Thrive & Survive

Posted: 01/2001

Thrive & Survive
E-procurement Presents New Efficiencies
in Today’s Competitive Climate
By Ed Bell and Jeff Trabaudo

Many businesses seeking new opportunities in today’s world face operational
challenges because of the rapid growth and changes caused from increased
Internet usage.

Managers are forced to find new ways to thrive and survive, as they feel
constant pressure to squeeze profit margins.

Given the need for speed and efficiency, it is no surprise that many of the
telecom industry’s marquee players–BellSouth Corp. (www.bellsouth.com),
Lucent Technologies Inc. (www.lucent.com),
Cisco Systems Inc. (www.cisco.com), AT&T
Corp. (www.att.com) and WorldCom Inc. (www.wcom.com)–use
comprehensive electronic systems for enterprise purchasing, or
"e-procurement."

Certainly many companies have used electronic methods for years to meet their
procurement needs. Today’s e-procurement refers to a powerful and less expensive
approach. Companies deploy web-enabled software systems to automate the
processes, internally and externally. Powerful data management tools are linked
to existing network and back-office systems and to user supplier systems and
e-markets as well. In this way, the firms can handle everything from
requisitions to invoicing and collections through user-friendly,
point-and-click, browser-style interfaces.

Many companies initially adopt e-procurement to manage nonstrategic or
maintenance, repair and operations (MRO) purchases. But as these systems become
more sophisticated, we expect to see a growing number of telecom firms to use
procurement tools to acquire more complex, strategic, mission-critical goods and
services, from switches, routers and servers to programmers and engineering
contractors.

Not Just a Trend

A reason e-procurement systems are so popular is they are no longer a
technological novelty for early adopters. In fact, e-procurement rapidly is
becoming a mainstream business process. We can say with confidence that
e-procurement will be in your future, either because you decide that it’s the
way to go (and initiate a deliberative planning process), or because you are
forced to adopt it later to remain competitive.

Stephen Lane, who has been watching developments in this area as a senior
analyst and research director for the Aberdeen Group Inc. (www.aberdeen.com),
believes e-procurement’s prime time is near, as long as you’re smart about
implementation.

"If you want to make your existing processes much, much better, there is
no reason to sit on the sidelines," he says. "Still, you need to enter
into this with a clear business strategy, one that allows you to implement
things incrementally, within a framework that recognizes the need for adding
additional capabilities in the future. As with all of this new economy
technology, you have to make allowances for change."

A high-placed executive at one of the country’s top telecom service providers
says her company’s success is partially due to its adoptation of an online
system that allows employees to order everything from coffee and laptops to
switches and routers through a highly automated e-procurement system.

The system automates all internal procurement activities, such as catalog
shopping, requisitions and approvals. It also uses the Internet to interface
directly with vendor systems, making for seamless end-to-end electronic
transactions, from request to purchase order to delivery, invoicing and payment.

The executive says smart e-procurement can lower operating costs and
accelerate response to customer demands.

Going electronic has not been easy, she cautions. Her firm’s involvement in
complex mergers and acquisitions has presented it with a range of procurement
processes that have "several layers of integration before we could get to
our end result."

However, she says e-procurement is worth the effort, given how sloppy
procurement can become an enormous drag on a company.

"We just did not want to be slowed down by having that anchor around our
legs," she says.

Hey, Good Looking!

E-procurement has become attractive within the industry because:

* Most telecom companies are expanding rapidly into new regions and
countries, presenting widespread logistical and administrative challenges for
managing and tracking procurement as operations stray farther from "home
base."

* Inefficient procurement processes can put a kink in plans to capture new
markets. Delayed orders, inadvertent purchases of nonstandard equipment, poor
communication between purchasing, receiving and workers in the field–all can
quickly stall a network buildout.

Rapidly changing telecom technology makes static, paper-based systems a
threat to network deployment. Imagine a scenario in which telecom engineers,
relying on a paper product list, order a router only to discover that it’s
equipped with outdated software which the company no longer uses.

* Finally, telecom-specific, Internet-based e-markets, some anchored by the
major players, are proliferating, offering companies new opportunities to use
e-procurement systems as a powerful tool for building dynamic,
electronically-managed relationships with vast supplier networks.

More Gain Than Pain

The chief attraction of e-procurement is savings by gaining control over
sprawling, cumbersome and routinely ignored purchasing processes.

Consider that processing purchase orders in a traditional procurement
environment costs about $100 per order. An e-procurement system can shave $70
from that figure.

We’ve worked with companies that are now paying $10 to $15 per purchase order
since going to e-procurement processes.

For example, one company we worked with took a tortuous 17-step, paper-based
procurement maze where requests languished for three weeks, and reduced that
process to a snappy three-step electronic process in which requests were dealt
with in less than a day.

With such efficiency, employees no longer are frustrated at making
off-schedule purchases, which can impact the bottom line.

We’ve also seen companies make profitable use of the copious amounts of data
on purchasing practices the e-procurement system can generate. One company
learned from this data that the way it had shipped supplies to foreign
operations was inefficient and was costing the firm millions of dollars a year
in foreign taxes.

Call It Easy

Because we install and maintain a wide array of business-to-business
e-commerce and enterprise systems, we have found purchaser-side e-procurement
systems are the easiest sell of all.

The up-front costs of adopting an e-procurement system can seem substantial,
particularly for smaller companies. The basic e-procurement packages from
established players such as Clarus Corp. (www.claruscorp.com),
Ariba Inc. (www.ariba.com) and Commerce One
Inc. (www.commerceone.com) run in the
hundreds of thousands at the bottom end.

And whatever you spend on the software, expect to spend about the same to
integrate it with your existing legacy systems and to customize it for your
procurement needs.

It’s not unusual for Fortune 500 companies to invest $2 million to $5 million
in building e-procurement systems. Smaller companies should investigate
subscription services providers, offers that will give them access to an
e-procurement system for a monthly fee. The cost ranges in the neighborhood of
$10,000 per month, but can vary depending on the procurement patterns.

Runnin’ in the Fast Lane

If your company is intrigued by e-procurement possibilities, what’s the next
step?

It’s more involved than simply purchasing an e-procurement software package
or subscribing to an e-procurement service and declaring yourself e-procurement
ready.

Given the complexities, it’s important to think of e-procurement as a new
process to manage your enterprise–a transition that will affect almost everyone
in the company.

Before you consider software purchases, you must initiate a broad, inclusive
planning process that involves all of your company’s divisions. During this
process, you should consider how e-procurement changes and improves existing
practices. With this detailed blueprint in hand, you then can decide how to
build your e-procurement system.

One thing that will become evident in this consideration: E-procurement has
potential applications, not all of which will be apparent until the system has
been in place for some time. That’s why it’s important to consider scalability
and flexibility alongside interoperability.

Picking the Fruit; Avoiding the Pit(falls)

As you implement the system, you should work to automate purchasing processes
on MRO items. That way, any initial glitches will not interfere with
procurements of mission-critical equipment.

We consider MRO procurement activities to be relatively straightforward. They
represent the "low-hanging fruit" of e-procurement, where savings
easily can be harvested.

A mistake we’ve observed occurs when companies take on too much technology
too fast. This often results in new expenses and higher maintenance.

Another common mistake occurs when the company dictates vendor catalog
formats. Don’t expect your vendors to comply immediately with your standards for
such things as the electronic versions of product specifications, pricing
information, product details, order confirmation, shipping and invoicing.

While some vendors may be ready for such sophisticated dealings, the
likelihood is that not all your suppliers have reached this level. This should
not disqualify them as valued partners, particularly if through the years, you
have cultivated a strong, reliable, mutually beneficial commercial relationship.

Remember, the most important goal of an e-procurement system is to get a firm
grip on your own internal business processes. Even if some vendors still receive
their purchase orders via fax, if all the other steps leading to that
communication have been automated, you’ve achieved a significant cost-saving
victory.

Shopping the Bazaar

This brings us to vendors operating through Internet-based e-markets and what
this could mean for the future of e-procurement.

E-markets are ambitious attempts to aggregate buyers and sellers in massive,
industry-specific online bazaars. While they generate a lot of interest, their
function has not evolved fully. Many of them are cropping up, but analysts
believe many will not survive.

A trend we see is that big players who team up with each other and with
dominant e-procurement system providers to create vertical telecom e-markets
that sell everything from basic network equipment to bandwidth.

For example, earlier this year, BellSouth and Commerce One announced that
they would create an e-market for telecom equipment. The companies hope to have
"anchored" six or seven dominant telecom industry suppliers, such as
Lucent and Cisco, with the goal of attracting smaller telecom companies to join
as buyers.

It’s one thing to visit them for the occasional shopping trip. It’s quite
another proposition to link your e-procurement system tightly with the e-market
commerce technology.

Remember, not all markets use the same standard. Some use a proprietary
system. It would be unfortunate to commit significant amounts of time and money
to become compliant with one e-market only to decide that another e-market,
which uses a different standard, better suits your needs, or worse, to see your
chosen exchange fall by the wayside.

We do not doubt the potential of e-markets to extend the benefits of
e-procurement significantly. But confusion exists out there.

For the time being, don’t let all the excitement and uncertainty about
e-markets become a distraction as you undertake your ambitious but rewarding
transition to e-procurement.

Ed Bell is president of CrossTier.com Inc. (www.crosstier.com).
Jeff Trabaudo is senior vice president for strategic business development for
CrossTier. They can be reached at +1 703 383 4100.

Consider This Before Turning to
E-procurement

When companies adopt e-procurement systems, it’s usually because purchases
have grown to a point where they practically are unmanageable through
conventional means.

It’s not so much the total cost of the purchases that causes the problem, but
the number of transactions involved.

For example, if you’re spending $2 million a year on maintenance, repair and
operating (MRO) purchases spread over 30 transactions, it’s hard to make a
business case for investing in a comprehensive e-procurement system. However, if
that $2 million involves a thousand transactions, then you’re ready.

But before you tackle any technology, make sure you have put together a
planning team that comprises representatives from all areas of the organization
including, but not limited to, engineering, accounting, systems operations,
human resources, marketing, shipping and receiving. After all, they all have a
stake in procurement, even if they rarely interact with each other.

Here are a few questions that can help jump-start the planning process:

* What are the current practices for dealing with such things as
requisitions, purchase authorizations, accounts payable, preferred vendors,
product specifications, inventory management, catalog maintenance, receiving
operations and service contracts? How could they be improved and better
coordinated through automated, electronic processes?

* Does it make sense to put all purchasing activities under one system? For
example, are they amenable to following the same set of rules, or should they be
served by separate systems with separate rules?

* If you use separate systems and procedures for different types of
purchases, how will you establish a common set of data reporting requirements
(since your CFO has to analyze and report all operating costs, regardless of
where they occur)?

* How is procurement handled for satellite offices, field operations and
overseas ventures? For example, if you dispatch a team of engineers and contract
workers to set up a new system of switches and routers in rural Kansas, what
happens when they find they need six cell phones, two laptops and a few spools
of cable?

* How will you deal with making electronic catalogs? Will you expect all of
the vendors to follow a common standard? How much of this information will have
to be keyed in manually? The answers to these questions could prompt you to
contract catalog creation and maintenance to a third party.