costs. For example, when buying new PCs, a company may be able to negotiate lower PC costs, which is good. However, if those savings aren't tracked and the process changes that have been made aren't shown, there is no way of understanding or proving the return on investment that is being driven.
e-Sourcing makes sure the savings go directly to the CFO instead of being used to buy more PC's. By doing this, the company isn't just saving costs, but creating cost savings for the CFO.
e-Sourcing enables companies to understand where they are spending inefficiently so they can make more informed, automated decisions. This understanding of analysis and visibility is critical, because we all know you can't save what you can't control. With e-sourcing, greater visibility can be gained into the budget process and a target for cash savings can be provided. Ultimately, the spend under management increases, which allows more money to be brought back to the CFO.
In addition, by making it easier to evaluate multiple suppliers and understand their specific strengths and weaknesses, e-sourcing software enables companies to expand their supply base beyond the small group of suppliers on which they have relied historically, so they can begin to competitively evaluate and bid-out projects. More competition in events raises the quality of suppliers and drives down product costs, ensuring that the suppliers that best meet a company's needs across multiple criteria (e.g. costs, features, delivery, shipping, availability, contract terms, etc.) are selected. Remember that e-sourcing is not about price alone, but also about raising the quality of the supplier. The ultimate goal is to improve collaboration with suppliers, make informed selections and effectively manage the relationships.
Finally, new process efficiencies allow companies to simply do more and better sourcing per year. Organizations can establish a systematic approach to sourcing that guarantees projects and events are both efficient and productive. Project management can also be easily incorporated into the sourcing process and enable cross-functional collaboration for creation of long term sourcing plans and tracking.
It is important to begin understanding and utilizing strategic e-sourcing software for your company's everyday purchasing activities. Software can speed processes and create continuous cost savings. In fact, research shows that every $1 saved through strategic sourcing has an equivalent impact to gaining $5 to $25 in sales. However, a company must first carefully evaluate the available e-sourcing products, determine which solution is the best, and then formulate a strategy to implement e-sourcing within the organization.
In order to remain competitive, looking closely at the value of strategic e-sourcing is vital. ________________________________________________________________________
Marc Osofsky is the vice president of product management and business development at Frictionless Commerce.