Executive Interview Copyright PROACTIS 2010
eprocurement Demystified: Top 10 Questions for Evaluating eprocurement 3 Introduction 4 1. What is eprocurement? 4 2. What are the most reliable drivers of eprocurement return on investment (ROI)? 5 3. Is it a good idea to get as much spending as possible into an eprocurement solution? 6 4. Do organisations need a purchasing application and an eprocurement solution? 7 5. Should a global organisation implement a single eprocurement solution? 7 6. How hard is it to integrate an eprocurement solution with an ERP? 8 7. Should organisations mandate eprocurement to drive adoption and compliance? 8 8. Can an organisation rely on punch-out connections for catalogue content? 9 9. What is the difference between eprocurement and procure-to-pay? 10 10. Should eprocurement be rolled-out to end users? 10 Further Information 11 About PROACTIS 11
eprocurement Demystified: Top 10 Questions for Evaluating eprocurement 4 More and more organisations are becoming interested in eprocurement because it provides an effective means to reduce costs. However, there are common questions and concerns around what it is, who should be using it, how it should be deployed and so on. To address these issues, PROACTIS has teamed up with industry analyst Gartner and their Research Director for Procurement Strategies to address these issues in an executive interview that shares best practice insights on how to get the most out of an eprocurement initiative. In the interview, PROACTIS and Gartner discuss the top 10 questions for evaluating and implementing eprocurement: 1. What is eprocurement? 2. What are the most reliable drivers of eprocurement return on investment (ROI)? 3. Is it a good idea to get as much spending as possible into an eprocurement solution? 4. Do organisations need a purchasing application and an eprocurement solution? 5. Should a global organisation implement a single eprocurement solution? 6. How hard is it to integrate an eprocurement solution with an ERP? 7. Should organisations mandate eprocurement to drive adoption and compliance? 8. Can an organisation rely on punch-out connections for catalogue content? 9. What is the difference between eprocurement and procure-to-pay? 10. Should eprocurement be rolled-out to end users? Gartner defines eprocurement as a software application that assists the non-professional procurement individual to place an order for goods and services. So when I talk about a non-procurement procurement, I mean a controller, an engineer, an accountant somebody that does not do procurement day-in and day-out. So what the solution does is it helps this individual, or these individuals, to find the things that they want to buy. To identify who the preferred suppliers are, to get approval for those purchases before the commitment is made, and then once everything is approved and finalised, to communicate those orders on to the supplier in an electronic format. When we look at the goal of procurement, it s all about reducing costs. But as Gartner also state, giving employees a better shopping experience, so that ultimately they can do their day job. What we re talking about is helping them to identify and request the right goods and services they need. At the best possible price, in the right quality and quantity, and at the right time. But it s got to be approved and against budget. You also need to think about the things that go on behind the scenes that make purchasing not just effortless but more controlled and effective. For example you re going to need to know: What is bought, by whom, and from where? What purchases are being made on-contract and off-contract? Are there any opportunities for consolidation there? Can you challenge existing contracts for cost savings?
eprocurement Demystified: Top 10 Questions for Evaluating eprocurement 5 What process do you need to measure supplier performance? Shopping is really only as good as the underlying processes that support it. So my definition of eprocurement is the range of technologies to support just that. You have the tools for execution but also for decision support. There are three primary drivers for return on investment. The first one is what I call the Stop, Wait, Don t Do It! driver of savings. And what that means is you are basically getting in front of spend and giving the organisation a chance to say hey let s not spend that money right now. And there may be a number of reasons why you would do that. For example, you may have something that you ve bought that may make do for what the requisitioner is requesting. The second way that you can generate return on investment for eprocurement is by driving compliance to the strategic negotiated agreements that your organisation has in place. Many organisations have put a lot of time and effort into picking strategic suppliers, qualifying them, making sure they re able and prepared to do a good job and negotiating excellent pricing for the organisation, from those suppliers. But what often happens in the absence of an eprocurement system is that individuals want to buy something, they need to buy something, but they just don t know where to go. They don t know who the preferred supplier is or what the negotiated price from that supplier is. And then the last one is of process savings this is enabling invoice matching to go more smoothly. An eprocurement system will give you the ability, as the requisitioner, to log in and say I got this service I got this laptop I got whatever it was I ordered and it was fine, or it was not ok and please don t pay the bill. So then instead of having to go off and search to figure out whether an invoice is acceptable to be paid, Accounts Payable know what to do and it streamlines their job considerably. We see a whole range of ROI drivers and the guaranteed savings to be made. Typically, we see customers achieving return on investment in less than six months, and savings of up to 75%. But what we re really talking about is cutting costs and reducing waste and error in making those purchases that are a necessary function of keeping your company up and running, i.e. non payroll spend. In the absence of an eprocurement system, there are a number of common issues you ll see in an organisation. In Purchasing, you ve got employees struggling to make the purchases they need. They ll often use credit cards or non-preferred sources, with no authorisation. In effect, they re circumventing your policies. We call this maverick spend. There s no visibility of purchase commitments and as a result, costs are attributed to the wrong accounts or departments and no one really knows what s being bought over time. And then you have your buyers the Procurement department. They don t know how many suppliers they have, who they are, their categories, and so on. The Finance system is littered with thousands of suppliers that have been made up on the spot. This leaves the company exposed to risk and cost, but also means the value of contracts aren t being fully realised. Review dates are being missed and this alone can justify a system in itself.
eprocurement Demystified: Top 10 Questions for Evaluating eprocurement 6 So what I m saying is the first time a company knows about a purchase being made is when the invoice arrives through the door. So this isn t spend control but more about managing what has been spent, which has a knock-on effect. Accounts Payable will spend 60%+ of their time fire-fighting and processing inbound invoices that s long paper trails, delays, inefficiency and cost. The short answer to that is absolutely or at least into some procurement or purchasing solution. When you re an organisation unless you really don t care about managing your spend, and today almost everyone does you ll want to be ahead of it and want to have the opportunity to say stop, wait to make sure that your purchases are with the strategic suppliers that you ve so carefully chosen, and to assist the process in Accounts Payable. So definitely, you should try to get as much spend as possible, if not into an eprocurement system that s designed for the casual requisitioner, then in an appropriate system for that spend. I agree. It may be stating the obvious but executives today are increasingly challenged to do more with less. And in my view that requires real control over spending. In our experience, if you analyse how much spend is under control by Procurement, it is likely to be 20-40% of total expenditure. So you typically find Procurement departments focused in spend categories over a certain threshold, let s say 50,000. But why? It s probably because they only have five people or so in the department. So the real question is how do you move that figure to 80-90%? And you ll probably need to do four things: 1. You will want to ensure everyone is spending through the same gate without abuse, so that gives you the maximum opportunity for bringing spend under control. 2. You ll also want to allow shopping choices, but you ll probably distribute the work of sourcing throughout the workforce. That will enable better sourcing collaboration amongst your experts. 3. Thirdly, you ll probably want to reduce your supply bases to a few strategic ones, for specific categories so that you can reduce pricing. And there are quick wins to be had in that space. 4. And lastly, you ll want to document spend on purchase orders and ensure that coding and approvals are made upfront. That will reduce a whole load of headaches when invoices hit Accounts Payable. So, all this has to be made easier than what you are replacing today. It s got to be simple, easy to understand, and above all, employees must want to use the system.
eprocurement Demystified: Top 10 Questions for Evaluating eprocurement 7 The answer to that question is yes. And the reason is that a purchasing application does a different thing than the eprocurement solution. A purchasing application is a software solution that is designed to support the Procurement professional. This is not the Accountant, the Controller, the Engineer, this is the person who works day-in and day-out in Procurement and is negotiating with suppliers, setting up blanket orders and also evaluating supplier performance. Almost all ERP systems or financial suites have a purchasing application that is called just that Purchasing and that comes generally hand-in-hand, working with the Accounts Payable application. And there s good reason for that there s a lot of interchange between those two systems. The eprocurement system, remember, is designed to support the casual requisitioner that does not work in Procurement. So you need both. But the thing to understand is that sometimes those can be delivered by the same vendor or in the same suite, and occasionally, even in the same application. Almost certainly organisations should adopt an eprocurement and a purchasing solution. The scale of the opportunity is enormous. When you look at large enterprises, up to a third of them have yet to buy any kind of eprocurement system, and a quarter of them are not using any kind of eprocurement tools. So it really doesn t matter what your drivers are whether you re selling goods for resale or you what to bring the cost of your indirect goods and services under control you ultimately want to be the fittest on the planet and the most competitive amongst your peers. So, your COO might wake up one morning and tell you that there are eprocurement capabilities hidden away in your existing infrastructure. But being a slave to a mandate for a single global IT provider probably won t cut it. You ll probably want a specialist one that eats, sleeps and breathes eprocurement, who has systems that are proven to leverage the value of your existing ERP investments. Let s face it, do you really want to compromise when it comes to the agenda of cost containment? If your question is is it technically possible? then absolutely, and we have customers that have done just this. However if you re asking me is it desirable? then probably no, not in all cases. This is because you probably don t want to impose a single set of business processes, that can become unwieldy across country territories and language boundaries, in one big-bang approach. Rarely do you see a worldwide sourcing agreement for indirect goods and services, like gas or electricity. But what global businesses really want to do is act global but think local. And technology shouldn t be a barrier to conducting sound business. Let me give you another example. In the past 5 to 10 years, many companies have grown through M&A. And with each merger or acquisition comes a new finance system that deviates from the corporate standard. So unifying these disparate divisions and ERPs is inherently costly and very time extensive. So what s really required is the ability to integrate
eprocurement Demystified: Top 10 Questions for Evaluating eprocurement 8 with and exploit the value of changing IT architectures. What we have to do is not just embrace it but exploit it. That means supporting multiple instances of finance systems, chart of accounts, local workflow requirements, etc. So what you are probably looking for is a configurable, modular design. One that can be deployed in a phased step-by-step approach, that gives you maximum flexibility, high takeup and low risk. It is an absolute core requirement for a best-of-breed eprocurement solution to be able to integrate on top of an ERP or an Accounts Payable system or financial suite. That is because if you set up an eprocurement solution that is not integrated back into the core suite then you will end up having to retype all your purchase orders. So as you can well imagine, the vendors in the best-of-breed eprocurement space are often very experienced in connecting and integrating to these Accounts Payable and ERP applications because it s core to what they have to do. As a best-of-breed supplier of eprocurement, we ve integrated to all flavours of systems. We have over 350 customers around the globe and only one didn t require us to integrate to an ERP system. It takes us on average under five days to integrate to an ERP system and with the leading ERPs, you are looking at just three days. So I would say that a core competency is not just being an eprocurement specialist, but being an integration specialist too. This involves integrating to finance and ERP systems, but also a whole stack of other systems. It could be document management business intelligence stock systems you name it. We would argue that a best-in-class system is better integrated than the eprocurement module that comes native with the ERP package. And that s probably no surprise when often those systems have been written 20 years after the target platform, or have just been acquired. So I think what you really need to consider is the total cost of ownership. That means ensuring that the integration is version independent so that as you upgrade to the latest ERP or procurement version, it doesn t become a heart and lung transplant. Well let me answer your question with a question: In the organisation where you work, do you have optional use of your payroll system? Are you told that you can use your travel and expense system to submit your expenses if you want to? Do your sales people have optional use of your CRM system for booking sales or booking orders? My guess is your answer is going to be a resounding no, of course it s not optional. These are important backbone applications of the organisation and this is how we run the business. It s really been amazing to me looking at procurement that we have even considered, much less permitted, the optional use of procurement solutions such as an eprocurement tool. I mean frankly, it s ridiculous to make an investment in a tool like that and then tell people they can use it if they want to. So without question, I m clearly in favour of mandating the
eprocurement Demystified: Top 10 Questions for Evaluating eprocurement 9 use of the eprocurement system. An eprocurement system is a corporate asset and should be treated as such. I agree. Corporate governance is an absolute given these days so what is required is a tool that can monitor and audit compliance behind the scenes. But you also need the built-in controls throughout the process the value chain if you will. So you need financial controls such as account coding, commitment checking, purchase authorisation and even audit trails. You also need buying controls such as catalogue access, sourcing rules, transaction templates and so forth. It s got to be practical for everyone to understand, so that complying with policies and procedures just becomes second nature. So let s look at that in a bit more detail The supplier process must be controlled, requisitions and orders must be approved and coded, and budget checked before the order has actually gone out of the building. Receipt of goods and services must be managed and then there s no need to authorise invoices. Exceptions and paper trails in Accounts Payable will naturally drop, enabling something like 60% straight through processing of invoices. You can then ensure and capture early payment discounts, and there s no more reliance on credit cards or managing thousands of exceptions. A catalogue accessed through punch-out is a really great asset for any organisation. We like punch-out very much at Gartner because it puts the responsibility of keeping the content fresh and up to date on the supplier, which is where it really belongs in the most part. The problem is you can t always rely on punch-out because a lot of suppliers do not have an ecommerce site and an ecommerce site is required to be present in order to have something to punch-out to. So the bottom line answer is: it s a great thing to use but it don t expect it do everything, and use it judiciously. Punch-out is one of the many great tools to interact with suppliers and to manage content. But I liken it to golf you ve got many different clubs in your bag to do many different jobs and that means looking at a strategy to balance supplier types, supplier capabilities and also types of categories. Sure, the Holy Grail is probably to ensure you do not suffer the cost for maintaining content and catalogues, and punch-out is certainly a good method and fulfils that aspiration. Let s have a look at it in a bit more detail. During a punch-out session your users will have access to the supplier s product catalogue so that you can ensure that they can select what they need from a pre-approved supplier. Once those items are selected, then they are often routed through the established approval and order processes. But you can go one step further if you want. There s a concept called punch-through that enables you to simplify the look and feel of the purchasing experience. Or you can even combine punch-out and punch-through with something called purchase order flip which enables you to reduce supplier costs and then opens up the opportunity for your Procurement team to renegotiate prices.
eprocurement Demystified: Top 10 Questions for Evaluating eprocurement 10 The eprocurement system supports the purchasing process through the point of sending the purchase order to the supplier and then it picks up, allowing the requisitioner to say yes I got this good or service and it was in good order, or it was not. Procure-to-pay takes that implementation the next step further and recognises that you ve set up a channel to communicate electronically with your supplier. And this is to send the purchase order or acknowledgement to them. The idea behind procure-to-pay as well, is if I have this channel set up, why not leverage that to get the invoice back? And by the way, since you are sending the purchase order in an electronic format to the supplier, why not use the data that you ve already documented on that spend to get the invoice back to repurpose that data and not bring in errors because you re retyping it or someone else is documenting the purchase in an entirely different way. I agree with Gartner s definition. Starting with eprocurement, that s all about streamlining day-to-day purchasing processes for employees, for their managers, and also for the buyers. And the end result? It should give full visibility of costs and also enable compliance to the company s policy and procedures. What procure-to-pay is, is it extends that cycle to Accounts Payable so managing the receipt, matching and approval of supplier invoices and also employee expenses. This saves a whole load of time taken up in manual processes and it allows for more productivity. In fact you can save up to 80% on the cost of processing invoices. We ve seen a lot of organisations be very concerned about rolling-out the eprocurement solution all the way to the Accountant the Controller the Engineer, and with good reason. If you have to buy more licences to be able to expand your audience to those people that are buying on their own behalf, it may cost a little bit more. Also, you may have a greater requirement for usability, ease of use, because there s a different level of expectation on how easy a system will be to use if you re only logging in once a week than for example if you re a departmental administrator and you re logging in every day to place orders on behalf of multiple people on your staff. So we do see a lot of organisations say why don t we just roll this out to administrators or power users? But that is not best practice and here s the reason why. One of the benefits of eprocurement and this is not a benefit that gives you hard dollar savings but it s still very important for productivity is that when an individual who needs the good or service is the one who s placing the requisition and logging into the eprocurement system, then they know at all times what the status of their order is. So if you really want to make your end users fully productive, even if it costs you a little bit more in the short term, I think it s definitely worth it because you empower them to be able to see the cause and effect. To know that they put in a requisition and can see exactly what s happening with it.
eprocurement Demystified: Top 10 Questions for Evaluating eprocurement 11 In our view, eprocurement should definitely be rolled-out to all end users, otherwise you re really layering in inefficiencies that you don t want to do. The procurement process has got to be effortless for the entire organisation. So for employees, that means inductive buying, it means having visibility of the purchase requests through all stages, it also means ensuring a true sense of ownership. For the department managers, they want easy budget checking, they want one-click approvals from wherever they are. They also need full visibility of costs. And then for the buyers or the purchasing departments, they ll want sourcing controls, centralised supplier and contract data. They ll need self-service buying for employees to streamline efficiencies and they ll probably also want self-service features and capabilities for the suppliers. So what I m really saying is eprocurement is all about supporting people s day jobs and ultimately delivering contribution to the bottom line. To view this interview as a webcast, or download other useful resources on this topic, please visit www.proactis.co.uk. PROACTIS is a leading provider of spend control and eprocurement solutions. Over 350 organisations across 70 countries use PROACTIS software and services to streamline their purchase-to-pay process and obtain best value and control in procurement. : to help organisations to automate the full buying cycle from improving the way they find, evaluate and engage suppliers to increasing "on-contract" spending and enabling more effective collaboration with their trading network. : to enable organisations to streamline the purchase-topay process, eliminate labour-intensive manual registration of invoices, speed up invoice matching and approvals and gain control of "after-the-event" purchase claims. Widely used in mid-to-large sized organisations across private, public and not-for-profit sectors, PROACTIS is routinely integrated with ERP and financial systems. PROACTIS also offers a range of on-premise and cloud-based delivery options, including Software-as-a-Service (SaaS) and dedicated-hosted application delivery, and flexible licensing models. PROACTIS Group was founded in 1996 and has been listed on the London Stock Exchange since 2006 (AIM: phd). Headquartered in the UK with operations in North America, PROACTIS has an extensive accredited partner network in EMEA, USA and APAC regions.
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