How to Know if E-Procurement is Right For You

While some companies have achieved price reductions through online sourcing, the focus of e-procurement initiatives today is process efficiency. Here's how to decide if, what and how you should buy electronically.

Reader ROI

• The questions you should ask before deciding on an e-procurement strategy
• The new tools that facilitate online purchasing
• How CIOs have managed their companies' expectations

At its peak in March 2000, the stock price of eprocurement software vendor Ariba reached $US183. In May 2003, it traded at $US3. Another e-procurement vendor, Commerce One, saw its stock peak even higher - an eye-popping $US330. Its shares, too, have recently become but a shadow of their former glory at just $US2 - and that's after a reverse 1-for-10 split in September 2002. Without that, the shares would be trading at 20 US cents.

But while the stocks of once-high-flying e-procurement companies have come crashing to earth due to excessive expectations, the dotcom bust and the vagaries of the market, e-procurement itself is quietly booming. Studies by AMR Research show that 17 per cent of the companies that don't yet have sourcing and procurement applications plan to implement them in the next year. "This is the highest percentage of any packaged applications category in the market today," says Pierre Mitchell, vice president of research at AMR. "That is a market growth of 12 per cent, up from $US1.7 billion in 2002 to $US1.8 billion in 2003."

Explaining e-procurement's allure isn't difficult. After a rocky start, it's finally delivering the goods. The software has matured; there's a critical mass of suppliers to buy from; internal systems - front and back - are better equipped to deal with e-procurement. The list goes on. Today it's possible to buy almost anything electronically.

Which is not the same as saying that everything should be bought electronically. Deciding whether to invest in e-procurement applications - whether or not your business can benefit from electronic sourcing and purchasing - it turns out, is a much more difficult call. Pens, paper clips and copier paper are one thing. Complex, made-to-order engineered components are quite another.

The Questions You Must Ask Yourself

E-procurement implementations often simply facilitate the catalogue-based buying of indirect materials such as office supplies. The ROI of those implementations is invariably good. Rarely, however, are they earthshaking. Savings on office supplies can only boost a bottom line so far.

Moving beyond this stage - from calendars and Post-its to direct materials (the stuff that goes into your product) and the various services that a company buys, such as consulting, auditing or cleaning services - is hard. If a company makes large purchases of strategically important raw materials or components, it usually does so in multimillion-dollar deals. These are often negotiated over weeks and months, arranging for supplies for up to a year ahead. In such environments, runs the argument, e-procurement adds little value. It may even get in the way.

But e-procurement can deliver more than just lower prices. Indeed, the net impact of its other characteristic deliverables - better productivity, faster processing, greater visibility, the elimination of maverick, or unplanned, ad hoc buying - can have a much higher ROI than what can be achieved by shaving a few pennies off price.

"The bottom line [on e-procurement] depends on your company and what it's buying," says Scott Elliff, president of Capital Consulting and Management. Elliff suggests that a CIO evaluating the pros and cons of e-procurement ask himself the following questions. Is the value of the spend high or low?

Is the product or commodity highly substitutable or not?

Is there a lot of competition or a little?

How efficient are your internal processes?

Rather than rushing to automate for automation's sake, those are the sorts of factors that require consideration.

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