Software Straight from the Screen

Newfangled software may revolutionize procurement, but not without some old-fashioned reengineering.
Bronwyn FryerNovember 1, 1998

Holger Huels, CFO of pharmaceuticals giant Boehringer Ingelheim, has a dream of freedom– from paper. “I really don’t want to see paper anymore in this company,” he insists in his rich German accent. Each year, Boehringer Ingelheim spends some $230 million on nonproduction materials and services, in the process generating mountains of requisition forms, purchase orders, invoices, bills, and memos. According to Huels, 80 percent of the paper being shuffled represents “only about 20 percent of the money we spend, in dollar terms.”

But the CFO believes the software his company installed earlier this year–an Internet-based electronic procurement system from Ariba Technologies Inc.–will dramatically reduce the costs associated with procurement. If all goes as planned, the system will streamline administrative routines, discourage off- contract buying, and enable bigger discounts from suppliers.

“If we save only one percent on these nonproduction costs by using Ariba’s product, we save $2.3 million,” says Huels. “This is a no-brainer.”

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Average-cost estimates for processing a paper- based purchase order vary widely; experts frequently cite a range of $100 to $160, although some would argue $20 is too high. All would agree, however, that the process is ripe for automation. That’s because purchase orders typically involve layer upon layer of costly labor–administrative assistants to fax and file them, mail clerks to move them, accounting staff to authorize them, managers to review and sign them. “You’re getting people who are far too senior to be doing these mundane jobs,” says A.R. Stevenson, president of Ashburnham Group, a management consulting firm in Peterborough, Ontario, Canada.

Huels may never realize his paperless dream– according to Xplor International, a Los Angeles­based association, corporate paper use is growing at 6 to 8 percent per year–but he is determined to try. Today, the supplies that Boehringer Ingelheim’s employees need, from Post-Its to pharmaceutical equipment, can be ordered from an online catalog. More than 400 users working with desktop Web browsers can tap into the Ariba system, which resides on a secure HP/Unix server. They can peruse a 30,000-item, 10-vendor database, select the supplies they want, and E-mail requisitions for electronic approval. (By year’s end, some 800 users will be able to shop for between 200,000 and 300,000 items from 15 vendors.)

The system informs employees whether an order has been approved, usually within an hour (provided the approvers are available). Purchases under $1,000 are automatically approved for authorized users. Orders are then dispatched electronically to vendors, either via E-mail, fax, or electronic data interchange. In the near future, the purchasing data will be fed into Boehringer Ingelheim’s general ledger system, where it can be categorized and aggregated.

“We’ve really focused on taking the fat out of our paper-related processes,” declares Huels. “We’ll be able to focus purchasing staff on more value-added activities, like supplier management. There will be less off- contract buying. We’ll concentrate our purchasing volume to nationwide preferred suppliers, which leads to higher discounts.” The bottom line, he hopes, will be savings of 60 to 70 percent in transaction costs.

Big Promises

With that kind of hope, it’s no wonder analysts see online procurement systems as an E-commerce equivalent of McDonald’s–serving millions and saving billions. According to Boston-based Aber-deen Group, Internet-based procurement applications are currently the “hottest segment” of business-to- business electronic commerce.

Such applications address one of the last bastions of paper- and labor-intensive processes remaining in the corporation. Analysts and academics lump the efforts to manage these processes–including travel and entertainment expense reporting and procurement–under the term “operating resource management,” or ORM. These processes have been difficult to automate, “because they typically deal with an entire employee base,” says Roy Satterthwaite, a research director in E-commerce applications for Stamford, Connecticut-based Gartner Group, an information technology advisory firm.

Essentially, electronic procurement systems allow employees to order supplies, equipment, or services from an online database of approved vendors. The faster process makes employees less inclined toward “maverick purchasing”–buying, say, a box of pens at the local retail store and putting the purchase on an expense report.

Electronic procurement makes it easier to manage suppliers and to negotiate volume discounts. These systems can also be linked to back-office systems. At Boehringer Ingelheim, the Ariba software was set up to push requisition data into the company’s enterprise purchasing system, which then passes the information on to its accounts payable system, says Huels. Eventually, he adds, the company may be able to collect and analyze the purchasing data to gain insight into buying patterns.

Cisco’s Success Story

One of the first, largest, and most successful implementations of an ORM system is up and running at Cisco Systems Inc., in San Jose, California. The networking technology giant (1997 revenues: $6.4 billion) has posted a supply catalog of 14 suppliers on its internal Web site, also using Ariba software. The system, which was implemented in 1997, went live in January 1998 and currently tracks 2,000 transactions a month.

According to Carolyn DePalmo, finance business process design manager and the force behind the design and implementation of the software, the system has handled more than $100 million in transactions to date, and the rollout is still only 35 percent complete. CFO Larry Carter believes Cisco will earn a payback on the system within a year. “We don’t do these kinds of IT projects unless we get payback in less than that,” he says.

The solution for Cisco has come none too soon. With the company growing at an annual clip of about 35 percent, the company’s purchasing department was drowning in purchase orders. In 1997, Cisco’s number of requisitions leaped from 2,000 to 4,000 a month, with an average processing cost of $130 per requisition. Direct orders to vendors for prenegotiated items, such as business cards or computers, totaled another 4,000 per month. Total process cycle time averaged 14 days, including 5 days for approvals.

But with the ORM system in place, the average cost to process a purchase order is heading toward $30. Labor is being cut “by an order of magnitude,” says DePalmo, not just in the purchasing department but across the company. At the same time, purchasing controls have been tightened. “With a paper-based system, we very often had invalid account codes, or people couldn’t read approval signatures,” she explains. “But now employees can charge products only to valid accounts and valid department numbers.”

Partly as a result of these tighter controls, CFO Carter predicts the company will henceforth be able to close its year-end books in a single day, as opposed to the average 10 for his industry. He’s also delighted that the 500 people in his finance organization have more time to do more-productive work. “Our productivity level is close to $680,000 per person now,” he says. “That’s awesome. It’s because all those people are now doing something more value-added than dealing with transactions.”

Now, The Bad News

As impressive as Cisco’s use of ORM software has been so far, it’s hardly the kind of thing just any company can do. Cisco, in fact, is highly unusual. The company already does 64 percent of its business online. And as a manufacturer of computer networking hardware and software, Cisco already lives in the world of networks and browsers. “Cisco has a vested interest in making electronic-commerce projects like this work,” says Gartner’s Satterthwaite. “You couldn’t find a corporate culture that’s more ready to do this than Cisco.”

Indeed, a number of barriers stand in the way of emulating a Cisco-like application. One, says Satterthwaite, is that electronic catalog and procurement systems are still in diapers. By some estimates, only about 20 such systems are actually online in U.S. companies. Although more than a dozen vendors offer E- commerce purchasing solutions, it’s tough for prospective purchasers to sort the vaporware from a viable product.

“Vendors are talking about tens of millions in return on investment, yet it remains to be seen what these systems actually deliver,” says Satterthwaite. “Most vendors are on version 1.0 of this software, and even the most advanced companies, like Cisco, have rolled it out to only a third of their populations.”

James Cullinan, vice president of global purchasing at MasterCard International Inc., in Purchase, New York, says it took two people in his company two months to hunt down the ORM system (Elekom’s Procurement) his company uses. “We looked at just about every company that said they had a product,” Cullinan says. “We wanted a real company with real customers and real products. There wasn’t a lot out there. As it turns out,” he adds, “we’re one of just a handful of companies that are doing this.”

Another barrier is cost. ORM software sells for anywhere from $20,000 to $1 million plus, says Satterthwaite, who adds that the necessary systems integration can run 5 to 10 times that amount. But even before purchasing the software, there’s all the time and effort it takes to lay the proper groundwork, so that the systems can truly represent real business processes. “CFOs need to figure in the cost of reengineering their procurement processes in the first place,” observes Satterthwaite.

At Boehringer Ingelheim, the reengineering effort proved to be enormous. The company decided to set up a 70-person shared services center, in Ridgefield, Connecticut, to handle all the high-volume transactions for all U.S. operations (accounts receivable, revenue cycle, payroll, and travel). That required more than simply buying and installing software. “Ariba requires a major effort regarding change management and the reengineering of your processes,” says CFO Huels. “It affects almost everyone in your organization. You need quite a lot of internal communication to make it work.” To develop a business plan for a streamlined ordering process that would cut down on transaction costs, Huels’s reengineering group spent 10 months studying best practices.

“I told people to really think outside the box,” Huels recalls. “They had to boil things down to the essentials. I presented them with a challenge: In accounts payable, what do we really need to do with an invoice? We don’t need to enter anything; in most cases we know the vendor, the amount, and the due date already. What we need is a confirmation that the material was received, and on this basis, we pay. I wanted us to really question which processes needed to stay, and which could go away.”

Instruction Required

Electronic procurement systems require an investment from suppliers, too, and while some suppliers may like the idea, others may not be willing to sign up. “Only those companies that are big enough to make suppliers jump when they call should consider this,” advises Satterthwaite.

Then there’s training. MasterCard, for one, has found that an easy-to-use Web-based interface does not an electronic procurement system make. When the company began rolling out Elekom’s ORM software last January, Cullinan soon encountered resistance among new users. During the initial training class, he realized that employees who were accustomed to the manual process of ordering supplies just didn’t get the electronic version.

“You’d think people would be more used to automation as a way of life,” says Cullinan. “But people want warm fuzzies. They need to know how the automation helps them in their job. The concept of working online, choosing from pictures, getting E-mail approvals, and having supplies tomorrow was hard for them.”

Cullinan knew that unless people were “thrilled” with the system, they wouldn’t use it, and the project would fail. Accordingly, MasterCard trained people in smaller groups and spent more time with individuals, and, as a result, the training portion of the rollout took twice as long as originally estimated.

To date, some 50 companies have approached MasterCard to learn how they can put together their own electronic procurement systems. Cullinan is willing to help, but he doesn’t sugarcoat his message. “I tell people, ‘If you’re not prepared to spend the time, resources, or attention, or if you’re not prepared technically or organizationally, you’ll get lost,’” he says. “Electronic procurement is more than a system. It determines how you will operate.”

Even once everything is up and running smoothly, still another problem raises its head, points out Satterthwaite. Suddenly, corporate purchasing departments discover they have to get into the Web-content business. When 17 vendors make changes to their prices or products, someone has to enter those changes into the system. But there may be a lack of uniformity among suppliers; for example, some might measure supplies in inches, others in centimeters. Such differences can make it tough for companies to aggregate data.

“Managing the content from suppliers is what makes this extra difficult to do,” observes Satterthwaite.

Changing the World

As with any pioneering technology, electronic procurement still has a long way to go. But the barriers are weakening, reports Satterthwaite. Vendors are making it easier for companies to catalog their information, and for users to warm up to an electronic interface. “As long as companies fork up the energy, the passion, and the millions to do it, they can benefit from this type of software,” Satterthwaite says.

MasterCard’s Cullinan longs for the day when employees will be able to order more products and services through the company’s procurement system. “We’ve been thinking about ways to get ordering of marketing collateral, complete with all the prepress requirements, on the system,” he says. When a department needs temporary help, it could use the system to tap into the temp agency’s system. Or an employee who wants training on a computer system could order a class and have it paid for online, in a flash. “We’re not sure yet how we will do that, but we know that eventually we will,” says Cullinan.

Even if the future isn’t paperless, it will certainly be a lot more efficient–and some, like Cisco’s Carter, say that’s revolutionary. “Think about how the Industrial Revolution changed the world,” he says. “Electronic commerce, and procurement systems like ours, are producing the current equivalent of that revolution. It’s changing the world in the same way.”