E-procurement is the latest e-business buzzword. What is it, where
has it come from and what can it do for you? Murdoch McTaggart
reports
It is debatable whether genuine and comprehensive Internet-based
electronic procurement systems yet exist. What certainly do exist,
however, are electronic purchasing systems where the processes of
requisitioning are carried out electronically. Procurement is very
much more than simply purchasing, however, and many of these
further requirements have yet to be met satisfactorily and at
reasonable cost.
Ian Taylor, Head of Procurement with the Halifax, believes that
most firms have been convinced of the benefits and are on the brink
of making choices. "One problem, however", he adds, "is the
surprising number of suppliers around." According to Taylor, using
best practice to select from competing suppliers is essential and
this requires the different departments affected, including the IT
department, to liase and co-operate fully.
The major benefit usually claimed when implementing
e-procurement is reduced costs. Any such savings go straight to the
bottom line and are therefore in a different category from the
benefits gained through increased turnover. Analysts vary in their
views as to what cost benefits or return on investment (ROI) might
be gained. PA Consulting, for example, claims that a project which
it designed and implemented for BP Oil yielded over 1,000% ROI in
six months. Deloitte Consulting claims that typical ROIs can be
greater than 300% in around two to three years.
Gartner Group, however, warns that e-procurement is at the
height of the hype cycle and that there are many hidden costs which
need to be properly considered. While conceding that electronic
purchasing can cut costs, particularly in the area of purchasing
non-production items, GartnerGroup believes that most companies
using software-based procurement solutions are unlikely to achieve
their projected ROI within 24 months.
Two striking characteristics of the growth of electronic
business and associated global trading have been the fudging of
clear demarcation lines between traditional processes extending
through even to overall company activities and, secondly, the
growth in the practice of partnering and forming alliances, often
on a short-term ad hoc basis. e-procurement is no different and a
number of models are developing, instances of which are challenging
earlier ways of doing business.
New purchasing models
Some companies are setting up as supermarkets, perhaps
orientated towards a particular group of customers. For example,
Wstore is an Internet-only reseller directed towards providing
purchasing facilities for European companies mainly in the range of
up to 1,000 workstations. One area where this differs from an
open-to-all e-commerce site is that the company actively partners
with resellers, using legal agreements, whereby resellers continue
to provide local advice and other services, leaving customers to
buy online with the margin shared between Wstore and the
reseller.
Wstore also provides financing and technical advice and passes
leads to its reseller partners. According to Tony Price, MD of the
UK branch, costs and so end-user prices can be kept down while the
company will shortly be able to set up tailored pages allowing any
authorised users within a company to place orders according to
their budgetary authority levels and limited to items meeting
agreed standard specifications so simplifying many purchasing
processes. "I fully expect a boom in online purchasing in the near
future", he says. Mondus, aimed principally at SMEs, uses a broking
model. Potential customers can post their requirements to solicit
offers. Suppliers who respond through the system are charged £1.00
for each offer made and a further percentage of between 0.5% and 5%
on a successful trade.
In other cases suppliers maintain their own catalogue offerings
with third party systems handling the process of joining these into
what appears to be one single catalogue. In some cases such systems
may be handled through links or specialised portals.
An interesting system, which is something of an amalgam of
different approaches is ChemConnect, a business-to-business
Internet exchange for buying and selling all types of chemicals and
plastics, particularly on a worldwide spot purchase basis.
Fundamentally there are two lists, product offers placed by sellers
and product requests placed by buyers. Sellers can also check the
product request lists and offer to supply while buyers, apart from
placing their own purchase requests, can browse the offers lists
and buy accordingly.
BBCN, a Houston, Texas, company developing e-procurement
solutions for the auto industry and others argues that the future
of e-procurement is in what it calls "trading hubs". These may be
vertical, focussing on specific industries, or horizontal,
focussing on specific functions or business processes. The major
difference with consumer sites such as Amazon, says Robert
Dowlearn, CEO of BBCN, is that B2B electronic hubs are two-way
mechanisms bringing commercial benefits both to buyers and to
sellers and require deep domain expertise and understanding to be
set up and to work well.
Buyer beware
Many claims have been made by suppliers - supported by most
analysts - that implementing electronic purchasing can cut costs
significantly and improve process efficiencies. But, Andersen
Consulting's Azad Ootam warns that implementing e-procurement is
far from being a simple exercise and requires considerable
preliminary analysis and negotiation to ensure that the business
case is made and that the place of e-procurement within the
business is properly understood.
The most successful e-procurement projects, he argues, are going
to be those where the eProcurement function becomes totally
embedded in the business process and where the system is
sufficiently flexible to accommodate the rapid changes in
technology which are inevitable. If negotiation of contracts is a
key plank of the business process then it's essential to build this
in from the start and not to become sidetracked by considering
claimed savings on purchasing, for example. Understanding what is
needed requires initial extensive analysis but this will be time
well spent.
E-procurement - is it all hype?
- PA Consulting says that a project that it designed and
implemented for BP Oil yielded a greater than 1,000% return on
investment (ROI) in six months.
- Deloitte & Touche Consulting says that typical ROIs can be
greater than 300% within two to three years.
- Gartner Group warns that electronic procurement is at the
height of the hype cycle. It says that most companies using
software-based electronic procurement solutions are unlikely to
achieve their projected ROI within 24 months.
Background to e-procurement
Electronic procurement has been around for something like 30
years. Until recently, with the growth of the Web, it's been in the
form of EDI and some specialised systems. Compuware, for example,
implemented their electronic trading On-Trac system around nine
years' ago to service their resellers and now claim to sell more
product electronically each day than do Dell.
Aware of the benefits of handling procurement electronically,
major retailers such as supermarkets tended to drive the deployment
of EDI systems, sometimes subsidising implementation to help
overcome supplier resistance. EDI still exists in its traditional
form but is increasingly being replaced with Internet-based methods
drawing on techniques such as virtual private networks (VPNs) or
extranets and using tools such as XML schemas. Where EDI has been
of considerable benefit has been that it's encouraged the putting
in place of efficient electronic processes on which other, more
general, procurement mechanisms can now be built.
Earlier systems were expensive and proprietary, although
corresponding to standard EDI protocols for the transfer of
information. Internet e-procurement, in contrast, has huge
scalability and, subject to implementation and security details,
opens up a huge global market for procurement including from
completely new suppliers.
What to look out for
- Cost savings using e-procurement can be considerable and go
straight to the bottom line. However, they're not guaranteed and
badly thought-out or badly implemented systems can prove both a
huge cash drain and a serious disruption to trading.
- Most so-called e-procurement systems are actually electronic
ordering or requisitioning systems. Negotiating with suppliers,
agreeing contracts, discount structures, levels of service and so
on are an important part of the whole procurement process and
aren't yet easily available except at significant cost.
- E-procurement won't succeed unless it's fully implemented into
the organisation's business processes. This means that
organisations need to carry out suitably detailed analyses of their
procurement processes, consider the business case for each element
and prepare proper timetables and budgets.
- Technology is changing rapidly and e-procurement systems must
be flexible both to allow new technological developments to be
accommodated as necessary and to take account of changes in
business processes both within the organisation and among its
suppliers.
- Businesses should use best practice mechanisms for considering
what they may need and to help them choose sensibly from the
rapidly increasing number of e-procurement suppliers.
Relevant URLs
www.bbcn.com
www.ec3.org
www.exchange.chemconnect.com
www.enetgroup.co.uk
www.iplanet.com
www.mondus.co.uk
www.tranmit.co.uk
www.wstore.com
The E-procurement Best Practice Network
BuyIT, the independent IS purchaser-supplier forum, has set up
the E-procurement Best Practice Network to enable senior managers
to share their experience in e-procurement and help them realise
the benefits of this global revolution.
It is inviting senior IT managers, finance and procurement
professionals from the UK's leading companies and public sector
organisations to a programme of informal events to identify best
practice in e-procurement and to consider the impact of
e-procurement on business.
The meetings will focus on e-procurement and the new enabling
technologies, including cost minimisation, supplier relationships
and standards and will look at issues arising from the
centralisation of purchasing.
If you are interested in participating, please visit our
website: buyitnet.org and book your place, or contact Peter
Duschinsky at IT World Consultants on 020 7828 7300 or by email:
peter@itworld.demon.co.uk.
Case study: University of Surrey, Roehampton
The University of Surrey, Roehampton, known formerly as the
Roehampton Institute, carries out a great deal of complex
purchasing of pharmaceuticals, reagents and similar specialised
products in addition to buying more mundane items such as
stationery. In 1998 it installed a new general ledger system from
Agresso. These met many of its needs but had the limitations that
there was no Web interface, that the user interface was somewhat
daunting and that the system accommodated only two levels of
purchasing authority.
According to Shelagh Legrave, director of finance, there was a
need to allow technicians who had considerable specialist knowledge
to initiate purchase orders, something which is now done very
successfully using E-net Software's Esparto product, a Web-based
Java application which presents a friendly interface, accessible
through any browser on any system and which then interfaces with
the Agresso General Ledger.
"Basically Agresso handles the main accounting processes,
auditing and control functions and necessary security while Esparto
gives us the flexibility, good user interface, and wide deployment
which we need", comments Legrave. In addition, Esparto handles the
customisation of the master catalogue, an amalgam of supplier data,
presenting it according to a wide range of purchasing authority
levels which have been implemented.
Case study, Mirror Group Newspapers
The main problem with the procurement system used by Mirror
Group Newspapers (MGN) was that it was highly paper-intensive, slow
and prone to error in consequence. Ian Randall, Group Systems
Accountant, explains that they were looking for the ability to get
all purchasing, invoices and related documentation into electronic
form and that their solution was to work with UK company Tranmit to
implement a system based on Lotus Notes. MGN already used Notes
extensively and had six programmers familiar with the product while
Tranmit brought in their experience to develop a customisable
system based on their existing Sprintlink product and linking in to
MGN Sun Accounts ledgers.
All requisitions are now raised electronically as required and
passed through the system for authorisation with appropriate
procedures in place to handle urgent purchases at the unsociable
hours typical of a busy newspaper. Invoices are also raised
electronically while incoming invoices are brought into the system
through document imaging processes. At present everything other
than specialist items of newsprint and ink are handled through the
system and Randall expects those to come in and a move to receiving
electronic invoices to come about in due course.
"The biggest benefit is in getting everything where you want
it", he says, "a welcome contrast to earlier when you never knew
where things were or what stage of the purchasing process they had
reached. So far it's delivered everything we wanted and more."