RETURNS FROM E-PROCUREMENT: Choose your procurement method carefully

Feature

posted 9 Jan 2002 in Volume 5 Issue 6

RETURNS FROM E-PROCUREMENT: Choose your procurement method carefully

European companies that have embraced e-procurement technologies have achieved very disparate economic returns depending on whether they have implemented e-requisitioning or e-auction capabilities according to a recent study by Accenture.

A recent study from Accenture has taken a good look at e-procurement analysing the benefits to business of e-requisitioning and e-auctions. In the case of e-requisitioning the jury is still out as far as its benefits - most companies are still at the early stages of their implementation. In the case of auctions the ROI (return on investment) can be very significant but only if key conditions are respected such as rigorous upfront preparation and suppliers communication and training pertinent category and timing selection.

Published for the second year a pan-European Accenture study expands research from a first study that gave a general overview of e-procurement penetration in the European market. This second study takes the research one step further by focusing on the early adopters (those with up to two years experience) using the most innovative methods in this field.

Despite the fact that e-auctions are still in their infancy (many companies have only on average put up for auction 1-2% of their spend compared with targets in the region of 30%) there is a strong degree of satisfaction as it has speeded up the whole sourcing cycle and typically generated savings of 10-35% depending on the specific auction undertaken.

“Compared to a traditional tendering process the view is that the incremental value of the auction itself is in the region of 3-5% for an average incremental cost running at approximately 1-2% of the auction value ” says Richard Laub partner in Accenture’s supply chain management practice.

Hitting its peak

According to the study e-bidding reaches its full potential when:

Spend categories and timing of the event are carefully selected to ensure competitiveness.
Communication with the suppliers and auction training are effectively conducted.
The upfront sourcing work is thoroughly conducted (eg sourcing strategy development spend analysis supply market assessment supplier identification total cost of ownership analysis and RFQ (request for quotation) development).
The appropriate e-auction and e-RFQ technology is identified and the appropriate support infrastructure was provided.

Under those conditions buyers benefited most from costs decrease and productivity increases. Furthermore suppliers benefited from a better knowledge of their competitors access to new business opportunities fair and transparent competition during negotiations and ease of response to the RFQ.

Four distinct e-bidding service providers were identified in the study:

Specialist service providers such as Freemarkets and Accenture DPS

This approach is quite popular because it requires little upfront investment and combines both sourcing and auction expertise is ‘ready made’ and is generally easy to use.

Independent category-focused marketplaces

This solution benefits from the fact that industry specific suppliers are readily available and trained in responding to e-RFQs and e-auctions.

Vertical consortia-based marketplaces (eg Covisint CPGmarket)

These solutions are typically used by the founding members of the marketplace as a means of generating quick liquidity for the marketplace.

Internal solutions where companies buy an auction licence from companies such as Moai Ariba and operate it from within

This solution was adopted by companies with significant auction experience and high forecast volume of future events.

“In order to assess the true success of e-procurement strategies a main distinction has to be made between e-bidding and e-requisitioning ” according to Laub. “In most cases e-bidding delivers strong ROI if the event has been well prepared and the category carefully selected. On the other hand it is still too early to make a final assessment on e-requisitioning since most of the European companies interrogated are still at a pilot or post pilot stage of their programme.”

Suiting some and not others

According to the study internally driven e-requisitioning programmes which require a high level of investment in technology catalogue creation and maintenance and systems integration are better suited for large organisations with a global presence and high catalogueable procurement spend. Furthermore e-requisitioning solutions are rated as not being very adequate for many of the indirect purchase categories such as services configurable purchases projects and spot buys and so on.

The study also confirms that a majority of European companies are still at an early stage of e-requisitioning (most started implementation in the last half of 2000 or early 2001). Even those companies who consider themselves as further down the journey than others are still faced with a two to three year roll-out programme. In fact early adopters have encountered low penetration rate of targeted purchases (20%) and targeted users (10%). Moreover these companies have often exceeded their initially budgeted investment by 20-40% mainly due to integration difficulties with backend systems.

However most companies were confident that their investments will eventually pay off particularly those who were combining their efforts with a parallel strategic sourcing effort. This last point was viewed as key to unlock the full potential from the e-requisitioning technology as it allows to rationalise the supplier base standardise the specifications and fundamentally challenge the “way things were bought in the past”.

The study also reveals that e-marketplaces are of great interest within the e-procurement field. Leading industry players and large multinationals have established their own e-marketplaces such as GlobalNetXchange (GNX) BuyForMetals (BFM) CPGmarket and others. A small number have already created or are creating their own independent private e-marketplaces but may look to expand their base to other players in the future.

Small concerns

Those not at the forefront of building e-marketplaces are mainly smaller companies with a predominantly national presence. They are too small to build their own e-marketplaces but are concerned about which marketplace to join given the proliferation that currently exists.

“However there is a consensus that e-marketplaces will see a consolidation in the near future as the current size of the market does not seem sustainable ” says Pascal Cretot partner in Accenture’s supply chain practice. Many large multinational organisations have already formed partnerships within their industry sectors to build e-marketplaces which will leverage their influence and buying power to (1) encourage suppliers to participate and (2) allow them to keep the benefits within their own enterprises rather than paying independent providers.”

E-marketplaces plan to offer a range of benefits:

The greatest immediate benefit of e-marketplaces is the auction functionality which almost all organisations consider to be of great value.
Enhanced supply chain management functionality is the second most valued benefit overall.
E-requisitioning is of less importance but is partially due to organisations having this facility set-up internally already.
According to the study organisations saw consortium e-marketplaces as the likely prevailing model moving forward. Major benefits perceived are the shared set-up costs and shared risks ‘guaranteed liquidity’ greater potential savings and a wider access to industry specific prime materials. On the other hand the main difficulties are shareholder co-operation problems time taken to build a critical mass of suppliers and also the work involved to get agreement concerning shared technology standards between the participants.

“The results of this study are a forewarning of what we expect to be a strong trend in the e-procurement space. In the future emphasis will be placed more on solutions aiming at increasing the professional buyer’s productivity - such as e-intelligence and e-sourcing - rather than on solutions dedicated to streamlining transactional processes ” concludes Laub.

Accenture conducted 30 in-depth telephone discussions with organisations operating in the European e-procurement environment identified as the most innovative. The 30 customer organisations interviewed are leading national and multinational corporations covering nine European countries and encompassing a broad range of industry sectors including automotive chemicals engineering manufacturing metal petrochemical pharmaceutical retail telecoms and utilities. The research was carried out during May 2001. Discussions were carried out with strategic decision makers typically the procurement director or manager with responsibility for e-procurement on a European or global basis. Specifically the objectives were to understand the e-procurement implementation strategy identify the key lessons learnt from implementation assess whether expectations have been met compare savings with expectations and identify the next steps.

Visit www.accenture.com

Originally published in e-mmerce