Paperless Procurement

To reach the point of "hands-free" procurement, companies must manage purchasing processes by exception. How? By implementing processes designed to take advantage of the Internet, managing those processes by exception, and continuously analyzing and optimizing those processes.

[From iSource Business, February 2001] Ask Pam Miller, accounts payable manager at building materials seller BMC West, how many filing cabinets she needs to store and catalog the 500,000 paper and electronic invoices that pass through the billion-dollar Boise, Idaho-based company every year, and she will happily report the answer: none.

Miller and BMC West are practicing one of the principles of "hands-free" procurement by archiving the company's transactional paperwork in virtual filing cabinets, a practice which has allowed BMC West to reduce staff time for processing invoices and to simplify the process for resolving transaction-related issues with suppliers. In doing so the company is on the leading edge of a trend toward managing purchasing processes by exception.

Too Many Touchpoints

A year ago Laurie Orlov, research director at the Cambridge, Mass.-based technology consultancy Forrester Research Inc., made a splash by predicting that "high-touch" e-procurement systems would not deliver the major savings promised by online purchasing at those companies that "stapled their procurement processes to people." In her January 2000 report, entitled "Hands-free Procurement," Orlov writes, "The problem with today's approach to e-procurement is that it doesn't eliminate manual inefficiencies." In other words even after automation the purchasing process involves too many people, creating a maze of "touchpoints" for transactions and impeding e-procurement efficiencies it is supposed to produce.

The solution, Orlov proposes, is threefold: Buying organizations must (1) implement new processes designed to take advantage of the Internet; (2) manage those processes by exception  that is, get people involved only when problems arise; and (3) continuously analyze and optimize those processes. Only in this way will companies be able to derive the full benefits that e-procurement offers, Orlov argues.

A year after Forrester released the "hands-free" report, at least one solution provider began helping companies follow Orlov's second recommendation by allowing them to manage exceptions more effectively. Optika Inc., headquartered in Colorado Springs, Colo., offers a platform for transaction resolution that allows buyers and suppliers to review purchasing documentation simultaneously online and settle disputes in an online, collaborative environment.

Publicly traded Optika has been providing business process consulting services to 1,800 clients for 12 years, with a focus on streamlining back-end accounting reconciliation processes. The company turned its attention to the Internet a few years ago as a new tool to achieve efficiencies in transaction processing, according to Steve Maegdlin, vice president of product marketing for Optika. The company targeted transaction resolution in part because of its own background but also as a result of a survey of solutions on the market. Says Maegdlin: "We took a close look at the marketplace and said, 'What seems to be missing in the whole equation of e-business?' The focus has been almost exclusively on the very front-end of the transaction." Optika found that no one was offering a solution for streamlining the resolution of issues between buyers and suppliers when an order went wrong.

Hands Off

Having identified its niche, Optika launched its Acorde family of solutions in April 2000. Acorde is the next generation of Optika's eMedia product. eMedia, which was adopted by companies such as The Home Depot, Food Lion, Southwest Airlines, Caterpillar, Clear Channel Communications, and ARVEST Bank Group, allowed companies to capture all the various types of information relating to transactions  purchase orders, invoices, receiving documents  in digital form for archiving, regardless of whether those documents were paper-based or electronic. A company's staff captured faxes and paper copies for indexing within the firm's virtual archive, while Optika's software captured electronic data from XML- or EDI-based transmissions or from an ERP system and brought the data into the archive for indexing. By fully implementing eMedia, a company could eliminate paper-based documents and allow its purchasing and accounts payable staff to locate and review all the documentation relating to a particular transaction without ever leaving their desks.

Acorde incorporates the features of eMedia and adds collaboration to the picture. With Acorde a company can provide its suppliers with controlled access to its archive of purchasing documentation through a "resolution hub." A buying organization establishes a virtual office with each supplier, storing all the transactional documentation on a server within the organization's own firewall or, when using Acorde through an ASP model, on an Optika server. When a purchase goes awry and a buyer needs to interact with a supplier to clear up the issue, both sides can simultaneously call up documents relating to the transaction online through a Web browser, review the documentation together, and resolve the problem either by phone, through an online "chat," or with the instant messaging feature. Acorde can also serve as one component of a supplier rating system since the software provides reports on how many issues arose with a particular supplier and how the issues were handled.

In implementing this type of system, companies benefit by streamlining their process for handling exceptions, which is in line with Forrester's recommendations. Navi Radjou, an e-business analyst at Forrester Research, agrees that Acorde supports the "hands-free" approach to procurement. "The hands-free theory says: automate procurement processes and manage them by exception. But how do you handle those exceptions when they occur? That's where Optika's solution can help by expediting the resolution of those exceptions."

Major ERP packages do provide transaction resolution services, Radjou notes. But their scope is generally limited to internal business processes, and when they do extend beyond corporate firewalls they presuppose that a company's business partners use the same ERP package. "Optika is trying to position their resolution hub for the any-to-any environment that characterizes B2B commerce," Radjou says. "So they are agnostic as to what enterprise systems you and your trading partners use."

From 33 Filing Cabinets to One

Pam Miller is not agnostic about Acorde's impact on how BMC West handles purchasing paperwork. "It's just totally changed our process," she says, adding that for one thing "no one has stacks of paper on their desk anymore."

BMC West, a former division of office products giant Boise Cascade, employs about 5,000 people at its 56 store locations in the American West. The company's 1999 sales exceeded one billion, and it works regularly with about 30,000 suppliers.

BMC West began working with Optika in 1997 using a local integrator, Integra, to implement Optika's system for archiving and indexing its transactional documentation. In March 2000, BMC West upgraded to the Acorde system, adding the capability to establish virtual offices with the company's suppliers. While the company will not set up the virtual offices with all of its suppliers, it's targeting the 20 percent of its suppliers that make up 80 percent of its purchasing.

BMC West's staff digitizes paperwork generated from purchasing transactions by scanning documents into the Acorde system. The staff indexes the documents using a custom-built Visual Basic form attached to the imaging system. EDI transactions go directly into the system. The Acorde software is tied into the company's back-end so that BMC West's accounts payable department can pay invoices entered into the system directly through Oracle Financials.

The scanning process has added steps in the payment process because invoices have to be sorted by type of paper prior to being scanned and then there is the scanning process itself. "But we more than make that up on the back-end," Miller says, because the company's staff spends less time processing transactions, filing paperwork and searching for documentation when an issue arises with a supplier. In addition, the learning curve for the upgrade to Acorde has been fairly gentle according to Miller who explains that the system's ease-of-use has made training "almost instantaneous."

Such was not always the case. Miller says that BMC West's initial implementation of the Optika system in 1997, which came when the company was moving its accounts payable staff from dumb terminals to personal computers, was difficult because employees had to learn how to use PCs and also cope with the new virtual archiving system. "Our people had never even used a mouse, so we had a tough learning curve the first time around," Miller recalls. Other stumbling blocks: BMC West had to install a more powerful server to handle the Oracle database that the company used for the archives, and the invoices that some suppliers provided were not "scanner friendly." BMC West had to work with those suppliers to have them convert to invoices that could be scanned easily into the system, a transition process that took as long as six months for some suppliers.

Still BMC West saw a ROI in 13 months for the initial system, and when Miller requested that the company upgrade to the Acorde system, she says that she did not even have to fill out the usual ROI justification paperwork. Since implementing the eMedia system, the company has reduced by attrition the number of staff handling incoming invoices from 16 to 12. Miller has also seen the number of filing cabinets in her department drop from 33 to one.

Both BMC West's suppliers and the company's remote store locations have responded positively to the Acorde system, Miller says. The remote locations can review documentation related to their own purchasing online without having to deal with hardcopies of paperwork. Similarly, suppliers for which BMC West established a virtual office can check whether their invoices have been entered into the system and whether payment has been made yet. "We don't play phone-tag anymore," Miller says.

Moving Beyond

Other buying companies using the Acorde family of products, besides BMC West, include The Home Depot, Siemens and Greenlee. The "entry cost" for the Acorde system is about $100,000, with the price tag rising as the number of users increases or as a company sets up virtual offices for increasing numbers of suppliers.

Maegdlin says that future upgrades to Acorde will likely expand the options for online collaboration available to users, moving beyond interactive chat and instant messaging to include voice and video capabilities so buyers and suppliers can communicate live over the Internet without picking up the phone.

Forrester's Navi Radjou believes Optika might face a threat from the so-called "B2B integration" solutions providers  companies such as Extricity and Webmethods  whose software solutions help integrate cross-enterprise business processes. These middleware suppliers could be tempted to provide "issue resolution" as a value-added service, Radjou says.

On the other hand, Radjou sees an opportunity for Optika to extend its software's capabilities to support collaborative environments within e-marketplaces. According to Radjou: "With the e-marketplace shakeout looming ahead (Forrester predicts that fewer than 200 marketplaces will survive by 2003), the survivors are going to be those e-markets that go beyond 'enabling' (mere matchmaking) and embrace a 'cradle-to-grave' approach in managing e-marketplace transactions."