5 Myths of eprocurement

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1 5 Myths of eprocurement It is said that things which are well known are rarely known well. This is noticeably true in eprocurement and ecommerce where there is plenty of received wisdom to be found. The problem with received wisdom, though, is precisely that it is received uncritically and is not sufficiently questioned even in the face of contrary evidence. To make a success of eprocurement means going into it with your critical faculties in full working order. The two most important and powerful questions you can ask a vendor or a consultant when faced with any claim are says who? and so what? In that spirit, we present our guide to five pearls of received wisdom which require much closer scrutiny. We also outline Elcom's approach.

2 1 eprocurement delivers substantial savings Nothing is so well known as the 'fact' that by implementing eprocurement you will generate substantial savings; unfortunately it is not as simple as that. When trying to collate evidence to make a savings case you run into a morass of numbers which seem impressive but seem to resist validation. Digging further you will likely see something else happening: the process of implementing eprocurement, when done properly, forces you to examine your existing processes and practices and this provides the data which enables you to control your expenditure and put in place better contracts, controls and processes. Here's the truth - the link between eprocurement and savings is not directly causal but is a correlation. It is the Business Change which delivers the substantial savings, what the etools do is lock those benefits into place and make them sustainable and repeatable. It is the broader benefits case which is the more important. When asked about the benefits which they derived from a move to eprocurement, a group of Elcom's customers identified the following: Better management information and automated record keeping. More efficient P2P processes Improved contract compliance Searching electronic rather than paper catalogues Quick and easy to use Fewer returns and fewer invoice queries Reduction of maverick spend Increased control of expenditure Resource savings from collaborative contracting Shared approach to supplier management. These form the basis of a Benefits Case about which we say more in a separate White Paper. 2 eprocurement is all about Buyers For the most part, Procurement and eprocurement are traditionally discussed from the perspective only of the buyer with almost no mention of the supplier except as a passive participant and frequently victim of a process. A moment's reflection will show that this is misleading. Just as procurement is about creating and maintaining relationships with a supply-base, so eprocurement is a set of tools which support that same end. If a buyer wishes to gain financial benefit from the purchasing process then the supplier must have a full part to play in delivering this. For example, should you wish your supplier to lower her prices then you should ensure that you assist her either in (a) cutting her costs or (b) gaining some other valuable benefit from the business/process change.

3 Examples of benefits identified by our customers' suppliers include Accuracy of orders fewer queries and errors Efficiency orders sent by agreed route Content reduced requirement to print hard copy catalogues Technical easy to provide content including punch-out connection where required Financial fewer disputes from invoice/order mismatches and consequent late payments Where accounts payable processes are examined and einvoicing is implemented, the benefits can also include better payment times (although einvoicing is also a more complex subject than often suggested). Our einvoicing solutions are, of course, designed to meet the business needs of suppliers as well as buyers. Working jointly to introduce on-line communications channels pays dividends for both Buyer and Supplier. By contrast, imposing an esolution which merely increases the suppliers costs is unlikely to lead to a sustained reduction in prices. 3 eauctions are the answer The reverse auction, in which potential suppliers compete to provide the lowest price (usually) against a fixed specification, is often promoted as a tool to deliver large scale savings. It is true that in some circumstances the results of a reverse auction can be spectacular, but some circumstances are not all circumstances or even most circumstances and there are deeper concerns which are worth exploring. One of the buzz phrases of recent times has been strategic sourcing which most people are agreed is a good thing, although the meaning of the term varies. If you aim to conduct sourcing to develop and create strategic sources of supply of goods and services which ensure continuous production then the main concern is not only purchasing well specified commodities at the keenest price: building and maintaining relationships with the players in the supply chain are also of crucial importance. By pressing suppliers on price above all other considerations, raw eauctions neglect the element of supplier management and thus overlook the damage which may be done to the buyer-supplier relationship. If your relationship with a supplier of a strategically important commodity is determined solely by their ability to offer cut-throat prices in the good times then they will have you over a barrel when times get harder. Worse, they may no longer wish to do business with you at all and prefer to work with other customers with whom they have a better relationship. In a cut-throat world the next throat to be cut may well be yours. In such a case, eauctions form the perfect example of counter-strategic sourcing. This is not to say that there are not substantial savings to be made from eauctions for some commodities in some circumstances, at least until the lowest sustainable price point is achieved. It is worth asking, though, why there are such savings to be made? One

4 answer might be that up until that point your buyers have not understood the market, the players in it and economic factors operating within it. In short your buyers may not have been doing their job as well as they led you to believe. An alternative answer is that your buyers understand the market very well and have previously awarded contracts on the basis of value received and not simply price achieved and the auction might therefore have sacrificed value for price. A third is that the process leading to the auctions has encouraged a proper management of demand, including aggregation of demand where appropriate, and this has permitted vendors to price differently. In any event it is not as simple as received wisdom suggests. 4 We can do eprocurement already we have an ERP Using an ERP for purchasing is like not buying a family car because you already have an M1 Abrams battle tank in the yard. Sure, it will get you to the mall but is it the ideal vehicle? ERP systems comprise a number of modules which have as their key focus the sanctity and primacy of the general ledger. The purchasing modules are designed to ensure that the purchasing information which is needed for financial purposes is available to the core finance module: it is concerned with inward data flows and is internally focused on the needs of finance professionals. But purchasing is not an inwardly facing financial process; it is a distinct and externally focused activity which has internal financial consequences. ERP systems began as a means of drawing together elements of manufacturing enterprises business, often on a worldwide business, in order to manage production planning and scheduling together with the other elements enabling control of production cost and planning. Over time, public sector bodies, which are notably not worldwide manufacturing enterprises, have purchased multiple instances of ERPs despite their actual need being, in the first instance at least, for an accounting system of record. There are a number of problems raised. It is not the purpose or context for which ERP systems were originally designed or the context in which they function to best purpose; As the public sector moves towards a collaborative ethos, ERPs require major reworking to permit them to interoperate they were designed for the operations of a corporation, not interoperability between corporations or public bodies; By incorporating multiple layers of functionality, which have a tendency to be defined by reference to the needs of either the production process or the ledger, they tend to sub-optimise performance of the modules. Generally the modules of ERP systems are not themselves best of breed instances of software for those functions; Even if full integration of modules is desirable (an assertion which begs the question), the promise of full integration is itself problematic if the functionality being integrated is not best of breed;

5 The costs of full integration in the context of configuration can be overlooked and not compared with costs of interfacing with best of breed modules; A potential single point of failure is introduced. The distinction between the conduct of the exchange and accounting for that exchange is potentially- lost. One of the effects of treating the purchase order module of an ERP as the transactional purchasing engine is that two separate functions become confused conduct of the transaction and accounting for the transaction. Also, to do the transactions, multiple people need to access to what ought to be a secure system of record to which there are very limited access rights. Typically this also means a substantial number of user/seat licences are needed. It goes without saying, of course, that, with more than 60 live interfaces in place, Elcom has extensive experience of integrating with all of the leading Financial Accounting packages including those in ERPs Implementation of an ERP for eprocurement fixes your future firmly in the past. 5 We need to join a 'marketplace' The idea of an online marketplace is a long-standing one and still occurs under various names. The idea is quite simple: suppliers are encouraged to lodge content in the market place where, it is hoped, buyers will come shopping and buy. Generally speaking this has not been a successful model. The difficulty is that purchasing from a marketplace is not procurement and, crucially, breaks the link between Procurement and the supplier. While there may be a pragmatic requirement for ad hoc purchases from time to time, the main aim should be to control third party expenditure through having contracts in place for indirect goods and services and strategic relationships in place with core suppliers. Also, in the European public sector, there are regulatory consequences to consider. Further, terms and conditions of purchasing from marketplaces may well have hidden dangers for example what remedies are available in the event of difficulties and which courts have jurisdiction should a legal remedy be sought. Finally, a supplier joining a marketplace with no guarantee of a ready supply of willing buyers is less likely to offer the same terms and conditions as where there is properly managed and guaranteed demand on terms and conditions set through competition. Of course, where a group of buying organisations collaborate in setting framework contracts then a marketplace of sorts can emerge and this may well be desirable but this is a result of strategic procurement approach, not an alternative to a strategic approach.

6 Elcom's Approach We work very hard to practice what we preach and not to perpetuate these myths. Specifically: We won't make idle promises about savings which downplay the need for business change to achieve them. We know that your business case is likely to be more complex than that. We have the expertise and experience to work with you to achieve it. And we won't claim the credit for your work. Our solutions make it easy for suppliers to participate whether through simple catalogue upload or through cxml punch out interfaces with their systems or through the easiest and fastest to value model of einvoice. Our general rule is that suppliers should not have to pay to join a proprietary network and a buyer or supplier's data remains their data not ours and is fully transferable. We actively support eauctions but also understand that they are not a silver bullet to be used in all, or even most, situations. Elcom s P2P effectively replaces the purchase order module of an ERP to provide a much more nimble and flexible tool which interfaces into the ERP at appropriate touch points. Our einvoice solution is designed to fit seamlessly with our P2P tool as well. And because we pride ourselves on our customer services all customers have access to us to suggest changes and to be involved in discussions around product development. We help you to connect to your suppliers on your terms and conditions to your mutual benefit. It is as simple yet as fundamental as that. At Elcom we don't try to sell you a product, we implement a solution. For more information on Elcom's products and services contact us for a no obligations chat. Use the contact details at or info@elcom.com