Integrating e-Procurement and Strategic Sourcing

By John Corini -- Supply Chain Management Review, 3/1/2000

Let's face it, people are fascinated by e-ANYTHING. Nightly announcements of skyrocketing Internet valuations and fantastic e-business projections by industry analysts only add to the fascination. So it's not surprising that once managers become interested in pursuing an e-procurement application, they are enticed by stories of companies that have realized huge bottom-line benefits from such a solution—all for what appears to be a relatively minor effort. No wonder, then, that many managers squirm with the vague yet disconcerting feeling that "I'd better do something immediately or get left behind" (a phenomenon best described as "e-panic").

Equally compelling is the companion piece to e-procurement, strategic sourcing. If only a little less sexy, strategic sourcing seems like a no-brainer—"I gather my spend data, put together an RFP (request for proposal) asking my supply base for a volume discount, ink the agreement, and watch the money roll in." Considering the eye-popping savings that companies often realize through their negotiated pricing, it's little wonder that strategic sourcing has been such a hot topic over the past decade.

The significant potential in both of these undertakings has been well documented. But to achieve that potential, an organization must clear a number of hurdles. This article outlines the main difficulties companies encounter in implementing both e-procurement and strategic sourcing and then describes how to deal with those difficulties. The synergistic benefits of integrating e-procurement and strategic sourcing are explained and the steps for successful integration laid out. In addition, a short case study illustrates one company's successful implementation.

At a surface level, the business case for e-procurement is fairly clear-cut: For the cost of software and pilot implementation (a range of $2 million to $4 million), a company can achieve an average return on investment (ROI) of 30 percent over the first two to three years, as reported in a recent e-procurement study by Deloitte Consulting. The benefits cited typically fall into two main areas:

• Less "maverick" buying—getting employees to buy from the established, corporate agreements that, presumably, include discounted pricing.
• Higher productivity—eliminating buyer intervention in the processing of low-dollar, high-volume paper purchase orders (POs).

Before an organization can realize these benefits, however, it has to address certain issues. Among the most important are selling the need, meeting supplier resistance, and rationalizing a fragmented supply base and changing inefficient processes.

Selling the Need: The Business Case

Putting the actual business case numbers together may be straightforward, but selling the change imperative to both internal stakeholders and suppliers is another matter. To start with, the business case's reliance on soft costs (i.e., transactional efficiencies such as reduced accounts-payable reconciliation) can be a major sticking point for both management and staff. Managers who are focused on the bottom line often consider soft-cost savings to be nebulous at best. Their skepticism lies in the "Frankenstein" nature of transactional efficiencies—that is, the total savings are the sum of the pieces of a lot of different functions. Therefore, tying these efficiencies to actual cost reduction can be problematic.

In the e-procurement realm, selling these soft-cost savings is complicated further by the often-stated intention to shift the transaction-focused resources freed up by e-procurement to more strategic pursuits, such as establishing agreements with suppliers. An executive logically might ask, "Where then are my bottom-line savings?"

The Solution: Properly implemented, an e-procurement system significantly improves the efficiency of the requisition-to-pay process. Therefore, the leaders of the e-procurement initiative first must engage key executives in a dialogue about how such "savings" are to be treated relative to the cost-benefit calculation in the business case. These kinds of decisions obviously are very delicate and must be treated differently from organization to organization.

Whether or not process efficiency savings are included in the business case, people ultimately will be affected and workload will be reduced. Managing this change is addressed later in the article.

Meeting Supplier Resistance

Supplier participation is no less critical to the successful implementation of any e-procurement solution. Without this participation, the software is useless. Few experiences are more disheartening than to finally overcome your own company's fear of electronic commerce only to run into resistance on the supplier side.

In an ideal world, all suppliers would be forward thinking. They would fully understand the benefit of e-business to themselves (as well as to you), and they would support your efforts in this area. Unfortunately, we do not live in an ideal world. Despite the acknowledged benefits of e-business, many suppliers have yet to fully embrace it. This situation is improving steadily every day. Yet, many of your suppliers likely have little more than an Internet site that describes who they are and what they make. We might call this the world of the "e-Business Brochure."

A recent Business Week-Harris poll supports this point. In a survey of more than 300 executives at large public corporations, fewer than half (45 percent) indicated that their companies accepted customer orders online. More startlingly, of those whose companies did not accept customer orders, nearly two-thirds (64 percent) indicated that they had no plans in the near future to change that strategy. The reasons for this mindset vary. But according to the poll, the primary reasons center on the perception that "electronic commerce conflicts with another sales channel or that the Internet simply doesn't fit their products and services."

Additionally, while many suppliers will produce a paper catalog, they often do not have systems capable of providing catalog-quality data. These suppliers, in particular, will interpret requests to provide content support (for example, up-to-date product availability and pricing) for an e-procurement implementation as an added cost and burden.

Beyond these infrastructure issues, however, lies something more fundamental: a fear of increased commoditization. Despite the lack of systems sophistication among a number of suppliers, very few do not understand the potential impact of e-business. They are well aware that buyers can comparison shop and switch suppliers with a click of a mouse.

The message for anyone embarking on an e-procurement effort is clear—gaining supply-base buy-in and participation is not a trivial matter. The experience of one major oil company underscores this point. According to one member of the e-procurement project team, "We tremendously underestimated the effort involved in getting catalogs online. Our plan had been to get 40 to 50 implemented within the first six months. By the end of that period, all we had gotten online were two."

The Solution: Major e-procurement solution providers have recognized the need to facilitate supplier content management and have taken steps to address this need. These steps include establishing Internet portal sites that allow suppliers to "publish" content to all of their customers in a single place and provide services to facilitate the entry of smaller suppliers to the e-enabled world.

In addition to leveraging these types of solutions, companies should develop a supplier-enablement plan and strategy early in the implementation process. Ideally, this should be done before selecting the actual solution. A supplier-enablement strategy lets the company prioritize the suppliers and commodities to be implemented at a detailed level. Doing this prioritization early on allows sufficient time to gain key supplier support of and commitment to the effort. It also lets you capture additional cost savings from the reduced cost to the supplier. Detailed prioritization also allows companies to rationalize their supply base into "e-enabled" categories.

Rationalizing a Fragmented Supply Base and Changing Inefficient Processes

What makes the supplier-participation side of the equation even more difficult is that companies are attempting to implement an e-procurement solution on top of a highly fragmented supply base. Without first rationalizing their supply base, they face a potential implementation nightmare. Although the extent of the problem will vary with the underlying model of the solution selected, one fact remains—the more suppliers involved in the implementation, the more costly, burdensome, and time-consuming the effort.

"Automating a mess yields an automated mess" is a maxim that applies in the case of a fragmented supply base. It applies equally to the poor procurement processes upon which companies are attempting to overlay an e-procurement solution. A case in point would be a company with arcane, multilevel approvals for low-dollar-expense items. The company may be tempted to simply "pave the cowpath" using the sophisticated workflow functionality of the e-procurement application, without questioning whether any added value is provided. The net change in these cases is the substitution of an inbox full of paper requisitions with an e-mailbox full of electronic requisitions. True, the process may be sped up some but not nearly as much as if the approval process were truly Web-enabled. More importantly, this blanket approach has not affected, in the least, the most expensive part of the process—the approver's time.

The Solution: The bottom line is that companies miss out on e-procurement's true potential when they (1) ignore additional process efficiencies that can be gained, (2) force suppliers to continue to deal with the business units of the company as unique entities, and (3) require additional systems configuration/maintenance to manage the process variations. To avoid these situations and capitalize on the e-procurement promise, companies should organize groups of key stakeholders prior to the implementation of each commodity in order to develop a common, e-enabled process. Ideally, this effort could leverage whatever infrastructure has been put in place to support supplier enablement or strategic-sourcing efforts.

Like e-procurement, strategic sourcing is conceptually easy. Most methodologies have the same basic components: spend-data collection, internal supply chain assessment, market evaluation, supply strategy development, and negotiation with and selection of suppliers. The key component missing here (and the one that makes the whole effort worthwhile) is implementation. Anyone who has worked on a project will recognize this phenomenon—the project workplan contains hundreds of tasks and activities, with the last activity being implementation. It is this last, lowly activity, however, that delivers the benefits.

Companies face three critical issues when implementing a new sourcing strategy: end-user compliance, supplier hedging, and indifference to poor processes.

End-User Compliance

When a company switches its long-distance phone service, compliance with the agreement is automatic once the employee picks up the phone. With most commodities, however, such easy compliance is the exception, not the rule. When end-users recognize a switch in suppliers, they generally tend to resist the change, despite the logic of reduced costs. This resistance develops regardless of the perceived criticalness of the commodity in question. (Anyone who has ever sourced office supplies will agree.) The potential surface reasons for resistance are numerous ... friendships with the incumbent supplier, bad experiences with the proposed supplier, perceived ease-of-use in the current process. The root cause of the resistance, however, is typically the same. People don't like change—especially when it is poorly managed or, as is often the case, not managed at all.

The Solution: Companies can take three steps to help ensure end-user compliance to the strategic-sourcing initiative: (1) clearly make the case for why a change is needed (the change imperative), (2) design processes that facilitate the use of the agreements (the user-friendliness factor), and (3) aggressively track compliance/benefit capture on an ongoing basis (the accountability activity).

When executives try the standard "mandate by memo" approach, they typically get about as far as they do with any other memo. There's little real impact on user compliance.

Supplier Hedging

Supplier hedging is another impediment to effective implementation of strategic sourcing. For one thing, suppliers tend to view spend projections with skepticism. They recognize the maverick purchasing issue. (After all, they're usually the ones encouraging noncompliance with their competitors' agreements.) In the absence of a tiered-pricing structure, then, suppliers will tend to hedge on pricing discounts—particularly if there's uncertainty that the company can deliver on the projected spend levels. The supplier may know, for example, that a corporate agreement with Company XYZ simply represents a "hunting license"—that is, the opportunity to sell to various divisions or locations. This kind of arrangement often ends up costing a supplier more in selling and capture expenses.

The Solution: Without demonstrating a commitment to deliver the full spend promised in the RFP and negotiation, a company will not optimize the strategic-sourcing potential. As a requisite to making that commitment, companies need to develop a detailed purchase history early in the sourcing effort. This valuable exercise entails collecting and processing detailed purchase data, which are usually obtained from the suppliers themselves.

The other key component here is to commit to reducing maverick purchasing. Budget commitments and plans for implementing e-procurement in support of the negotiated agreements would demonstrate such a commitment.

Indifference to Poor Processes

For strategic-sourcing initiatives to succeed, poor or inefficient processes need to be changed. But often, companies show an indifference to these processes—leaving efficiency gains and hard savings on the table. For example, a company may commit its business to a certain supplier but have no process in place that guarantees payments will be made in a timely manner. In fact, few companies have payment processes that allow them to capitalize on early payment discounts that lead to potential savings (even though they may still take those discounts). The reason early payment incentives are offered in the first place is that the supplier recognizes the time value of money. Therefore, using innovative payment practices, like procurement cards, and eliminating invoice approvals can add to hard-cost savings, while increasing transactional efficiency.

Strategic sourcing and e-procurement can deliver tremendous efficiencies to the suppliers as well—provided that the right processes are in place. Suppliers that already have developed order-management systems capable of automatically processing electronic orders recognize paper and telephone orders for what they are—an added support cost and a way of introducing errors into the transaction. On the other side, customers undergoing the expense and effort of implementing e-procurement obviously share that awareness. Both suppliers and customers need to work toward developing the processes that will maximize the benefits for everyone.

The Solution: The most successful sourcing efforts over the long term go well beyond just signing the contract. To maximize their return on the sourcing investment, companies should make integrated process redesign a standard sourcing approach. A strong process focus will enable a company to reduce internal process costs, take advantage of cost savings available from suppliers, and, most importantly, ensure that employees are aware of the sourcing agreements and can easily execute them.

All of us have heard of the three essential planks of enterprise transformation—people, process, and technology. While effective strategic sourcing addresses the process element and e-procurement provides the enabler for the new process, the difficult work of institutionalizing the desired change centers on actually getting the people to change. The people factor is all too often ignored. In fact, when push comes to shove in either initiative and resources become tight, organizational change is often the first consideration tossed aside. The key challenges are to recognize and manage the change and then to institutionalize that change.

Recognizing and Managing the Change

The old axiom rings true here: The people issues are the hard part. Changing the way people work is vastly more difficult than designing the change—whether that change is the result of a reengineered process, a new system, or a new supplier. A parallel from the enterprise resource planning (ERP) world bears this out. According to a Benchmarking Partners survey of 62 Fortune 500 companies, respondents identified people issues as their primary obstacle in implementing ERP. These issues were rated higher than both technology and process issues combined! The fact that ERP implementations are widely viewed as enormous "technology" initiatives provides an important lesson (and warning) for companies pursuing e-business solutions.

With e-procurement in particular, the impact of reduced workloads in the procurement and accounts-payable functions bears special attention. Productivity improvements in these areas can be a significant component of the business case. However, the human reality of these savings is reflected in the words of a procurement manager who was recently evaluating an e-procurement opportunity: "I like the supplier savings here, but I don't plan to be one of the transactional savings."

One way of dealing with the implications of this issue is to continually reinforce the idea that buyers will switch from a transactional to a strategic focus. However, simply stating this intent does not make it a reality. The underlying question still remains: How does a buyer acquire the skills needed in this new strategic world? Individuals used to processing paperwork and expediting orders have probably not had much chance to develop such strategic capabilities as negotiation, analysis, and supplier management.

The Solution: Prior to implementation, companies need to identify the potential effects on their people. Then, they need to go beyond just speaking the words. They need to establish and execute a concrete plan for making the transition happen.

Institutionalizing the Change

To be truly successful, both e-procurement and strategic sourcing require the kind of ongoing care and feeding that can only be provided by dedicated individuals with clearly defined roles and responsibilities.

Many procurement organizations display a "one-shot deal" mentality when it comes to strategic sourcing. This is evidenced by the following standard response of many purchasing managers on the subject of strategic sourcing: "We've already done that."

World-class organizations take the opposite view. They see sourcing not as a temporary initiative but as a way of life. These organizations both expand the application of sourcing to additional spend areas and revisit previously addressed areas to continually mine for further value. The successful companies have established the infrastructure to enable effective sourcing. That infrastructure is built not just on technology but also on a permanent, experienced organization working within a common sourcing framework.

The "one-shot deal" mindset also applies to e-procurement, where viewing "go-live" as the finish line can blind a company to the ongoing support that the application will require. This support includes continuing supplier-enabling efforts, content management, administrative data maintenance (end-user, supplier profiles, and business rules), rollout of software upgrades, and, last but not least, marketing e-procurement to the organization.

The Solution: The bottom line is that institutionalizing the changes—and thereby realizing the long-term benefits—associated with e-procurement and strategic sourcing requires an investment. Early in the effort, companies need to identify the permanent roles (both full-time and part-time) needed to provide focused support for the initiatives. They then need to develop the people fulfilling these roles as the implementation proceeds.

Despite the challenges involved in implementing e-procurement and strategic sourcing, the gains are well worth the effort. Furthermore, those gains can be multiplied when the two initiatives are integrated. (The accompanying sidebar on Page 73 shows how one company, Baker Hughes, did this.) e-Procurement, for example, frees up human resources to focus on more strategic-sourcing activities. Strategic sourcing, for its part, can reduce the number and complexity of e-procurement catalogs. Exhibit 1 lists a number of examples of the e-procurement/strategic-sourcing synergy.

The promise of e-procurement is both significant and real, as early success stories have clearly demonstrated. When it comes to actually implementing an e-procurement solution, however, companies need to plan for and recognize the challenges they will encounter. These include issues such as supplier resistance and ongoing support costs—issues that can limit the success of any implementation. The same holds true for strategic sourcing. Unless effectively addressed, challenges like end-user compliance and supplier hedging can greatly diminish the benefits that will be realized. And, of course, there are the change-management challenges—which can be as difficult to deal with as any other.

When e-procurement and strategic sourcing are viewed in isolation, the implementation challenges can appear daunting. When viewed together, the complementary objectives become evident, and the implementation effort takes on a clearer focus. Thus, while each initiative can be undertaken independently, only by integrating e-procurement with strategic sourcing can organizations realize the full potential of either.

A Best-Practice Case Example Baker Hughes, an oil-field services company headquartered in Houston, has integrated strategic sourcing and e-procurement with good initial success. In designing its strategic-sourcing initiative, Baker Hughes recognized that its traditional approaches had failed to deliver the promised benefits. Romy Gibbons, the company's strategic-sourcing team leader, explains: "Our historical approaches ranged from individual divisions developing supplier agreements to several divisions collaborating on the development of supplier agreements. In most cases, use of these agreements was voluntary from the end-user's perspective, and most used the ordering and payment process of their choice. There was little consistency in our approach to working with the supply base, no real commitments to our suppliers in terms of compliance with agreements, and little use of common processes. The resulting agreements may have been well thought out and negotiated, but the required level of 'buy-in' from the organization was just not present." To address these issues, Baker Hughes first focused on properly structuring the strategic-sourcing initiative. The company set up full-time sourcing teams for each commodity and assigned leadership and accountability for the overall effort within the Executive Leadership Team. Divisional participation was made mandatory, with each division being represented on a Commodity Advisory Board. With this structure in place, each commodity team then received responsibility for simultaneously executing along two separate but integrated work threads—sourcing and infrastructure (see the accompanying graphic). While the sourcing activities focused ultimately on delivering a supplier agreement, the infrastructure thread sought to put in place the necessary process, technology, and organization elements to ensure realization of the negotiated benefits. Office supplies is one area in which this approach has been applied successfully. Baker Hughes consolidated hundreds of vendors into a single, national supplier. Yet while consolidation is common to many sourcing efforts, the uniqueness of this particular example lies in its heavy emphasis on: Establishing a common, user-friendly, and efficient process that encourages end-user compliance with the established agreement. Aggressively tracking agreement compliance and benefit capture. Putting in place a commodity coordinator to manage the commodity and the supplier relationship. Today, all end-users place orders via e-procurement and use procurement cards to pay for all purchases. The success of this integrated approach is evidenced by early feedback from the account manager for one new supplier: "Midway through the implementation, my Internet Group came to me to ask the secret of how Baker Hughes got such high compliance with use of e-procurement. They hadn't seen anything near that high with any other customer. I told them that Baker Hughes just designed it that way and made sure their people knew the process." Exhibit 1: The e-Procurement/Strategic-Sourcing Synergy How Sourcing Aids e-Procurement Reduces number and complexity of catalogs. Reduces maintenance cost and complexity of catalog and system. Focuses development work with preferred suppliers. Focuses catalog content and features on priorities. Prioritizes roll-out based on benefits. Develops "strategic" capabilities in personnel freed up by e-procurement. Addresses the necessary business process issues that can make e-procurement difficult to accomplish. How e-Procurement Aids Sourcing Encourages use of supplier agreements by eliminating "maverick" buying. Allows for increased volume estimates in negotiations by capturing more data on purchases. Frees up procurement resources to focus on strategic efforts. Takes advantage of potential cost incentives available from supplier for use of e-business. Aids in measuring performance.