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E-procurement adoption is mushrooming as companies realize the cost-savings potential in direct and indirect purchasing, along with the benefits of more fluid supplier relationships. Companies should start with the commodities that pose the least risk and change management challenges. One way to get started is through procuring commodities via purchasing cards.

In the late '90s, analysts forecasted that billions of B2B dollars would flow through e-marketplaces by now, reshaping buyer-supplier relationships and taking millions of dollars out of the process cost. But in their rosy predictions, analysts failed to account for the role risk aversion and change management would play in determining the course of e-procurement's slow but steady growth.

E-procurement is actually flourishing in surprising areas. The companies rolling out e-procurement successfully are those that took a nontraditional look at their supplier segmentation strategies. E-procurement is growing rapidly in low-cost commodities, such as office supplies, industrial supplies, and computer peripherals, primarily because they're nonstrategic commodities where risk is low and change is less disruptive.

Why? The key driver of e-procurement adoption is the ability to streamline the entire purchasing lifecycle from sourcing and purchasing through to payment and financial reconciliation. However, early adopters soon confronted the obstacle of e-payment. Few buyers were willing to risk large sums of money with start-ups developing untested payment solutions. They subsequently discovered that e-procurement works well with e-adaptable payment solutions like purchasing cards, which are traditionally used for low-dollar, indirect commodities.

Nonstrategic commodities aren't enough to justify the investment in new systems and the cost of change, so companies that are enjoying success with indirect commodities are starting to expand their e-procurement initiatives into other quadrants. To minimize the risk and resistance to change, companies found that using a payment option suppliers already trusted eased the implementation process.

Traditionally, procurement strategies focused on finding the lowest price for goods and services. E-procurement is changing traditional purchasing processes. Today, companies are moving beyond price and discovering additional cost savings opportunities by reexamining their approaches to supplier segments.

This paper discusses how companies today are looking beyond simple purchase process savings and evaluating total transaction costs, including the accounts payable component, for the organization. While pursuing the cost savings potential of e-procurement, it's not often easy to integrate the new online processes with existing offline purchasing processes.

How E-Procurement Altered Supply Segmentation

The Institute for Supply Management (ISM) Supply Segmentation Grid, shown in figure one, illustrates a classic framework for procurement managers.¹ In the traditional model each quadrant is defined by the level of risk or exposure of a typical purchase and the relative cost or value of an average transaction.

Initially, e-procurement tools and market- places were aimed at strategic commodities, which fall into Quadrant IV of the Supply Segmentation Grid. However, companies didn't anticipate e-procurement's impact on supplier relationships, and change management issues quickly inhibited the success of migrating strategic suppliers to e-procurement platforms.

Early adopters of e-procurement found that the commodities within Quadrant I were more inclined to succeed, due in part to more fluid supplier relationships, and that they were using either checks or purchasing cards to pay for the commodities in this quadrant. By using purchasing cards, companies were able to mitigate the risk for their suppliers. In most cases these suppliers were already accepting purchasing cards so the effect of change was minimal. As we drill down deeper into the quadrants, we will discuss how change management issues and risk are minimized while the breadth of e-procurement programs is maximized.

Quadrant I: Tactical

Quadrant I represents low cost, low risk transactions. Examples include everyday purchases, such as office supplies, PCs, and software. However, with e-procurement, Quadrant I also represents items that are easily available from suppliers via e-catalogs. These items can be purchased directly by end users using a purchasing card. Quadrant I items allow companies to set a purchasing policy, choose key suppliers, and let end users make decisions. Companies benefit by having the ability to eliminate individual invoices and maintain control over individual transactions. Under the traditional procurement model, the Quadrant I focus was on efficient processing of large numbers of transactions. E-procurement brings effective purchasing centralization and the opportunity to reduce costs by negotiating prices.

Quadrant II: Leverage

Quadrant II includes high-ticket indirect cost items, such as materials requisition order (MRO), general and administrative (G&A), and travel and entertainment (T&E). In commodities with existing high technology capabilities, such as T&E (airlines) and telecommunications, there has been a swift transition to new purchasing approaches. The suppliers' strong technology capabilities usually mean Web-based functionality or services for end users, such as reserving air travel online or using more complex "follow me" virtual office telecommunications services online. The leverage in strategic sourcing negotiations can now focus on outsourced industry experts. Outsourcing is also a vital sourcing alternative for low risk/high cost Quadrant II commodities suppliers that are not ready for online transactions. Typically, outsourcing candidates have diverse products and services that are costly and difficult to bring online, such as facilities, maintenance, and temp agencies. For added flexibility in vendor selection and improved data collection, some companies use payment vehicles such as corporate cards for T&E and purchasing cards for MRO and G&A expenses.

Quadrant III: Critical

The high risk/low cost quadrant contains items, such as small parts or specialty items, that have a low relative value to the end customer but are critical to completing an organization's finished product. Quadrant III transactions are typically closely managed to ensure continuity of operations. Companies are reluctant to move goods and services in this quadrant too quickly into e-procurement tools because of the risk of service or manufacturing interruptions.

Quadrant IV: Strategic

This quadrant contains items of highest importance to a company's end product. This quadrant has traditionally been the top priority for effective supply chain management. Particularly for manufacturers, effective integration of key suppliers within the production cycle historically resulted in enormous cost savings and product improvements. The new purchasing challenge for Quadrant IV items is to develop and take advantage of online RFQ and auction processes. E-procurement for these strategic goods and services has been shown to reduce prices by as much as 20 percent through auctions.² Consultants in e-procurement have already noted the dichotomy of online auctions that drive down price and minimize relationship, versus the partnership and collaboration required by supply chain management.³ Still, some accounting process savings are achievable, companies have begun to require purchasing card acceptance as part of e-auction and e-RFP criteria.

Change Management Tactics in Turbulent Times

Selling Change to Colleagues, Employees,and Suppliers

Although the cost-savings benefits were clear, early online corporate travel Web sites were plagued with low usage by frequent travelers. It was hard to persuade them to give up phone-based customer service. Likewise, procuring online is a huge change for your organization and your suppliers. One way to successfully communicate the change is to focus your message on empowering individuals. The most successful corporations leveraging e-procurement learned the lesson to communicate, train, sell, persuade, reward, and then repeat, if necessary, for employees to adapt to the new process. In addition, it's important to have senior management sell the change message throughout the implementation process and on an ongoing basis. Suppliers may be reluctant at first, but then will soon realize the benefits of automating their processes.

Largest Costs to Procurement Strategies Are Often Hidden Integration Costs

Often cost estimates do not include key hand-offs or downstream impacts to existing legacy systems. If your corporation has a decommission strategy underway, leverage this to reduce the number of downstream systems your project might impact.

Technology Expertise is Critical for Most Strategic Procurement Decisions

While this sounds obvious, many initiatives begin with business expertise alone. Bringing in technical experts early for both parties enables more informed decision-making. Although overall technical investment has dropped, many corporations are still in the middle of completing large ERP or new technology initiatives. Ensuring the strategy fits the corporation's technical architecture is critical to long-term success. Many companies with highly complex systems have elected to use hosted solutions to minimize impact on internal systems.

E-Procurement on the Rise

Over the past two years, many companies have chosen to procure online, and some are increasing transactions by over 300 percent from 2001to 2002. E-procurement presents a number of opportunities to realize significant savings in both direct and indirect purchasing. To take advantage of these opportunities, companies should start with commodities that pose the least risk and change management challenges. Successful companies are getting started by procuring commodities online where the accounting processes have already been streamlined to a great degree due to the use of a purchasing card. Selecting "e-procurement ready" commodities should be based on form of payment used as well as impact to the organization and the supplier.

Choosing suppliers that have made the technology investment required to enable e-procurement transactions will help in achieving transaction cost savings. In addition, adapting proven purchasing strategies including price negotiation, outsourcing, RFPs and reverse auctions to new categories of transactions will help increase purchasing process efficiency. Finally, companies must provide payment methods to purchasers that streamline the payment process and provide data that can serve as the basis for improved purchasing management decisions.

Endnotes

¹ Joseph L.Cavinato, Ralph G. Kauffman, The Purchasing Handbook, NAPM, McGraw Hill 2000, pps. 87- 95.

² Pantellos site case study. "Fiber Duct Auction." www.pantellos.com/news.

³ Dale Neef, E-Procurement From Strategy to Implementation, p. 128, Prentice Hall, 2001.