GUIDELINES FOR EVALUATING PROCUREMENT SOFTWARE

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1 Solution Spotlight GUIDELINES FOR EVALUATING PROCUREMENT SOFTWARE SearchFinancial Applications

2 selection C hoosing the right can be challenging, especially as purchasing has evolved to encompass the basics of buying along with strategic sourcing. This essential E-Guide reviews key requirements to keep in mind when evaluating, including the pros and cons of implementing an on-premise or Software as a Service (SaaS) application. PAGE 2 OF 13

3 selection STRATEGIC SOURCING CHANGES THE RULES FOR PROCUREMENT SOFTWARE SELECTION Catherine LaCroix, Contributor While purchasing has evolved from the basics of simply buying materials or supplies, the strategy remains somewhat the same: Companies need materials and services to function, and those must be purchased on the open market. When you introduce the notion of strategic sourcing, however, the story gets more complex as do the requirements for purchasing new. The term has evolved from purchasing to to strategic sourcing and supply chain management, said Ted Weyn, Managing Partner with Alpharetta, Ga.-based consulting firm HCMWorks. If organizations are really embracing strategic sourcing, they ve gotten away from the lower levels of purchasing, but the transactions still have to be managed. is a concept that means just what it sounds like: managing purchasing transactions in a strategic manner that allows for ongoing analysis and adjustment -- based on pricing, supplier performance and current PAGE 3 OF 13

4 selection needs. [Organizations say:] Let the technology manage the transactions; provide us with the visibility so we really can be strategic, Weyn said. The on the market that enable strategic sourcing are still often labeled as, sold within ERP, supply chain management or standalone products. KEY REQUIREMENTS FOR PROCUREMENT SOFTWARE STRATEGY Any system will track transactions, providing a history of purchases. But this often is not enough to enable strategic sourcing, Weyn explained. Within the system, companies should be able to see not only what was purchased, but all the specs surrounding that purchase. If a company spent $1 million on desktop computers, for example, would that cause the company to lose out on home productivity? You can see how whether it be computers, consulting services, office supplies, there are opportunities to make strategic decisions that could provide better product, better service or in the case of direct, better margins by buying smarter, Weyn said. But without that level of granularity or detail, you won t know what you re spending on. PAGE 4 OF 13

5 selection Companies should also look at the type of spend involved, according to Jason Busch, managing director at Chicago-based Azul Partners. Purchases may be an indirect material spend (toner cartridges or office supplies that support doing business) or direct spend for manufacturers (metal, plastics, materials associated with production). There is also a third category that includes services such as consulting, legal or accounting providers. That s one way of looking at the market and defining the scope, Busch said. The other way is to look at the transaction itself and the supplier relationship, which shows how much you spend with a given vendor over time. Another important function for enabling strategic sourcing is contract management, key for negotiating and managing terms with suppliers, including pricing and performance requirements. Contract management for should support advanced negotiation functions, including methods to collect and compare vendor bids, as well as functions for managing contracts, improving spend visibility and data analysis. Steel and aluminum, for example, is important to the auto industry, Weyn said. If you save a dollar for each item [using contract management functions], it s gone from purchase to strategically sourced. Contract management is especially important for managing multiple tiers PAGE 5 OF 13

6 selection of suppliers and subcontractors, said Busch of Azul Partners. In the oil and gas industry, contract management is very big deal, said Busch. If you contract with Halliburton to drill your well, they have to manage all the sub-tier suppliers, so those details go into the contract. You want to ensure those sub-tier suppliers are adhering to your code of conduct in terms of materials used and labor laws, for instance. CHOOSING THE RIGHT PROCUREMENT SOFTWARE FOR STRATEGIC SOURCING To start, an organization should form a cross-functional committee to help determine what areas this new would touch. This group should include representatives from the business or operations groups that will use the system, as well as the CIO and IT department responsible for implementing the system. This group must consider overall goals and strategy, gather requirements -- and consider one other often-overlooked issue, Weyn said. Change management is required as in all new adoptions, said Weyn. Without change management as a business requirement, it s not likely to succeed. That s because at the end of the day, success with a system PAGE 6 OF 13

7 selection is all about adoption -- a fact many companies don t consider enough upfront. Some companies implement and see only 10% to 20% adoption. We call it through prayer -- plug and pray, said Weyn. They spend millions of dollars on a system that they can t get people to use. It s important to look at the pain points of the end user. Another key consideration is understanding the difference between configurable and customizable. Configurable means that it s within the existing capability of the system out of the box, so that changing settings will deliver the required functionality. Customization is a different story, though. If it s outside of that configuration capability, that s customization and that s very expensive. That s why requirements gathering is important so you can see the system doing what you want it to do, said Weyn. PAGE 7 OF 13

8 selection PROCUREMENT SOFTWARE PURCHASERS MUST WEIGH PROS, CONS OF SAAS VS. ON-PREMISES SYSTEMS Catherine LaCroix, Contributor Organizations purchasing have many strategy choices to make, not the least of which is whether to go with a SaaS system vs. onpremises. While SaaS can have lower upfront costs and faster implementation times, on-premises may offer more flexibility for customization and easier integration with other applications, according to experts. Now many of the new and e-purchasing deals are SaaS (also known as on demand or cloud-based ), according to Duncan Jones, vice president and principal analyst of Sourcing and Vendor Management at Cambridge, Mass.-based Forrester Research Ltd. [With this model] chief officers can initiate a project without waiting for IT s approval or assistance, he said. They can start small, generate ROI and pay for expansion of the program. But there are drawbacks of SaaS-based, Jones cautioned, such as PAGE 8 OF 13

9 selection security, integration (especially between on-premises and SaaS ) and vendor lock-in. The third of these is the major gotcha, said Jones. SaaS is mainstream, but it s still a relatively immature model, and we're only just beginning to see the first waves of renewals of SaaS contracts signed three years ago. Another expert agreed that there are pros and cons to both methods. The upside of going the SaaS route is a constant stream of updates and innovation, said Ray Wang, founder, Insider Associates LLC and Principal Analyst and CEO with Constellation Research. Another issue to consider with SaaS is that it s configurable by changing settings available in the, but can t be customized, Wang added. If customization is required, on-premises might be a better choice, albeit with its own drawbacks. This lock-in [with on-premises ] is different as you don't own the IP but you do own the data. On-premise is great if you want to customize the product to the hilt. But it s awful when you have to keep catching up on upgrades and patches and taking the system down to do this, Wang said. Wang and Jones agreed that on-premises options may have the edge for companies with strict security and compliance requirements or those that need to integrate with other. While integration PAGE 9 OF 13

10 selection is certainly possible between SaaS and on-premises, it may be slightly more challenging for some companies than just integrating two on-premises. But another potential problem with the on-premise model, Jones said, is that the vendor gets paid when the is purchased. So for some vendors, it doesn t matter if it gets implemented or not. The major ERP vendors have sold millions of unimplemented e-purchasing shelfware, said Jones. In contrast, SaaS vendors tend to be much more motivated to ensure a client s success, because they won t get the renewal if the client is unhappy. HOW TO CHOOSE As with most application choices, whether to choose depends on the specific business requirements of an organization. It's not about the deployment model but more about whether you are meeting the business need first, said Wang. Then you look at the technology solution. Then you look at cloud or on-premises. Wang suggests starting with a business model and well-researched PAGE 10 OF 13

11 selection business case. I'd go with cloud where I could if it s commoditized, he explained. I d go with custom development if I had a proprietary advantage. I d go with onpremise if there's no other solution out there. Forrester s Jones also recommends clients who are considering SaaS vs. on-premises to consider an exit strategy should the chosen vendor try to hike prices by 30% when their initial contract ends. With products such as e-sourcing, you could quite easily migrate to another solution, but if you have 20,000 people using an internal e- service that took you two years to fully implement, then you re probably going to have to accept the price hike, Jones said. With that in mind, companies should have defined renewal options in the contract. IS SAAS THE FUTURE OF PROCUREMENT SOFTWARE? Given the complexity of processes, a new, third type of model may emerge, according to Dan Roehr, vice president of business development at Alpharetta, Ga.-based HCM Works. There's no way that [on-premises providers] can compete in terms of research and development (R&D), maintenance, release maps, customer-specific PAGE 11 OF 13

12 selection customization, one-by-one-off focus, Roehr said. In order to be profitable, their price points have to be at a place where, in reality, cannot afford any longer. According to Roehr, it s now difficult for organizations to support the costly on-premise infrastructure and justify the millions of licensing dollars the onpremise fees may require. Instead, he sees the future of and supplier relationship management technology as delivering a basic and stripped-down framework that leverages an ecosystem of specialty vendors who can build out specialty processes such as item and service ordering, or add value and customization through app like plug-ins. It's happened successfully in the consumer world with Apple and it s happened in the enterprise CRM world with the likes of SalesForce.com. Roehr said. That model has proven to be an enormous success for the niche, specialty providers and, most importantly, enterprise customers. PAGE 12 OF 13

13 selection FREE RESOURCES FOR TECHNOLOGY PROFESSIONALS TechTarget publishes targeted technology media that address your need for information and resources for researching products, developing strategy and making cost-effective purchase decisions. Our network of technology-specific Web sites gives you access to industry experts, independent content and analysis and the Web s largest library of vendor-provided white papers, webcasts, podcasts, videos, virtual trade shows, research reports and more drawing on the rich R&D resources of technology providers to address market trends, challenges and solutions. Our live events and virtual seminars give you access to vendor neutral, expert commentary and advice on the issues and challenges you face daily. Our social community IT Knowledge Exchange allows you to share real world information in real time with peers and experts. WHAT MAKES TECHTARGET UNIQUE? TechTarget is squarely focused on the enterprise IT space. Our team of editors and network of industry experts provide the richest, most relevant content to IT professionals and management. We leverage the immediacy of the Web, the networking and face-to-face opportunities of events and virtual events, and the ability to interact with peers all to create compelling and actionable information for enterprise IT professionals across all industries and markets. PAGE 13 OF 13

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