The economic downturn saw organisations across the globe enter
retrenchment mode, with CPOs charged with keeping a much closer eye on
what they were spending while simultaneously grappling with increased
supplier vulnerability.
In the area of procurement
technology, this created something of a paradox. Many organisations did
not have the tools to increase spend visibility or ensure more spend
came under management – yet making large purchases in packages that may
not deliver returns for a number of years was increasingly frowned upon.
According to research by
Forrester 2009 the
procurement technology market was largely flat; by no means a bad
performance at a time when others were in freefall. In 2010, however,
sales – including licences, maintenance, software as a service (SaaS)
subscriptions and implementation services – grew by 12 per cent, and is
forecast to do likewise in 2011.
Capgemini’s
Global
CPO survey 2010: achieving sustained business value through procurement
found that 22 per cent of organisations had invested in “cost-effective”
technology as a result of the downturn, but for many companies it was a
case of getting more out of existing systems.
CPO
Agenda offers a guide to what the main areas of focus are for today’s
CPOs, the key trends in procurement technology and what practitioners
would like to see going forward.
The quest for visibility
Analysts agree that getting adequate visibility into what they are spending remains the biggest challenge for most organisations. “If you line up 20 CPOs they will all tell you they are dissatisfied with the degree of visibility they have at their fingertips and the implications that has for them in terms of being able to execute commercially advantageous arrangements, drive proper performance and ensuring that suppliers do what they need to,” says James Abery, head of supply chain consulting at Capgemini.
Aberdeen Group’s September 2010 survey,
From preservation to prosperity, the CPO’s agenda for a new decade confirms this – with 21 per cent of respondents listing a lack of visibility into enterprise spend as one of their top two concerns, behind only cutting costs and managing supply risk. Over a quarter of CPOs (26 per cent) said they intended to implement spend analysis tools in the next 12 months, with a further 11 per cent planning on doing this further down the line.
David Loseby is procurement director at UK pub network
Stonegate, owned by private equity firm TDR Capital, and former CPO at Westminster City Council. He believes many of the more complex systems can only be afforded by larger organisations, leaving mid-tier companies and smaller firms struggling to get effective visibility through existing applications.
“Typically you tend to find that the systems are more geared to cost being allocated to cost codes, so people’s budgets or areas of expenditure,” he says. “They’re not geared to being able to say how much you’re spending on a commodity or service. The frustration is that they have lots of data, but there’s nothing they can do with it. They’re data-rich and information-poor.”
This lack of immediately accessible spend visibility is being compounded by corrupt master data, says Chris Shanahan, vice-president of global procurement at US-based medical technology firm
BD. “Technology is great, but if you put garbage in you get garbage out, so it’s fundamental that we get the right master data and educate people about why they’re doing this,” he says.
Supplier network interoperability
One issue CPOs are becoming more aware of is the problem of online supplier networks, which are often imposed by buyers on vendors as a means of processing orders and receiving payment.
As a result, many suppliers are faced with multiple networks and can spend vast amounts of time and money re-entering data into their own systems – costs that are eventually passed on to the supplier.
“You read a lot of stories about companies launching a payments portal and you think about the poor supplier who has invested £100,000 in an invoicing system and will now have to retype that into the new system. It’s all very well extending that to your suppliers, but you’re not taking cost out of the system, you’re adding it in,” says Guy Allen,
Fujitsu vice-president of global procurement.
Buyers need to be aware of just how damaging this could be for them in the long run, warns Duncan Jones, principal analyst, sourcing and vendor management, at Forrester Research. “It needs buyers to realise there is a problem and for larger providers to work together and for the market to consolidate a little bit,” he says. “There are 20 or 30 companies operating as the link between their clients and their clients’ suppliers. If there were only five or six they would all work together quite happily.”
E-procurement
The use of e-procurement tools such as e-sourcing, e-RFX, contract management and transactional platforms such as electronic catalogues appears to have stalled somewhat.
Capgemini’s CPO survey found that the majority (64 per cent) of CPOs use such systems for less than 20 per cent of their overall spend and 67 per cent say they do not expect a dramatic rise in the use of such tools (although 82 per cent do expect some form of increase).
Such tools could become more of a focus for future purchases, however. Aberdeen’s CPO agenda survey found 35 per cent of CPOs plan to adopt e-sourcing packages in years to come, while 30 per cent have similar designs on e-procurement products.
Forrester’s Jones says many companies are now looking to incorporate e-procurement tools into wider spend analysis packages.
“Maybe in the past they were doing reverse auctions but didn’t have the reporting systems – the spend analysis systems – so they might do a big one-off exercise every now and then,” he says. “Now we’re seeing more companies adopting tools that do them on a regular basis and building in the logic to analyse spend automatically.”
Greater collaboration
As cost-saving has risen up the agenda, so too has interest in spend data from other departments. Aberdeen’s CPO agenda survey found interdepartmental collaboration came top of a list of areas for performance improvement within a technology context, as procurement looks to feed data into enterprise-wide solutions.
“A CPO can’t just think about procurement, they need to think about finance, treasury and the C-level – and that’s the mindset they need when looking at a new solution,” says Chris Dwyer, research analyst at Aberdeen Group.
“There are some solutions out there that do that very well but it’s not across the board.”
Fujitsu is one organisation that has used software to bring different functions closer together. “About two and a half years ago we introduced a procurement database to give data not just to procurement people but to everyone in the company,” says Guy Allen.
Aside from the potential to save money through more effective negotiations, such a setup can bring about less expected benefits for procurement, he adds.
“The version we put out to the wider domain wasn’t the feature-rich one and eventually people wanted to know how much we’d spent over the last quarter and how it had changed,” he says. “It was a way of linking us in with the business and also gave us an excuse to send out an email saying the latest data was available so we were at the forefront of people’s minds.”
Such collaboration also extends outside the business, to suppliers and other partners, says John Lark, senior marketing manager at spend management provider Ariba. “It’s about how you can provide suppliers with better visibility into your payments, how you can get better at paying suppliers on time, allowing suppliers to better access cash as a result of the strength of the buying organisation,” he says.
Delivery models
As organisations have looked to avoid upfront capital investments and cumbersome IT implementations, SaaS has continued to increase in popularity. Forrester says subscriptions continued to grow in 2009 while licence spend retracted, and are now 30 per cent up on 2008 levels.
The use of such packages means organisations can deliver relatively quick wins in categories that may traditionally have been ignored.
Forrester, for example, suggests organisations rolling out the first iteration of a SaaS application to manage contingent labour can achieve a positive return on investment within a year, with average costs ranging from $30,000 to $75,000.
Separate research by Aberdeen confirms the attraction of making a difference quickly; the ability to deliver prompt returns was seen as the main factor in driving enterprises to consider on-demand solutions (cited by 65 per cent of CPOs) while being able to deploy an enterprise-wide package quickly was the next most attractive characteristic (47 per cent).
Despite the attraction of SaaS, however, many organisations are also moving away from best-of-breed applications and back towards ERP systems, says Abery at Capgemini. “I’ve seen a number of point solutions that are being replaced with SAP or Oracle modules,” he says. “Whether it’s being driven by procurement or IT is more difficult to discern, but there seems to be more of a focus now back to fully integrated IT solutions from one vendor.”
BD is currently in the process of moving the entire organisation – consisting of 110 sites
worldwide – to a single instance of SAP. “When we want to do spend analysis today we have to get data from 22 areas,” says Shanahan. “Moving it to one just streamlines the whole spend analytics area.”
Supplier information packages
As the issue of supplier health has moved up the agenda, the demand for supplier information packages that allow organisations to monitor their entire relationships with a supplier has grown. “A lot of companies are large complex structures and you don’t necessarily know that you’re dealing with a subsidiary that’s actually part of a bigger group,” points out Jones.
“Once you’ve got that knowledge, you can add up all the data that you have about that particular supplier on the various systems – data about quality, transaction and performance data, on-time delivery, invoice accuracy, all the performance KPIs – and then external newsfeeds about that company such as financial credit-rating data that might indicate that a supplier is doing very well or just about to go out of business.”
At present, there is something of a rush among vendors to dominate this space, says Jones, with ERP vendors, supplier networks and new, more specialised entrants all staking a claim.
Gartner, too, identifies a trend towards more effective management of supplier information, which is likely to lead to a greater degree of supplier self-service in terms of monitoring and updating information. It estimates organisations spend up to $1,000 a year per supplier to manage this kind of information, and suggests this could decrease to below $150 with effective use of technology.
Supplier onboarding is a particular issue, says Mickey North Rizza, research director at
Gartner Supply Chain Leaders, with suppliers often having to be entered on multiple systems in various parts of the business, each requiring different pieces of information.
Contract lifecycle management
Another emerging trend likely to become more prominent is that of contract lifecycle management, helping organisations run sourcing events through to managing their contractual arrangements with suppliers and ensuring compliance with those terms.
According to Aberdeen’s CPO agenda survey, only 23 per cent of organisations have already deployed this technology, but 24 per cent intend to over the next year and 19 per cent list this as a longer-term aim.
“Companies are looking to buy a contract lifecycle management package and use it to manage both the buy and sell-sides of the equation,” says Gartner’s North Rizza. “An ordinary workflow would look at the negotiation with that contract going back and forth and the terms and conditions, but we’re also seeing a lot more around e-signatures and analytics which tell you when the contract is going to end and how much value you’re getting out of it.”
The CPO's wishlist
So what would CPOs really like to see from technology vendors? At BD, Shanahan laments the lack of a procurement dashboard that would allow him to demonstrate measurement of suppliers in key areas such as risk, sustainability, corporate and social responsibility, environmental credentials and compliance with labour laws.
“People underestimate what there is in the procurement space,” he says. “How do you satisfy the executive who doesn’t want to go into detail but is able to click and drill out information they can’t interpret fully? There’s an opportunity to do more there.”
An affordable business model is top of Loseby’s priorities at Stonegate. “There’s no model where you can pay as you go or that plugs a specific need when you need it,” he says. “Even with SaaS you have to buy the licence fees and you have to think about decisions a long way out; it’s more of a mid to long-term decision than something you might need for specific periods within a business lifespan.”
In the longer-term, buyers and providers should come together to work on packages that would lead to mutual benefits, he suggests, and the jewel in the crown would be a tool that could reconfigure historical and current data into information of genuine use to procurement.
For Abery at Capgemini, however, the biggest problem lies closer to home. “We could probably improve packages, but the real issue affecting procurement today is that the firms that have managed to apply those in the correct way are often in the minority.
“There are a lot of organisations, from blue-chip downwards, that have spent significant amounts on technology, but they’re not working in the way they had envisaged and they’re struggling to understand how to break out of this cycle.”
White elephants
A few developments over the past couple of years have so far failed to catch on. Ariba’s Lark points to companies that allow – and technologies that encourage – individuals to purchase certain products or categories through sites such as Amazon, even if it’s not going through procurement.
Lark is clear he doesn’t view this as best practice. “When you start to look at the cost it tends to be relatively steep,” he says. By doing this companies may also be bypassing existing arrangements with the same suppliers, he adds.
There are also packages that run the risk of bypassing the human aspect of procurement altogether. Fujitsu’s Allen gives the example of a solution that claimed to be able to assess tenders by assessing how suppliers scored in certain priority areas. “Technology shouldn’t replace hard analytical work,” he says.
