Getting returns from e-procurement

Paul Donovan discovers that if companies choose the right areas and are prepared to be patient, e-procurement can offer...

Paul Donovan discovers that if companies choose the right areas and are prepared to be patient, e-procurement can offer substantial savings

Eight out of 10 companies want payback on e-procurement profits within 12 months, a new survey has found.

The research showed that e-procurement was viewed in a positive light by board members, with 76% seeing it as the way forward for competitive businesses.

Dynamic Markets conducted the research among directors and senior managers involved in purchasing for 10 of the largest organisations in the UK with turnovers of more than £200m.

The most successful implementations of e-procurement were found to be where the purchasing professionals drove the process forward, supported by enthusiastic backing at board level.

The majority of senior managers seem to be embracing the idea of e-procurement though actual implementation is being done by purchasing professionals on an incremental basis.

"Some companies are still at the feasibility stage or are watching and learning from their overseas parent companies before rolling out solutions in the UK," said the report.

The most common types of directors involved in the e-procurement strategy are the IT director (89%), the purchasing director (83%) and the finance director (78%).

The researchers found there were some key drivers, though the overall priority for introducing e-procurement seemed to be the desire to install a more efficient process and make savings.

Some 42% considered their purchasing departments to be understaffed, resulting in a lack of time and resources being devoted to adding value to the business. And 72% saw cost leveraging opportunities being lost while maverick purchasing by staff was another concern.

Reporting lines

While company boards put a high priority on e-procurement, the management reporting lines did not always reflect those criteria.

Among purchasing professionals, only 22% report directly to the board, although 78% suggest that their strategic contribution is taken seriously by the board.

Seventy per cent of companies mentioned that a special implementation team had been established. Typically the team would be made up of a mixed group including senior purchasing professionals, IT and finance managers. Less commonly it would include suppliers.

Seven of the ten companies questioned had just one solutions provider, two firms used two providers and one had three providers. All the companies remained within budget with the average investment at about the £1.2m-mark.

The top five categories thought most suitable for e-procurement solutions are stationery (94%), office furniture (88%), standard computer hardware (84%), travel (78%) and car hire (72%).

Martha Bennett, chief executive officer at e-business Connect, is not surprised that these five areas have been found the most popular for e-procurement strategies. "If you take account of car hire and travel, procurement is almost exclusively about maintenance, repair and operation," says Bennett.

She believes that areas like manufacturing are less developed and that e-procurement will need to push more down the supply chain in that environment.

Among those senior managers questioned there seemed to be a broad range of definitions regarding e-procurement. Some 48% regarded e-procurement as purchasing using the Internet while a further 28% saw it as electronic trading but not with specific reference to the Internet. Another 20% consider it as the automation of processes throughout the supply chain and 2% as the real-time tracking of orders. A final 2% defined it as all electronic systems that allow purchasing to carry out its role.

Paul Smithard, joint managing director of PMMS, believes that there are four basic stages that companies adopt regarding e-procurement.

At the most basic level e-procurement is viewed as a glorified e-mail, a second group sees it as an opportunity. A third perceives the marketplace changing because of the Web.

"The fourth, the most sophisticated, see e-procurement not in terms of a transitional phase but as the whole purchasing strategy," says Smithard.

Stumbling block

From a practical viewpoint Smithard says IT departments can often become a stumbling block regarding the implementation of e-procurement strategies. "The board of a company may not fully understand the technical side of e-procurement but support the strategy due to what they are hearing in the media. But it is when you come up against the IT departments, charged with implementation, that the real problems emerge," says Smithard.

This view finds resonance in the TomorrowFirst report. "In only one company was the initiative proposed by IT, and similarly, only one saw the CEO initiate and dictate that the company would adopt e-procurement," says the report.

Bennett has a more sympathetic view as to why IT departments are not always keen to be in the forefront of e-procurement strategies. "IT personnel are hesitant because to be optimally effective e-procurement strategies have to be integrated with existing systems," says Bennett. "You only have to look at the amount of manual re-keying of transactions that has to be done even on e-procurement networks at present to see some of the problems."

No doubt the key to the future success of e-procurement strategies will be the bottom-line return in terms of efficiency savings. The scope for savings in some areas is clearly massive. Bennett recalls a study at Frankfurt airport which found that in 80% of procured items purchased, the cost of the item was less that the cost of purchase. Among respondents to the survey, the time frame for achieving a return on investment varied between nine months and five years with most responses falling between one and two years. Clearly the large companies are prepared to allow a reasonable time for what in some areas will be substantive savings.

Lessons learned

Best practice from the early adopters of e-procurement include:

  • Using a commercially available package (rather than in-house)

  • Involve purchasing professionals

  • Don't be afraid to change processes

  • Avoid links with legacy IT systems

  • Employ external trainers for all staff

  • Keep it simple

  • Take an incremental approach

  • Learn lessons from an overseas parent company.

  • Read more on IT supplier relationship management