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Accenture

To remain at the forefront of innovation, companies must continue to keep pace with evolving sourcing and procurement technologies. Early adopters can help ensure their success in today's markets and secure their future market position.

Procurement technologies have progressed considerably. In fact, given advances in the scope and sophistication of corporate procurement teams, it would be difficult to find any company whose procurement operations could not derive new value from the use of modern purchasing or sourcing tools. However, if procurement technology has gained significant ground in the last few years, then what should companies expect in the next few? This paper looks at four of the most promising trends in procurement technology.

Maturing and Scaling of Procurement Technology

Early on, procurement technologies concentrated largely on the acquisition of indirect materials using electronic catalogs and workflow tools from established names such as Ariba and SAP. More recently, solution providers expanded their range to address direct materials – a move that has helped many companies improve profitability. But down the road, challenges pertaining to services procurement will produce the greatest changes in procurement technology.

Services procurement is particularly important because of the growing complexity of service-related category management and the rising value of service providers in general. Additionally, more companies are outsourcing service activities that used to be done inhouse. In fact, more than 33 percent of a typical organization’s current spend is on services – such as contractors, temporary labor, travel and training and marketing – and this ratio is expected to grow. Purchasing departments typically manage less than 10 percent of this spend, and compliance with preferred providers is often low. The net effect is a wide-open field for services-savvy procurement applications that can help companies curtail rogue spending, work efficiently with a wider range of suppliers, simplify the sourcing process and actively manage total costs.

A good example is contract labor – an area where coordinated procurement is arduous, and compliance with preferred agreements is particularly poor. Much of the problem is due to the complexities of identifying and hiring appropriate temporary labor and the subjective nature of hiring decisions. These challenges have made it difficult for buyers to embed procurement and negotiating rules when electronically acquiring temporary labor services. However, new service- focused capabilities in e-procurement software will soon help companies overcome such obstacles.

Like e-procurement, e-sourcing technologies are becoming more powerful and, consequently, more popular. Originally designed to support the reverse auction (or e-auction) process, e-sourcing capabilities are starting to find their way into core applications, including enterprise resource planning (ERP) offerings from vendors such as SAP. As this continues, workflow and knowledge management functionality will become more sophisticated, thus enhancing the sourcing process. In addition, increasingly robust analytical tools will help companies proactively assess sourcing opportunities, identify alternatives and evaluate proposals from prospective suppliers. The latter will be made possible by increasingly sophisticated modeling tools that enable companies to better determine and manage total cost of ownership across a wide array of categories.

Niche specialties in e-sourcing will also advance. A good example is the back-and-forth interaction required for negotiation of the specific language in contract documentation. Applications are emerging that enable companies to evaluate and mark up documents online, thereby resolving contract issues in something closer to real time and leaving a clear audit trail. Another promising area exists in the decision support function – specifically optimization solutions that evaluate numerous variables on a large scale. In transportation for example, buyers will be more able to present complex, multi-variant scenarios, including specific business constraints. Suppliers will be able to respond with multiple bid variants of their own, including price breakpoints and discount percentages that vary by volumes, sites and so forth. These powerful decision support systems enable companies to create more possible combinations than can logically exist in a typical e-auction system, and to scrutinize all possible combinations for scenarios that best fit their business needs.

As noted later in this paper, e-sourcing tools will become more valuable as their integration with other technologies is enabled, and as organizations regroup to take advantage of these capabilities. Contract management, for example, is an e-sourcing capability of burgeoning importance, yet its success requires tight integration across procurement and financial systems. By pulling information from enterprise applications, new potential arises to monitor performance, enforce compliance and become more attuned to milestones, aberrations and expiration dates.

Lastly, look for niche vendors and ERP companies to focus more on applications that use standard capabilities to solve nonstandard problems – avoiding the need to create expensive, over-customized software. A company called Elance is developing one such solution – an application for sourcing and managing complex services on an ongoing basis. Rather than build a new application for every servicerelated commodity, Elance has developed a powerful, generalized framework that helps buyers address high levels of complexity for commodities such as marketing and temporary labor. The solution addresses the strategic sourcing requirement and the tactical buying need – where business users construct, approve and procure complex services orders (which are almost always different every time). A simple example would be an agreement for print services, where negotiation off the rate card is a complicated endeavor addressed through strategic sourcing, but significant value is captured by accurately following the rate card for custom print service jobs. Today, these requirements are not adequately addressed by traditional e-procurement systems.

A leader in the scaling of procurement technology is General Motors, which recently began a global deployment of SAP's Supplier Relationship Management (SRM) suite. Prior to this implementation, SRM capabilities (e-procurement, e-sourcing and business intelligence) were deployed narrowly – usually serving a single geography or business unit. GM has broken the mold by launching multiple implementations of a single suite from a single vendor. In effect, great strides in functional capabilities now make it possible for companies like SAP to provide a global one-stop shop.

More Sophisticated Business Intelligence

In the near future, procurement systems will be a lot smarter about gathering, interpreting and communicating relevant procurementrelated information. To date, procurement-reporting capabilities generally have been weak. This means the potential for better procurement analytics is enormous – even in the short term, with buyers able to capture savings they previously were unaware of. For example, spend-aggregation opportunities across departments or business units are less likely to be lost, and off-contract purchases can be identified more easily and addressed more proactively. Further down the road, such capabilities will enable companies to perform more in-depth analyses in less time, thus maximizing their ability to negotiate with suppliers, manage supplier performance and free up buyers to concentrate on more strategic activities.

The greatest value, however, will be improving the speed of decision making, with alerts, triggers or reports customized by end users. With this capability, the procurement function literally becomes more proactive – identifying problems before they get serious and flagging cost reduction opportunities before the company reaches its annual round of “let’s go find the money.” In effect, continuous improvement becomes more of a reality. You could also say that better procurement intelligence democratizes a company’s information management capabilities by putting more powerful tools in the hands of those with the business insight to use them productively.

Before these milestones can happen, however, most companies will require much more granular data and significantly improved classification schemes for content. Many should also plan to increase the granularity of item information (e.g., complete supplier data and/or line-item data from their bills of materials) captured in reporting and analysis solutions. Others will need to develop a clear and deep understanding of their services spend. These efforts – combined with technology improvements – will translate into real money very quickly.

During its acquisition of Caesars Entertainment, Harrahs Entertainment used a single suite of business analytics tools from SAS Institute to analyze the entire spend history of both companies and to identify sourcing priorities for the soon-to-be combined companies. Accomplished entirely in a clean room to comply with Federal Trade Commission requirements and protect competitively sensitive information, this approach made it possible to identify substantial synergies – particularly in sourcing – to support the merger’s business case. To uncover additional value through new sourcing opportunities and to gain operational insights similar to the above, Harrah’s also is implementing this capability in-house.

Integration of Procurement Technology With Other Parts of the Business

A natural analog exists between increasing procurement business intelligence and tightening procurement technology’s integration with other business systems. Both ERP and best-of-breed vendors have made it a priority to link procurement technology more fully to financial, logistics and even product life cycle management (PLM) systems.

The PLM connection is particularly relevant to direct-material sourcing (where a growing number of companies are pursuing cost reductions and new capabilities) and to the increase in companies undertaking global sourcing across commodity categories. Consider that the connection between product development and procurement is innate: up to 80 percent of direct-material costs are locked up in the design and prototyping phase. However, better linkages with e-sourcing systems have strong potential to extend near- and long-term benefits for product development and procurement. Those advantages include improvements in part reuse; streamlined item acquisition and availability; expanded sources of supply; improved access to preferred vendors; and greater economy at the design stage – all without compromising designer priorities such as quality, functionality and manufacturability. In effect, better connectivity with PLM tools means new chances to design costs out of new products and leapfrog the competition.

Although immediate cost reductions are not the mission of supplier portals, better integration with procurement technologies is another important advancement. The key benefits here are better collaboration with suppliers and the potential to automate basic transactions, such as purchase orders, purchase order acknowledgements, advance shipping notices and invoices.

Primarily focused on evaluating supplier performance, RFID applications are another procurement integration target. To date, supplier performance evaluations have generally been shallow, manual and largely subjective: “Did they hit their delivery window?” “Were orders complete?” However, linkages between RFID and procurement applications have the potential to inform supply chain decision makers in real time about actual reject rates, improve item tracking to accelerate recalls and warranty management processes and even abet vendor-managed inventory processes (i.e., deployment or removal of an item immediately triggers an order for a replacement item).

Last, planning and forecasting are tremendously important parts of the entire procurement life cycle – particularly in direct materials. For this reason vendors will make integrating procurement capabilities with planning, forecasting and MRP systems a major priority. This connection will effectively close the loop – reducing overall costs by providing future materials requirements to suppliers that, in turn, will be able to respond quickly without maintaining excessive inventories or suboptimizing manufacturing capacity to deal with frequent crises.

Stronger Influence of Web Services on Procurement

Today, procurement professionals access various procurement portals to acquire materials, check status, complete transactions, research potential vendors and manage e-sourcing events. In the near future, a greater percentage of those interactions will happen transparently between systems, with software that uses open standards to connect applications and data sources over the Internet on demand, instead of through custom interfaces developed on proprietary networks. For example, when an item is ready to ship, the supplier’s system will have the ability to automatically generate and submit an advanced shipping notice. Later, the same automatic process will help trigger the generation and forwarding of an invoice. Basically it’s the promise of electronic data interchange, but without proprietary networks and proprietary software.

Right now, the focus for Web services development is on building infrastructure and developing standards. In the near future, however, emphasis will shift to actual application components, such as industry-specific content. Shortly thereafter, early-adopting companies will be able to:

• Simplify the connection of disparate systems to reduce connection costs and enhance collaboration with suppliers;
• Readily access new applications, thus extending information transparency and granularity; and
• Share more (and more detailed) procurement-related information with select suppliers, thereby reducing costs and fostering more long-term relationships.

Improved transaction and content management, as well as planning and scheduling processes, also will be major beneficiaries of advanced Web services. Today, for example, planning/scheduling often requires companies to log on to a supplier’s system, download a forecast and then read and react to it manually. In a Web services environment, forecasts and plans will be shared, updated and enhanced in a more real-time fashion. Design, financial, manufacturing and logistical information will (with the proper authorizations) be ubiquitous.

Maintaining Momentum

In recent years, procurement-related economies have been well documented. Cost reductions associated with e-auctions, for example, frequently reach 15 percent of the addressed spend. Outsourcing the procurement function has been shown to yield even greater savings, in addition to cutting operating expenses, improving capital allocations and generating new revenue streams. Moreover researchers have concluded that procurement improvements that reduce a company’s cost of goods sold by as little as 1 percent can produce the same margin lift as a 12 to 18 percent rise in sales growth.

However, as more and more companies upgrade their procurement capabilities, the competitive advantage produced by those improvements will narrow. Which is why companies must investigate new opportunities for procurement innovation now. In fact, many of today’s leaders already have transformed their procurement capabilities, and now are working to derive greater value by scaling, integrating and leveraging their procurement investments. For them, high performance means staying ahead of the curve by seeking out tomorrow’s procurement tools today.