Online sourcing fails to deliver

Online sourcing is delivering far lower savings to business than expected because of hidden costs inherent in the new purchasing...

Online sourcing is delivering far lower savings to business than expected because of hidden costs inherent in the new purchasing model, Forrester Research has warned.

In a report released last week, the analyst firm said that European companies have failed to achieve the levels of cost savings hoped for from online sourcing initiatives.

Forrester puts the failures down to fudged price comparisons and weak purchasing compliance.

David Metcalfe, senior analyst at Forrester, said companies should not be seduced by suppliers' claims about how much can be saved through e-sourcing initiatives such as auctions, tenders and requests for quotes.

"Suppliers of all stripes use claims of 10% average cost savings to drive demand for online sourcing technologies and wrap-around consulting," he said.

"But average price reductions defined in contracts do not add up.

"Indeed, Forrester believes online sourcing offers firms the prospect of year-on-year average cost savings of less than 5%," Metcalfe said.

To calculate the true cost savings from e-sourcing, firms must deduct licence fees and consulting charges - additional fees that they did not face before, he said.

Companies also need to ensure that they have the contract management functionality needed to enforce changes in purchasing behaviour, Metcalfe said.

In some cases, he explained, plant managers distributed around the world continue to buy from regional suppliers, short circuiting e-sourced corporate deals.

Suppliers have a responsibility to help in this area, Metcalfe added. Many suppliers lack contract management functionality entirely, he said.

For the future Forrester believes companies will shift their e-sourcing focus from seeking short-term price reductions to achieving sustainable value creation on multiple criteria, such as product quality and timely delivery, Metcalfe said.

"Purchasing directors will soon realise that price reductions from e-sourcing do not equate to cash rebates in the bank," he said.

"To ensure that geographically dispersed plant managers comply with deals negotiated online, firms will integrate their accounts payable enterprise resource planning modules with their sourcing application's contract management module," Metcalfe predicted.

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