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In 2000, the B2B 'revolution' was in full swing. Today, the reality is sobering.
One company we interviewed invested $5 million in a Vertical Market only to see the organization shut down without executing a single transaction. Another company paid consultants for over 30,000 hours of work to implement an e-Procurement solution. Today, they have a handful of catalogs up and running with a compliance rate below 50%.
The following graphic represents a typical ROI projection used to justify the purchase of an e-Procurement system in the recent past (see Figure 1).
In this example, the costs in Year One include e-Procurement software, integration, implementation, internal IT costs, and content development.
We have proven that there is a way to drive a measurable and compelling return on e-Procurement investments in a short timeframe. However, it requires a different, more comprehensive approach.
Lack of Focus on Unit Cost Savings
A multinational clothing manufacturer recently canceled their e-Procurement project after 24 months and millions in fees due to their inability to obtain supplier content. When the implementation ran over and money was tight, the lack of tangible results forced the CEO to cancel the project.
In this case, lack of focus on supplier content gives insight into the way the company and their consultants perceived the project.
"The project is about technology that will enable savings".
We believe this is flawed. The thought process should be:
"The project is about savings, enabled and sustained with technology".
SOLUTION: Focus the Project on Achieving Bottom Line Savings
Sourcing strategy and technology are two vital halves of the solution. A sourcing strategy is needed to identify and pursue the unit cost savings that will drive the return. The technology is needed to capture and sustain those savings over time. A company can identify enough savings while the implementation is underway to completely fund the project, possibly within the first year. For example, we saved a $1 billion manufacturer $800,000 in savings on a $4 million steel buy within the first four weeks, which funded the first several years of the project.
ICG Commerce provides two avenues for rapid unit cost savings. We aggregate the spend of our customer base and negotiate deals with premiere suppliers in over 40 categories. These 'pre-sourced' deals provide immediate savings.
So, how does a lack of focus on procurement strategy promote project failure? A $3 billion diversified manufacturer found out the hard way. Without a clear strategy the company could not decide which categories to automate first. In addition, target commodity volumes were highly inaccurate because the manufacturer lacked a complete understanding of company spend. This led to long project delays and a lack of confidence in the ROI projections. Ultimately, the project was canceled.
Another common mistake is the lack of a thoughtful category roll out plan. Initial categories should be selected based upon potential for success. A manufacturer might select industrial MRO (Maintenance, Repair, and Operations supplies) categories as early targets given high transaction volume and a large amount of spend. However, these categories are often complex, can require custom product configuration, have end users that may not have access to a computer or may be uncomfortable with technology, and have a supply base with wide variances in sophistication. The success of this type of category in phase one is highly dependent upon the company's circumstances and the specific suppliers.
SOLUTION: Develop an Overarching Procurement Strategy
A procurement strategy is intended to provide a roadmap to savings enabled by the technology. A high-level spend analysis is a critical first step in any procurement strategy. We have analyzed over $100 billion in spend over the past 12 months alone for companies ranging from $250 million in revenues to $26 billion. Without exception, the results of this brief analysis are eye opening and more accurate than internal category volume projections.
From the spend analysis companies should develop a tailored savings strategy for each category using the most appropriate combination of sourcing and procurement services and technologies. Depending on the category it may be appropriate to rationalize the supply base and streamline procurement processes. Regardless of the approach selected, the goal is to reduce the total cost of the goods and services procured.
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