In the second part of our look at e-procurement, David Bicknell
finds out how companies are measuring return on investment
It is more than three years since a range of blue-chip companies
learnt that by radically changing the way they buy everyday goods
and services, they could make large cost savings which would go
straight to the company's bottom line. Inevitably, there was more
hype than reality in some of the claims. In many cases improvements
in supply chain processes were being double-counted. The wilder
estimates of 10%-20% had been replaced by sober predictions of 8%
returns from implementation of e-procurement best practice across a
range of organisations.
Even 8% was a stretch too far in some cases, requiring significant
headcount reduction, and so a lower target was adopted, perhaps as
low as 1%.
Yet, that 1% of the corporate spend of a global company like Cable
& Wireless could still mean savings of millions of pounds, year
on year. That has changed boardroom perceptions at companies such
as Rolls-Royce, from mere interest to regarding e-procurement as
having a positive effect on long-term stability.
The investments by major corporates to support e-procurement have
cost between £15m and £25m as they sought to streamline their
procurement operations, rationalise their suppliers and get key
suppliers electronically enabled.
The first generation of projects should be demonstrating the
measurable savings achieved. Savings are being made, but few
companies can say they have been accurately monitoring and
measuring the real benefits.
In the current economic climate companies are working harder to
justify their investment. Those that decided early on that they
were going to make e-procurement work by measuring their returns on
investment and setting up benchmarks are now being held up as
exemplars by others belatedly trying to measure their own
success.
BuyIT, an independent network of companies and public sector
organisations, which has facilitated best practice thinking on a
range of IT and e-business issues, recently used the experiences of
Cable & Wireless and Rolls-Royce and, with input from Diageo,
Shell, IBM, Prudential, Reuters, Royal Bank of Scotland and
Kellogg's, developed a set of guidelines on return on investment
and metrics. One BuyIT member, for example, is expecting to save
£114m over five years and to bring 500 suppliers online.
IBM, as a user with an overall global purchasing spend of $42bn
(£38bn), identified e-procurement as a means of reducing costs way
back in 1993. Since then, it has made savings of $9bn. According to
Peter Edwards, IBM's business operations centre manager, the move
has been a major success. "We found if we shaved just three points
a year off our spend, it generated hundreds of millions of dollars
in savings. It meant that we had to get procurement operating as a
global unit, and it has been very successful," he says.
That meant changing the mindset when it came to purchasing
strategy. Edwards explains, "Previously purchasing would be made at
an individual country level, with savings logged by individual
buyers, which would then be signed off. But now we have people
trying to leverage the spend, perhaps looking at what we did at a
regional level and taking it to a global level.
Other factors have helped, such as IBM taking time to benchmark
industry trends for savings in areas such as travel, temporary
staff, and IT contractors.
In its Measuring the Benefits from E-procurement - What to Measure
and How to Measure It guideline, BuyIT identified five
interdependent savings drivers:
- Transactional benefits
- Compliance benefits
- Management information benefits
- Price benefits
- Payment benefits.
While all of these rely on the skill of the corporate procurement
and purchasing department, at the heart lies a joint effort with
the IT department, with challenges facing both.
The IT department has to integrate e-procurement with enterprise
resource planning (ERP) systems and IT systems to support business
needs. But most organisations are still a long way from being able
to deliver
e-procurement on the back of an integrated ERP system. So solutions
from software providers, such as Ariba, Commerce One, Oracle and
SAP, are also being used to drive their e-procurement projects. The
IT department then has the job of finding short-term ways to
interface these with back-office systems.
The purchasing operation may have just as a tough a job as IT,
imposing new standards of discipline and performance monitoring,
changing attitudes, such as ending maverick buying, and aligning
cultures. It means, as one BuyIT member, Diageo, says, working
globally, not multinationally. SAP believes successful
organisations usually have a strong supplier relationship
strategy.
Most companies have realised that savings are less than they
originally thought, and that the definition of e-procurement has
got bigger. It is no longer just about e-transactions, but includes
sourcing, e-procurement, and payment.
A BuyIT member says, "E-procurement is just about doing it more
efficiently. But you have to adapt the process - just because you
e-procure does not make the process efficient. You are using one
tool to buy from, and you have one process with chosen suppliers
who are on board. You do not have to monitor and police a lot of
different tools and processes."
Some organisations, for instance, Shell, have opted for e-sourcing,
or reverse auctions, the strategic sourcing of products using the
Internet, rather than tackle e-procurement, where all of the staff
in the organisation are encouraged to comply with the deals
corporate buyers have done.
Eric Davies, Royal Bank of Scotland's head of purchasing, processes
and systems, is also putting his energies into e-sourcing, and is
being particularly successful at it. Davies defines e-sourcing as
"a process upstream of letting the contract. It's an extra tool for
our professional buyers but doesn't replace the professional buyer
and is an extra option for them in their sourcing activity leading
to the contract".
In contrast, he says, "E-procurement is about creating the
connectedness in the deals that the buyers have done and offering
it on the desktop to encourage compliance. The increased compliance
is your return on investment, as well as the user-friendliness that
encourages people to do that rather than some other ad hoc process,
and the fact that you can connect into suppliers' sales order
systems and so cut out cost within the supply chain."
Davies says he is looking for every potential mechanism to help to
deliver savings, and e-sourcing was an obvious choice. "The
e-sourcing solution we've developed involved a third party, and we
just need to punch out on the Internet using a hosted software
solution from Freemarkets."
Royal Bank of Scotland's e-sourcing activities have seen purchasing
meet its targets, gaining an early payback on its investment in the
Freemarkets service in less than a year, and overall cost
reductions of about 20%.
Diageo, which owns the Guinness drinks brand, made its business
case estimate for e-procurement savings with a suggested return of
3% to 6%, a figure mainly based on buying compliance within the
business. It will soon have more than 70 suppliers online, with
1,450 users of the system. Services procured include the
acquisition of temporary staff, from ordering through to payment.
Having seen e-procurement first-hand, Roy Jakes, head of Diageo's
global e-procurement programme, offers the following advice:
- Do not just e-enable faulty processes
- Do not underestimate the fact that this is cutting edge
technology and you need to support suppliers which lack skills
- Do not underestimate internal change management - this is a
significant change and needs top down support to enforce a new way
of working
- Do not set excessively ambitious long-term goals. Set two- to
three-month milestones.
For some companies whose procurement operations are already
well-honed, simply making the case for e-procurement can be a
headache. Alistair Hirst, European procurement director for cereals
group Kellogg's, is interested, but knows he still has to generate
a return on investment.
Kellogg's presence in the fast-moving consumer goods marketplace
has meant that it already has a leading-edge procurement team,
which has taken significant costs out of the production process. In
fact, it has been so successful, that Hirst has been struggling to
make an effective business case for e-procurement. Previously, the
cost of implementing new software has tipped the balance away from
the company's decision to go down the e-procurement route. But
recent falls in the cost of the software solutions means Kellogg's
may eventually adopt it.
Peter Duschinsky, a director of BuyIT, sums up the current view on
e-procurement and return on investment, "The business case for
e-procurement is based on being able to achieve year-on-year
reductions in purchase prices and savings from lower process costs.
While early claims are now seen as unrealistic, and it has turned
out to be harder to implement than initially expected, none of our
members has any doubt that e-procurement is still a 'no-brainer'
for larger organisations with significant low-value, high-volume
spend."
E-procurement - and getting a measurable return from it - has been
a winding road, but ultimately the journey will be worth it.
Keys to successful e-procurement
- Define key performance indicators early in the process to
enable successful benefits tracking
- Distil the business case into measurable key performance
indicators which should be monitored throughout the project
- Agree on the measurement process and baseline
- Don't forget "soft" factors such as time savings, improved
information and worflow, and make a conscious decision on whether
you want to measure them
- Get sponsors' buy-in and sign-off
- Get a third-party or in-house independent auditor to track and
monitor the success of the project.
Case study: Cable & Wireless makes savings of £25m a
year
Cable & Wireless also gained main board-level
approval to make a significant investment in what it believes is a
world class e-procurement solution, based on full integration with
a single, global SAP implementation.
"The global procurement team has successfully implemented revised
global processes and a supporting e-procurement system. Internally
it is changing the way we requisition and buy goods and services.
These processes ensure greater compliance and governance, leading
to significant cost reductions for the company. Externally it is
going to improve our supplier relationships," says Ben Jackson, the
company's global e-procurement director.
The telecoms giant expects e-procurement to deliver operating cost
savings of up to £25m a year, with Online Auctions already
estimated to have delivered savings of £2.5m. One PC auction made a
50% saving in 30 minutes, while a utilities auction covering gas
and electricity made a 22% saving. Cable & Wireless has adopted
130 suppliers, deployed in the UK, US and Japan, and has more than
2,000 users.
Significantly, Cable & Wireless has invested heavily in
e-procurement metrics, with the board insisting that the
e-procurement operation must have someone measuring the benefits
full-time. Gesa Juttner is the supply manager who uses key metrics
to monitor and track the performance of procurement against agreed
targets and forecasts, confirms the wisdom of the policy. "Like all
companies we had processes in place, but no-one was watching to see
that they were followed. Now buying performance is visible and
that's changing behaviour," Juttner says.
Case study: Roll-Royce drives process change with
e-buying
E-procurement has now become so important to
business strategy, that Rolls-Royce, faced with the effects of 11
September, subsequently decided to ring-fence its e-procurement
activities.
Peter Conway, director of business process improvement at
Rolls-Royce, had already persuaded his board to make a
"significant" investment in e-procurement, part of which went on
Exostar, a business-to-business exchange for the aerospace and
defence industry. The commitment to this investment and its
expected return has remained in place.
Conway admits that e-procurement alone will not give benefits. "It
is all about the process change that goes alongside it. If we try
to implement e-procurement without process change and without
rationalising back-office systems, we'll find it won't make the
returns that would make this a no-brainer."
The benefits for Rolls-Royce come in three areas:
- In the procurement process itself - but not necessarily by
cutting headcount out of the process
- Procurement activities: more than two-thirds of the cost of the
final product is based on the purchased part, and Conway is looking
for significant cost improvements of between 1% and 2%. Although
there has been lots of hype over e-auctions, Rolls-Royce says it
has also learned from its activities there. "We have run a range of
auctions achieving significant reductions in the price we're
paying," says Conway.
- Alignment of the Rolls-Royce supply chain, "A lot of money is
tied up in managing our supply chain, and we need to rationalise
our supply chain to become more effective," Conway says.
BuyIT's guideline offers more advice on
e-procurement
The BuyIT guideline, Measuring the Benefits
of E-procurement - What to Measure and How to Measure It, was
developed collaboratively by BuyIT members, led by Cable &
Wireless and IBM UK, with input from Elcom, Guinness UDV, J
Sainsbury, MRO Software, Rolls-Royce, Shell and Taylor Woodrow.
The guideline defines five areas of benefits: transactional;
compliance; management information; price; and payment, together
with definitions of what comprises e-procurement applicable
spending, and possible constraints to success. It also explains how
to measure each of those benefits, breaking them down into:
- Aim
- Baseline approach
- Hard and soft benefits
- How to get the measurements
- What measurements you will get
- How often to take the measurements
- What the risks are.
BuyIT will also shortly be releasing a framework guide for chief
executives on how to drive e-business strategy. Both will be
available free at
www.buyitnet.org/