Procurement in the New Normal

Procurement in the New Normal

INTRODUCTION - THE NEW NORMAL As we exit one of the worst recorded global economies, companies are realizing that business will never be the same. The slow climb out of where we had been will take us along a path of commerce unlike any the world has ever experienced. The world will become smaller, more-connected, faster-moving and more reliant on methods of commerce that were not even available 10 years ago. We are entering the New Normal. Some of tomorrow s corporate stars will be age-old companies that have a culture of adapting and growing, others will be companies that may only now be the glimmer in a founder s eye. Still, these successful companies will have three major points of commonality in their ability to: Reduce Costs Increase Agility (Reduce Risks) Complete Commerce Management In this paper, we will discuss the specific procurement steps needed to develop a strategy that will maximize corporate health and prepare your company to be a leader in the New Normal. REDUCE COSTS To reduce costs, there are three key elements to consider: ROI, hidden implementation costs, and realistic time to value. Within this section we will explore each of these elements and their critical success factors. Positive ROIs ROI is a term that considers both the costs and the derived value. The costs of the solution are dependent on the vendor and the internal deployment costs (which will be discussed in the next section). The value is based upon how a solution can deliver realized savings, and contains two major drivers: purchase-based savings and processbased savings. Renegotiating supplier contracts is at the core of procurement competency, so many organizations feel there is no real benefit to be gained from system enhancements. Unfortunately, strong negotiation skills do not correlate directly to delivered savings. In fact, repetitive audits have shown that without a proactive procurement solution like Procure to Pay (P2P), nearly half of negotiated savings are never actually realized. 2 Copyright 2010 Ariba, Inc. All rights reserved.

Figure 1: Leakage from lack of procurement system compliance Negotiated Savings From Sourcing (ex. 20-25%) Lost Contract Compliance 5-7% 1 Invoice Reconciliation & Discounts 4-6% 2 Operating Efficiencies (ex 3-5%) Savings via Leakage (ex. 9-13%) Realized Savings Without eprocurement (ex. 11-12%) Value of eprocurement Value of Spend Vis Sourcing Contracts Time Organizations that have come to recognize the existence of this leakage will often put in place initiatives around compliance, but here it is also important to understand two key drivers: compliance with contract terms and adoption. While many solutions may ensure compliance within a particular catalog, the proactive integration to contracts is very important to driving all of the compliant savings. It s quite common for procurement organizations to negotiate specific terms and conditions that vary from the standard catalog terms (whether in terms of price breaks, total volume, or even payment terms). Without the ability to proactively attach these customer-specific terms to each of the orders, there is no way to ensure capturing of all the leakage. Even when the efforts are made to ensure the alignment with the catalog, integrated compliance takes this to the next level driving payment discount options through the process to the AP department, allowing them to capture additional savings opportunities. This understanding raises the importance of ease of use, from a management, catalog update and end user perspective. Most understand how important broad, simple ordering capabilities are to maximizing end-user adoption, but often overlooked is the maintenance of compliance drivers. Key questions that should be considered are: How easily can contract terms be generated and maintained? How and who maintains and refreshes catalogs? The second area of ROI contribution comes from improvements in process efficiencies. Some of these factors can include: Ease of ordering from the correct vendor Collaboration with vendors for optimizing orders Ease of managing receipt/order exceptions Ease of communication between AP and supplier invoicing Copyright 2010 Ariba, Inc. All rights reserved. 3

In a 2009 Procurement conference, Hackett put the cost at fielding a single call from suppliers into AP at over $25 per call i. Another example is a company that identified that they were spending 30 hours per week managing exceptions with one vendor. Following the solution deployment, they were able to cut this back to 30 minutes per week a 60x efficiency improvement. The figure below helps give some guidelines around the typical savings benefits based on the historical benchmark data and the Aberdeen e-procurement Benchmark Report: Figure 2: Benefits of an Integrated P2P Process ii 49 % Improvement 65 % Improvement 74 % Improvement > 90 % Improvement Before After Req to Order Costs Req to Order Cycle Time Maverick Spend Savings Leakage Some organizations may choose to incorporate process improvements into their ROI calculations, others choose to use it as an upside driver. Regardless of the approach selected, the fact that process improvements often equal 50 percent of the compliancedriven savings is a critical factor that must be considered within the estimated ROI. Implementation Costs Some companies forget the costs of implementation when considering a procurement solution a mistake that can lead to grave consequences. Any procurement solution is going to require changes within the organization that may impact technology, the culture or the processes. Factors that must be accounted for include: Upfront solution cost Consultant resources required to implement solution Internal resources required to implement solution (IT and business) Frequency of upgrade Cost of purchasing solution upgrades and system dependencies Cost of internal resources to implement system upgrades 4 Copyright 2010 Ariba, Inc. All rights reserved.

Many of these costs become hidden within the typical business case. IT costs, internal hardware costs, system maintenance costs and upgrade costs all get buried within fixed costs. However, this reasoning does not work within the New Normal. Today, the most-strategic IT organizations are recognizing the opportunity to move outside their typical tactical and maintenance roles into one with a more-strategic corporate position. According to IDC iii, technology is shifting whereby, Cloud (public, private, hybrid) is the new delivery platform. This is because such a move allows the IT resources to do more with less, increases total platform stability, reduces risk and increases system agility. Clearly this shift aligns with the key business directions and suggests that all procurement organizations must consider a SaaS (Software as a Service) solution during their evaluation process. However, a note of caution: Simply because a solution is hosted by the vendor does NOT make it SaaS. A true SaaS solution at a minimum meets the following criteria: Network-based architecture and integration (configured NOT customized) Activities can be managed and distributed via the web Supports rapid enablement of new connections (suppliers, buyers, business units, etc.) Regular, centralized feature updating Optimizes collaboration between transacting parties When the Total Cost of Ownership (TCO) is accurately evaluated, CD or Hosted CD solutions are typically 3x 5x the cost of cloud or SaaS solutions. Furthermore, many of the benefits of networking and supplier collaboration are not possible, diminishing the benefits that can be delivered by the solution. IT departments that are embracing this understanding and migration are finding their positions elevated within the company as they take a more-strategic C-level role. Their resources can be migrated from the system maintenance to the solution alignment with business needs a clear need within the rapidly changing commerce of today. Proven Time to Value Savings are of little benefit to a company today if it takes five years for them to be realized. True, some strategic projects may be based on a five- to 10-year horizon, but procurement should impact the bottom line this year and all subsequent years. In the past, it was nearly impossible to evaluate a comprehensive procurement solution that could be piloted in less than 18 months, much less delivering value within that time. That is no longer the case. Today, companies are using the strategies discussed above to implement systems that pay for themselves within six months of a project initiation, and have significant bottom-line benefit in the very first year. In fact, the age-old practice of looking at ROI over a five-year horizon was often predicated by the costs and times of deployment. Upgrade costs were frequently ignored or significantly discounted in order to develop business cases that would make sense yet would never be measured against. (How many companies actually go back to see how they did against a plan adopted five years ago?) Copyright 2010 Ariba, Inc. All rights reserved. 5

In the New Normal, there are two key horizons for evaluating a solution s delivered benefit: the first year (starting at implementation) and the end of the third year. Note that it is important to do the evaluation from the time the project begins, NOT from the time of pilot or launch. When these steps are taken, the true time to value of a solution is best understood. INCREASE AGILITY: Organizations will often state that their primary objectives involve the reduction of risk whether with suppliers, across multiple business units, global diversification, or in response to shifting market conditions. In each case, the ability to reduce risk is tied to how agile a company can be in its response to business changes. There are three key components to maintaining corporate agility: visibility, all-to-all connectivity, and system cohesiveness. 360º Visibility Without visibility, we are blind in the actions and direction we take. Decisions become reactive and we are never able to move ahead to the position of a market leader. If you feel that most of your time is spent reacting to changes, then this is a clear indication that visibility should be a key concern. Visibility is an easy concept, but often undervalued in procurement. We may ask for a few reports of summaries of what we have spent, but is this truly visibility? How can we make timely decisions if we have to wait until two months after a quarter s close to understand what we spent? By then, the world may have changed. So what makes up good visibility? Key factors include real-time information around: Spend amounts, categories and compliance with contract terms/preferred vendors Supplier risk and process information Internal process efficiency Catalog maintenance activities Upgrade schedules and impacts With the ability to understand and manage these factors in real time, we can begin to adapt our behaviors from reactive to proactive. Not only does this allow us to become more efficient with our resources, but to identify saving opportunities that would have been missed under a reactive model. All-to-All Connectivity Only through connectivity across all aspects of commerce can the necessary information be made available to gain the critical visibility mentioned above. However, there are two key approaches to creating connectivity: One-to-one and all-to-all. 6 Copyright 2010 Ariba, Inc. All rights reserved.

Supplier Supplier Supplier Buyer Supplier Buyer Manager Sourcer Buyer Historically, solutions have relied upon a one-to-one architecture where links were created between a single entity and another partnering entity. For example, a company could select a specific supplier, and then build the links within the internal and supplier systems to be able to communicate invoice information back and forth electronically. However, for each link that was established, this structure needs to be re-created due to unique attributes of each transaction. This meant that for each supplier there could be tens to hundreds of such sets of code as the numbers of catalogs, users and rules all expanded. Clearly any time a new supplier, business unit, or even group of users was added, these same architectural elements need to be reviewed, tested, modified and ported to the new transactions. This model quickly made it impractical to expand beyond a few suppliers. In fact, most companies using this architecture will, even today, have at most a couple hundred catalogs and suppliers that are actively maintained. In contrast, an all-to-all architecture is not based upon creating individual links, but instead in creating protocols that allow the development of a network. Suppliers are active and enabled (not simply saying they are willing to create new one-to-one links as is the case with some claimed networks ). New suppliers can be easily added, and the common integrations work across all aspects of the solution suite. The sharing of information and knowledge among the entire user base can quickly be tailored and updated whether it is new contract terms, approved vendors, or even product preferences. As a result of the all-to-all architecture, a network is created that allows agility and knowledge far beyond what could ever be supported with the designs of old. Copyright 2010 Ariba, Inc. All rights reserved. 7

System Cohesiveness - Unify All ERPs Core to increasing corporate agility is the ability to not only interface, but to unify all of the corporate ERPs, regardless of manufacturer or version. Even if your entire company today is on a single system and version, it is likely that this system will require upgrading at some point in the future. Is it reasonable to believe that all locations will be simultaneously upgraded in a fashion that will not have an impact on your procurement effectiveness? Furthermore, if you are architecting to be a market leader, it is quite likely that you will increase the corporate reach through natural expansion or acquisition. When this happens, what does the procurement solution need to address the new business unit or to integrate the purchasing activities of a new acquisition with your corporate strategies? Companies that have learned how to rapidly integrate new business units and acquisitions into the compliance of the parent company find significant cost benefits that may never have been accounted for in the initial expansion strategy plans. In contrast, companies that tie the upgrade and feature enhancements to the architecture of the ERP soon realize that their ability to expand and adopt new capabilities is tied to farmore costly upgrade requirements, and sometimes is not even possible without replacing complete business unit or acquisition ERPs. The importance of an ERP-agnostic solution is becoming more and more apparent to the point that some ERPs are even making the claim of offering this option. What is important to consider is not just whether the solution can be made to integrate with different ERPs, but how quickly, easily, and cohesively this can be done. It is critical to understand whether the processes and rules can be maintained across systems, where flexibility can be given based on business rules, how reporting is consolidated, and how this links to critical business areas such as the contract and supplier interactions. COMPLETE COMMERCE MANAGEMENT: Commerce does not happen in a vacuum. It requires interaction with others suppliers, legal departments, buyers, and other industry peers. When the view of procurement is elevated to consider all of these elements, influence moves beyond the transactionbased focus and into the realm of complete commerce management. To maximize effectiveness, three key elements must be considered: managing services as well as goods, end-to-end commerce management, and the network effect. 8 Copyright 2010 Ariba, Inc. All rights reserved.

All Goods and Services Organizations will frequently enter into the evaluation of a procurement solution looking at goods and catalogs, but not take into consideration the management of services. Surprising to many is the fact that companies typically spend 20-80 percent of their indirect budget on services. This may at first glance seem more than anticipated, but a review of the list of services below will show how pervasive services spend really is: Temp Labor/VMS Contractors/1099 Consulting Print Market Research Promotional Items Call Center Direct Mail Legal Projects SOWs Installations Facilities Clinical Trials R&D Engineering MRO Landscaping Advertising/PR SEM/other marketing services Unfortunately, most services spend falls outside the scope of the typical procurement solution. Some may even challenge that there really isn t much savings opportunity within these sectors. Historical benchmarking has shown that savings negotiated within services is some of the most-significant categories, at times approaching a 35 percent cost reduction opportunity. Services optimization is one of the most under-utilized segments of savings delivery. The magnitude of impact, both from total spend and savings potential, make it one of the greatest savings opportunities today. It is critical that any procurement solution under consideration have a clear and integrated component that can address the services spend in an integrated and cohesive fashion. Complete Commerce Just as commerce does not happen in a vacuum, the key aspects of a total commerce solution must be cohesive and seamless in their integration. Identifying a procurement solution that requires extensive customization into a contract system quickly diminishes the value and agility below what is needed in today s markets. While all aspects of a comprehensive management solution may not be implemented simultaneously, when considering a procurement solution, it is critical that it has the necessary level of transparency with solutions covering: Suppliers Sourcing Contracts Payables Cash management Visibility Copyright 2010 Ariba, Inc. All rights reserved. 9

Since most solutions today have some level of offering to address each of these business needs, or have established partnerships with other companies to do this, it is important to understand the enabling architecture between these solutions. Just because the solutions may be sold by the same company does not mean that they are architected off a common platform. In fact, most companies selling full solution suites will have different architectures for the different solutions. What this means to the user is increased maintenance of links between solutions, less availability of information between solutions, and sometimes user experiences that are so dramatically different they even require different log-ins for each solution. In contrast to this is the commerce management suite, which is designed off a common platform. The user experience should be quite consistent throughout, and information should be readily available from all applications. In fact, in the best solutions, a user-customizable home page or dashboard can be created and modified to incorporate data elements from all of the solutions that are pertinent to each person s specific area of responsibility and focus. Network Effect The Network Effect refers to the fact that the more points of knowledge (suppliers, buyers, receivers, AP folks, etc.) connected on a network, the greater the opportunity to operate in a collaborative fashion. While historical systems have limited the ability to optimize these expert bases, today s world-class networks allow amazing interactions, placing expertise and knowledge at our fingertips. Capabilities such as dynamic collaboration on goods and services and supplier-recommended solutions are all possible with today s best networks. Communities are cropping up to explore best practices as commerce reaches a new level of online socialization. When evaluating the strength of a network, key factors to consider include: Number of users currently on the network Number of suppliers on the network Level of commerce over the network Networked community options Ease with which new participants can be added Networking capabilities are quickly becoming the backbone of future business processes and are a critical component in any of today s leading solutions. 10 Copyright 2010 Ariba, Inc. All rights reserved.

CONCLUSION: EMBRACING THE NEW NORMAL Today s successful companies are questioning the behaviors of the past, and changing to respond to a new economy. Gone are the days where limited suppliers worked with a manufacturer to put out a single product that was, available in any color as long as it s black. The world has become smaller, faster, and more driven by the well-informed buyer. Anything you can imagine is available with a couple clicks of the mouse, typically from several companies with similar offerings. How do you differentiate and maintain profitability? How do you emphasize your competencies? These are the challenges defining the future of commerce, the challenges that tomorrow s leaders are meeting with reduced costs, increased agility, and a better understanding of how to manage the complete commerce landscape. It s the job of these leaders to ensure their businesses are meeting the challenge, and the job of Procurement to develop solutions that ensure success in this New Normal. FOR MORE INFORMATION: To learn more about Ariba s solutions and how they can benefit your organization, go to: http://www.ariba.com/solutions/ John Lark Sr. Solutions Marketing Manager jlark@ariba.com 650.390.1903 i Pierre Mitchell of the Hackett Group at the Ariba Spend Management Day, Fall 2009 ii Aberdeen, The eprocurement Benchmark Report, August 2008; Hackett, Delivering on the Evolving Value Proposition of Procurement, June 2008. iii IDC, Enabling the New Normal: Software Predictions 2010, January 2010. Copyright 2010 Ariba, Inc. All rights reserved. 11