E-Procurement: Myth Is as Good as a Mile

Survey reveals enterprise-wide E-procurement is still more hype than help. That will change.
January 1, 2003

After years of hype and high investment, reality has set in among corporate E-procurers. In the heady dot-com-crazed days of the late 1990s, company after company thought wonderful things would happen to their bottom lines if they began sourcing and purchasing goods and services on the internet. Back then, IT experts predicted with glee that “big-bang” E-procurement systems designed for massive corporatewide implementations would save firms anywhere between 25 percent and 60 percent of costs and bring widespread process benefits.

For the most part, companies are still waiting for predictions like those to come true. Various research reveals a massive gap between expectations and real-life experience, resulting in many E-procurement projects being scaled down and spending cut back. After a booming 2000, corporate investment in E-procurement and E-sourcing stalled in 2001, growing only 19 percent to E1.8 billion, and will “plod along” at a 16 percent compound annual growth rate through to 2006, says AMR Research in a recent applications market study.

“E-procurement has been mis-sold,” contends Mary Kingman, business development manager of U.K.-based Tranmit, which supplies procurement solutions to Sony Music and DHL among others. “Buyers have been needlessly confused by promises of fully automated processes and electronic trading, when the truth is that the vast majority of transactions still involve paper.”

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A global study in September, for example, from AT Kearney, a management consultancy, revealed that 96 percent of the 150 companies polled are running E-supply management systems. But remarkably, those systems are covering only a fraction — an average 11 percent — of their cost base. That’s a far cry from the 70 percent to 80 percent coverage predicted a few years ago.

Firms have learned the hard way that problems ranging from content management to supplier enablement can slow down an E-procurement project. In the AT Kearney survey, the main problem cited was a lack of integration with existing procurement systems, but respondents also admitted underestimating the difficulty of getting staff to use the new systems. “It is common for companies to experience early success with pilot projects but run into huge difficulties when they try to go for a broad-based implementation,” notes John Blascovich, author of the AT Kearney report.

Some businesses are now seeking ways to automate processes on a short-term, tactical level, rather than investing in costly, longer-term strategic projects.

Little by Little

“The key thing we’ve learnt about e-procurement is that it’s best to take an incremental approach rather than throw everything at it and hope you’re going to get a rapid return,” says Ian Taylor, head of group procurement at Halifax Bank of Scotland (HBOS), a UK financial services firm.

Since April 2000, Taylor has been building E-procurement systems for HBOS to support 2,000 users at over 1,000 sites. “We wanted a safe, lower-cost incremental solution,” says Taylor. Co-developed with Arelon, a collaborative software developer, the system has already cut staff time spent on procurement, reduced wastage by 25 percent at a saving of around E500,000 a year, and clipped purchase costs on stationery and the like by at least 2 percent. Now he’s creating applications for high-cost items such as temporary staff and company uniforms.

Taylor says its was important that the applications were developed incrementally. “We were able to prove each stage internally as we went along and easily adapt things to suit our own needs,” he says. “We also collaborated closely with our suppliers to ensure that they could take the technology on board at each step of the way. We haven’t achieved Nirvana in terms of absolute integration with their systems, but we’ll get there.”

Anecdotal evidence suggests that more and more procurement managers share Taylor’s view. At Volkswagen, for example, Meike-Uta Hansen, B2B head of purchasing at the German carmaker, says she “started with small, but effective, projects, beginning with key elements like online negotiation.”

Two years and an estimated E27m later, Hansen has built an auction site to support all operating companies and brands including VW, Audi, Seat, and Skoda. Providing access to online auctions and requests for proposals (RFPs) electronic catalogues, and supplier databases, the system has supported 1,400 online auctions involving 4,000 suppliers from steel to tires to office copiers. These deals accounted for E14 billion of supply spend, around 20 percent of VW’s entire cost base.

Savings have been impressive. VW claims to have shaved 20 percent off costs thanks to online auctions, amounting to E700m, and 21 percent from RFPs.

Hansen, however, believes there’s more work ahead. “We have reduced lead times, cut costs, reduced staff levels, and negotiated better terms, and that’s wonderful,” she says. “But every company is going through a major learning process. People have to realize it is still very early days for sourcing and procurement systems.”

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