Redefining Procurement through Electronic Commerce

This paper introduces a new B2B procurement model that relies on eCommerce and electronic markets to compress cycle times, reduce non-value added roles, increase the information flow and generally lubricate the supply chain. In this way, we will show how buyers, suppliers and end customers benefit. This model is contrasted with today's "best practices," so organizations can understand what options they have when migrating to new business models and reducing costs while increasing overall organizational effectiveness.

Strategic Sourcing- The Traditional Approach to "Partnering"
A number of consulting firms have a very lucrative services business focused on strategic sourcing. Repeated across industries and even the same client every two or three years, the focus is on helping organizations buy better. Teams of bright MBAs come on-site, segment purchasing budgets by type of good/service, identify the vendors for each segment, eliminate those believed unnecessary, and renegotiate lower prices by aggregating demand with "preferred suppliers". Suppliers grow their sales volume at lower prices and guaranteed service levels with the hope that the scale economies will more than offset the lower prices. Business cases forecasting the savings and newsletters are written declaring the success of the initiative.

But making these benefits stick is very difficult. Over time, the projected benefits tail off because organizations have little ability to enforce these strategic sourcing agreements. Some refer to this as the rubber band effect- an organization's ability to stretch to achieve these savings quickly snaps back with the passing of time. As a result, individuals buy from suppliers directly off contract and prices migrate back to the pre-sourcing price levels. Two to three years later, the organization is ready to do another strategic sourcing project.

Managing Demand Proactively- A New Business Model
Our work with a number of organizations across industries has identified a highly effective alternative to strategic sourcing that can deliver long-term, sustainable savings by transforming the way in which organizations buy. Unlike the above model, our focus starts within the organization to proactively manage demand and processes. And, some of the greatest savings opportunities come from indirect goods and services purchases ­ the pencils, personal computers, temporary services and other incidentals that typically comprise 25% of what organizations spend. Depending upon the degree that procurement is fragmented across the organization, corporations can achieve savings of 10% to 25% of annual spending. These savings drop directly to the bottom line and are based on managing resources within your organization. With mergers and acquisitions taking place across a number of industries, this is a topic all CFO's are extremely interested in.

Figure 1.	Emerging Business Models in Business to Business eCommerce

• Transaction Control:
  This consists of two extremes. In a seller centric world, buyers "travel" to a seller's site to transact. Alternatively, as power shifts to the buyers, sellers increasingly have to participate in a "reverse market" in which they respond to seller's stated needs and deliver catalog information electronically to the client. All this is consistent with customer relationship management and their desire to service a "market of one".
• Degree of Competition:
  The other factor depends on what you are buying and the degree of collaboration vs. competition. For fungible goods, highly competitive spot markets are developing in which buyers and sellers come together to transact on a one time basis. Decisions are made typically on price and availability. Alternatively, in a collaborative environment, buyers and sellers have longer term relationships, share information and negotiate longer term contracts. For example, buyers negotiate long term contracts with suppliers and integrate manufacturing and planning processes. Through collaboration, ultimately both become more profitable together.

Pulling these two factors together defines emerging alternative business models in B2B eCommerce that organizations must consider. Ultimately, a procurement strategy will recommend a combination of models depending on what the organization is buying.

Focusing on eProcurement
While all of these business models are appropriate at different times for different types of commodities, this paper will now focus on eProcurement in which the buying organization plays a key control in the transaction. It relies heavily on collaborative, negotiated relationships between the buyers and their preferred suppliers.

Within this model, buyers work with their preferred suppliers to create catalogs of items which the buyers agree to procure from their preferred suppliers. These catalogs include information such as description of the products, delivery lead times, and negotiated prices for each. These items are then collated into a unified catalog, which typically resides on the buyer's Intranet, and can be accessed by all members of the buying organization. Alternatively, suppliers can provide access to these catalogs which they maintain on the Internet. From this buyer-centric catalog, purchasers can not only have visibility into negotiated agreements with their preferred suppliers, but can also fill out purchase requisitions, route those requisitions for approvals, and convert the purchase requisitions into purchase orders electronically. These electronic transactions can be integrated with the buyers accounting and enterprise management systems and processed according to rules of those systems.

Figure 2.	Demand Management Enablers

Finally, this new model provides a dramatic contrast to strategic sourcing which is based on supplier price concessions. This new model focuses on partnering with suppliers by providing them with direct access to the business buyers, providing information to proactively project demand and ultimately share profitability. This alignment changes the nature of the discussion and gives buying organizations the right to ask for future price concessions after they have been earned and not simply by demanding them as the "price of admission".

Alternatives to eProcurement
Organizations that adopt the above eProcurement business model want to maintain control of procurement within their enterprise and put the infrastructure in place to assure this. But not all organizations will have the foresight, scale or funding to put in place this end-to-end, integrated procurement environment.

Absent this commitment, the rapid adoption of the Internet as an electronic marketplace will further fragment an organization's demand. With access to the Internet at the desktop, organizations will increasingly buy what they need hopefully using procurement cards which will provide the procurement group with some management information around this "leakage". Individuals will quickly begin buying at seller web sites and use a variety of electronic marketplaces to meet their needs. Like the introduction of PCs in the business environment in the mid '80s, lack of controls will lead to proliferation and result in everyone being their own Chief Procurement Officer. Taken to an extreme, organizations will need to rapidly regain control of procurement or find themselves in a situation where the businesses are paying too much for what they buy, focusing on activities that are not core to their business, and relying on individuals who lack the procurement skills needed to be effective in this role.

Migrating into the Future: New Roles Required
We believe that large organizations spending more than $1 billion annually need to put in place a procurement strategy aligned with their overall business strategy. While it is unlikely that any one business model fits an organization's needs, they need to define the right combination that will allow the organization to be most effective.

This framework also helps highlight why and how the role of procurement is changing. Traditionally, procurement organizations have been order takers who have spent most of their time handling paperwork. In procurement model, procurement professionals take themselves out of the transactions as customers "self service" their demand on the desktop. These catalogs effectively provide enterprise access to the goods and services that have been sourced by the procurement organization. procurement group consists of professionals who spend the majority of their time fulfilling a new set of roles including:

• Internal Customer Management-
  focusing on developing strong relationships within the enterprise to assure the satisfaction of the business with an emphasis on meeting needs and assuring maximum transaction volume.
• Supplier Relationship Management-
  conducting strategic sourcing, contract management and generally making sure that the suppliers are providing the performance the business needs to continue and/or expand the relationship over time.
• Order Fulfillment -
  managing the day-to-day transaction flow beginning with requisition and approval all the way through to receipt and payment of the goods and services.

Beyond these three roles, the organization is managing compliance, generating management information to support customer and supplier management, and managing the electronic catalogs either internally or in conjunction with the suppliers.

Sponsors and Benefits of eProcurement Transformation
Embarking on such a transformational journey, which is a multi-million dollar investment, can only succeed with the sponsorship of "c level executives." The compelling reason for executive sponsorship is resident in the personal value proposition eProcurement offers.

• Chief Financial Officer-
  This provides CFO's with the ability to significantly reduce cost while increasing overall organizational effectiveness. They should ensure they have the business case, migration plan, and an overall benefits measurement program to enable them to realize and sustain benefits year after year.
• Chief Information Officer-
  eProcurement is one of the first "killer applications". It allows CIO's to demonstrate to the business the value they can deliver on the desktop. Buyers and decision makers help create the management information that comes from integrating procurement and financial systems.
• Chief Procurement Officer-
  For those CPO's who can embrace this vision, their organization moves from being a cost center to a service center providing services that increase the effectiveness of the business while simultaneously increasing service.

Beyond the internal winners, suppliers are increasingly accepting this business model after initially rejecting it. Benefits that accrue to suppliers include:

• Increased sales volume-
  By providing electronic catalogs on the desktops, enterprise wide, they are able to capture volume not previously available.
• Reduced sales costs-
  Vendors can redefine the role of the salesperson who can move to a more consultative sell and take advantage of the leverage eProcurement provides.
• Reduced operating costs-
  The eProcurement operating model assures accurate and timely orders and goes a long way to minimize the cost of reworking error prone manual orders.
• Improved demand insight-
  Through this electronic connection, organizations can better forecast buyer demand and use this to pull products/services through the supply chain.
• Improved customer relationships-
  In teaming with their customers, they are able to better service them, reduce overall procurement costs, and lock in long term relationships.

CONCLUSION
While this may appear to be a large step for organizations, one should focus on assessing the current procurement environment, creating a procurement vision that works for them, and building a business case that shows the benefits to be achieved. Typically the results can be surprising. And for some organizations, they may actually think about the strategic role of procurement once they get it right internally. To what extent might this service provide value to their customers? What additional products and services might they be able to cross-sell? To what extent would this deliver similar savings to their customers and drive client retention? Maybe strategic procurement is no longer the oxymoron one might think.

About the Author
Christopher Sprague is an Associate Partner within Accenture Financial Services Practice and has spent the last ten years focusing on how information technology can both support existing business strategies as well as create entirely new ones. More recently, he has become one of the leaders of the eCommerce practice and heads up the eProcurement market offering. Mr. Sprague graduated from the MIT Sloan School of Management.

Note to Readers: The author would like to thank Christopher F. Carfi for his thinking on Emerging Business Models in B2B eCommerce. This work has been invaluable in developing client strategies that allow procurement to deliver new forms of value to the business.