Supply Chain

Expense Management: Better Ways to Buy

Sometimes costs don't need to be cut so much as captured, quantified, and reconsidered.
Yasmin GhahremaniSeptember 1, 2008

At the height of the dot-com boom, in January 2000, the term “E-procurement” appeared in these pages for the first time. Virtually synonymous, then, with E-commerce, the term joined a burgeoning pantheon of Internet buzzwords and promised a revolution in how companies bought and sold everything from raw materials to contract labor. So your head of sales knows the names of all his clients’ kids? Quaint, but pointless: soon all buying and selling would take place in cyberspace, transparently, instantaneously, and impersonally. Welcome to the New Economy.

It has not, of course, played out that way. Online auctions, trading hubs, E-marketplaces, and a host of other sourcing options have come and gone. Putting the letter “E” in front of a conventional business practice, it turns out, does not magically transform it overnight.

But in the intervening years, much has changed — fitfully, often painfully, and sometimes almost invisibly. Today companies can bring automation to bear on a wide range of sourcing and procurement tasks. Virtually every dollar a company spends, in fact, can be spent more wisely if the right systems are put in place.

Companies that want to shop more smartly have a huge range of opportunities to do so, from targeted areas such as travel and entertainment to broad procurement programs for core materials and other supplies. While the current economic climate makes it tempting to mandate cost cuts across the board, a wiser course might be to inject some electronic discipline around expenditures so that you can feel confident that you’re getting your money’s worth. What follows is a survey of some of the most promising developments in several key spending categories.

Travel & Entertainment

Despite the recent surge in oil prices and the attendant impact on business travel, research firm Aberdeen Group reports that 80 percent of enterprises saw their T&E expenses rise over the past year, by an average of 14 percent. If higher airfares are painful, so too are the hidden costs imposed by clunky monitoring and reimbursement processes. T&E has traditionally been an atypical form of expense, with employees spending their own or company money up front with substantial discretion; compliance kicks in after the fact, when they file expense reports, by which time it may be too late to do much good.

That was the case at Pentair, a maker of water- and pool-filtration equipment. Until two years ago, employees would book trips through a designated travel agency — or not — and often charged purchases to their personal credit cards. Low corporate-card usage made it difficult to tell exactly what employees had done and whether they were using preferred airline and hotel partners. On top of that, a manual expense-reporting process was time- and labor-intensive for both employees and the beleaguered accounts payable department.

But a system that combines online booking with expense reporting changed all that. The booking tool guides travelers to partners with which the company has negotiated volume discounts. Once an itinerary is chosen, all expenses can be loaded into the expense report with a mouse-click. Employees have half their paperwork done before they even leave; once on the road, credit-card charges are automatically added to the report as they accrue. “I tell people, ‘You may hate it the first time you use it, but after the third or fourth time, you’ll love it,’” says Natalie Chantal McGrady, a former indirect supply manager who now consults for Pentair.

Along with the technology, the company instituted a new credit-card policy. The online booking system accepts only the corporate credit card, and Pentair auto-pays all approved charges made with it. If a traveler books outside the system, he has to pay those charges himself and wait to be reimbursed.

The system generates plenty of data to help Pentair better enforce compliance and manage budgets, and the finance department can run reports by the approving manager, expense type, or department — a process that used to take three days or more but now requires only a couple of hours.

As is the case with much of the technology now reshaping corporate purchasing, Pentair subscribes to rather than owns the software it uses. For a one-time setup fee of $20,000 plus $28,000 in internal IT costs (also one-time), the company can accommodate the 3,000 employees who travel each year. This year alone it has already reaped $100,000 in preferred-provider discounts and savings on travel agent fees, while increased use of the corporate credit card is expected to boost the rebate by the card issuer by about 20 percent.

Pentair also expects to save on process efficiencies, but that payback will take longer due to the expense of training finance staff and rank-and-file employees on the new system. Aberdeen reports that automating expense reports halves the filing time for travelers and cuts processing costs from an average of $30 to $19 per report.

Beyond T&E

For many companies, however, taming T&E is not enough. They’re looking to keep better tabs on other expenses through “spend management,” a broad category that includes everything from T&E packages to spend analysis, E-sourcing, E-procurement, E-invoicing, and supplier relationship management (SRM) software and services. As with the system described above, virtually all of these capabilities are available as Web-based services priced by some unit of usage, often a per-user per-month basis. Forrester Research says the overall category averaged 14 percent annual growth between 2003 and 2008, easily outpacing the overall software market.

Spend-analysis software, in particular, has taken off in recent years. It helps a business determine exactly what it’s buying and from what company. A global enterprise with a multitude of divisions may have dozens of suppliers for the same product, or have different divisions that unknowingly use the same supplier (one division classifies it as “IBM,” for example, while another uses “International Business Machines”). In many cases companies miss out on the volume discounts they could get by consolidating and centralizing purchasing.

There are two ways to tackle spend analysis. For $50,000 to $100,000, a horde of consultants will sift through invoices, purchase orders, and contracts and produce a report, most likely on one facet of the business. Or, for $100,000 to $500,000, you can tap software that will do it for all aspects of the business all the time.

Diebold, which makes automated teller machines and other security systems, opted for the latter. Vice president and chief procurement officer Linda Parcher says the company’s spend-analysis tool helps guide a continuous range of global purchasing decisions. “We’re constantly using the software to [determine] what our current spend is, and leveraging that in negotiations when we need to add products,” says Parcher. “We look at the current supplier-spend stratification to make sure we don’t have too much spend with one supplier.”

Straight to the E-source

In many respects, today’s “E-sourcing” delivers what yesterday’s E-procurement promised: an easy way for suppliers to bid for contracts online through reverse auctions or by submitting electronic requests for proposals (RFPs), quotes, and information. “It gives suppliers the information they need so they can put their best foot forward,” says Roy Anderson, vice president of MetLife’s global procurement, “but it eliminates the sales stuff.”

At transportation and logistics company Con-way, E-sourcing brought some much-needed standardization to a process that was so ad hoc that, as chief procurement officer Mitch Plaat notes, some RFPs were “not optimal” and in other cases “we hadn’t even gone through the bid process.” Rolling out the system posed some challenges, notably the resistance of managers who wanted to keep their supplier relationships close to their vests. But with C-level support, the initiative pushed through and sourcing acquired more rigor.

Con-way declined to disclose figures, but E-sourcing software vendors claim that users can often negotiate 10 to 20 percent savings. Beyond savings, E-sourcing platforms provide a way to compare suppliers on attributes other than price. Some companies, for example, use them to create supply chains based on environmental sustainability or other criteria.

MetLife uses E-sourcing as part of an effort to make its purchasing strategic rather than tactical. For instance, if it decides that a key part of its IT strategy is to make greater use of hosted storage over the next five years, it will look for vendors whose strategy matches that. “The data allows us to see which suppliers are moving in our direction,” says Anderson. “If their bids are getting further and further away from the preferred structure, they’re losing focus on MetLife.”

Con-way paired its E-sourcing software with an SRM module, which tracks service-level agreements, rebates, and contractual discounts. It also provides a structure for periodic reviews and supplier-performance scoring. “The suppliers know how they’re being judged,” Plaat says. “It’s all measurable on the scorecard and shared in quarterly reviews.”

Going Shopping

Once a supplier base is established, whether it be for computer hardware or Post-it notes, buying becomes a breeze. Or, at the least, not a chore that requires a specialist. At MetLife, 95 percent of indirect goods are now ordered through self-serve online catalogs. This makes it easier and more cost-effective for suppliers to do business with MetLife, and frees up procurement staff for more-strategic projects. The procurement department’s head count is 10 percent lower than it was seven years ago.

Rounding out the buying process is E-invoicing, which has seen rapid growth in recent years. Some of the systems, which are most often offered by either credit-card or software companies, scan paper invoices (which still make up 80 percent of all bills), while others require suppliers to switch to electronic invoices. This is one area of corporate life where the concept of “paperless” is really taking hold. Paper invoices can get lost, damaged, misplaced, misinterpreted, or ignored. In electronic form they can be tracked, processed, and reconciled far more quickly and with lower error rates.

David Griebl, vice president of shared services at Monster Worldwide, says that lost invoices were all too common at his company, resulting in everything from canceled cell-phone subscriptions to, in one case, the near termination of electricity to an office where a bill got buried under a stack of papers.

Now that the company has instituted an E-invoicing system, “those horror stories are over,” says Griebl. An electronic invoice shows up in the queue of the person who needs to approve it. If it’s ignored for a few days it goes to the person’s boss. That seems to make people more attentive to their queues.

Ironically, Monster signed on not for the direct benefits of E-invoicing, but because it also satisfied a Sarbanes-Oxley requirement. “We wanted to make sure that when someone approved a $100,000 invoice they really had the authority to spend $100,000,” says Griebl.

It Takes an iPod

All forms of spend and expense management come with challenges. Managers complain the software still needs to be more user-friendly, and interfaces with existing software need to improve. And technology alone can do only so much. “Do not assume that the spend-management solution will save you money,” says Neil Deverill, a London-based consultant who has headed procurement departments for several large multinationals. “It can improve your knowledge of who is spending what with whom, but you will still need to improve your business processes. And, you may have to recruit specialist talent and do some extra training to get the most from it.”

The biggest challenge may well be getting the workforce on board. No one likes change, even if it means getting reimbursed for that client lunch far more quickly than before. C-level sponsorship is essential. So is patience. When it rolled out new invoicing software, Monster surveyed a pilot group, used that feedback in training and communications, and held a contest in which the first 50 early adopters received an iPod. “We really thought we’d sold it and that we understood the concerns,” says Monster’s Griebl. “But they linger. People are difficult to change, even if you’re helping them out.”

Next time maybe a MacBook Air?

Yasmin Ghahremani writes about business and technology from New York.

What Companies Want

Top 10 reasons cited for adopting spend-management software or services

Spend-Management Priority

• Deliver measurable results that correlate to bottom-line metrics
• Accessing and analyzing spend data
• Identify savings opportunities faster
• Increase visibility to upcoming spend in majority of spend categories
• Supporting multiple business units or geographies
• Completing projects on time and within budget
• Recruit, audit, and measure performance of your suppliers
• Build internal commitment for spend-management programs
• Ensure end-user adoption of your spend-management solution
• Extending coverage without adding resources

Source: Ariba Inc. survey of 600 finance, procurement, and business executives

Predicted growth in supply-chain sourcing over five years
Spend-analysis software is a small but fast-growing market.